<PAGE>
SCHEDULE 13E-4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
U.S. Office Products Company
- --------------------------------------------------------------------------------
(Name of Issuer)
(Name of Person(s) Filing Statement)
5 1/2% Convertible Subordinated Notes due 2003
- --------------------------------------------------------------------------------
(Title of Class of Securities)
912 325 AB 3
912 325 AD 9
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
Thomas Morgan
President and Chief Executive Officer
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.--Suite 600 East
Washington, D.C. 20007
(202) 339-6700
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
WITH COPIES TO:
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George P. Stamas, Esq. Mark D. Director, Esq.
Wilmer, Cutler & Pickering Executive Vice President--Administration,
2445 M Street, N.W. General Counsel and Secretary
Washington, D.C. 20037 U.S. Office Products Company
(202) 663-6000 1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(202) 339-6700
</TABLE>
May 5, 1998
- --------------------------------------------------------------------------------
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation $217,350,000 * Amount of Filing Fee $43,470
- ------------------------
* Assumes purchase of $230,000,000 in aggregate principal amount of Notes at
94.5% of the principal amount of such Notes.
/ / Check box if any part of the fee is offset as provided by Rule 0-11 (a) (2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid $____________________________________________________
Form or Registration No.____________________________________________________
Filing Party________________________________________________________________
Date Filed__________________________________________________________________
<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The issuer is U.S. Office Products Company, a Delaware corporation (the
"Company"). The address of its principal executive office is 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007.
(b) The securities which are the subject of the Offer are the 5 1/2%
Convertible Subordinated Notes due 2003 (the "Notes") of the Company. As of May
1, 1998, there was $230,000,000 aggregate principal amount of Notes outstanding.
The Offer is for any and all Notes, in authorized denominations or integral
multiples thereof, at 94.5% of the principal amount of the Notes, plus accrued
and unpaid interest up to, but not including, the date of payment for the Notes
by the Company. To the best knowledge of the Company, no Notes are being
purchased from any officer, director or affiliate of the Company.
(c) The information set forth in the Offer to Purchase dated May 5, 1998
(the "Offer to Purchase") filed as Exhibit (a)(i) hereto, under the caption
"Market and Trading Information" is incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the Offer to Purchase under the caption
"Source and Amount of Funds" is incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under the caption
"Source and Amount of Funds" and in Annex A to the Offer to Purchase under the
caption "The Strategic Restructuring Plan-- Financing Transactions" in Annex A
thereto is incorporated herein by reference. No plans or arrangements to finance
or repay such borrowings have been made.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The information set forth in the Offer to Purchase under the caption "The
Offer--Purposes of the Offer" is incorporated herein by reference. Upon
completion of the Offer, the Company plans to cancel and retire all of the Notes
purchased by the Company.
(a)-(g) The information set forth in the Offer to Purchase under the
captions "Summary -- The Strategic Restructuring Plan" and in Annex A to the
Offer to Purchase under the caption "The Strategic Restructuring Plan" is
incorporated herein by reference.
(h)-(j) Not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Not applicable.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The information set forth in "Summary--The Strategic Restructuring Plan" and
"The Strategic Restructuring Plan" in Annex A to the Offer to Purchase is
incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offer to Purchase under the captions "The
Dealer Manager," "Depositary and Information Agent," "Fees and Expenses" and
"Miscellaneous" is incorporated herein by reference.
2
<PAGE>
ITEM 7. FINANCIAL INFORMATION
(a)-(b) The information set forth in "Index to Financial Statements" in the
Offer to Purchase is incorported herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) None.
(b) Other than compliance with applicable requirements of federal and state
securities laws, U.S. Office Products Company is not aware of any U.S. federal
or state regulatory requirements that must be complied with or approvals that
must be obtained in connection with the Offer.
(c) Not applicable.
(d) None.
(e) Reference is hereby made to the exhibits hereto, including the Offer to
Purchase, which are incorporated in their entirety herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) (i) Offer to Purchase dated May 5, 1998.
(ii) Letter of Transmittal.
(iii) Notice of Guaranteed Delivery.
(iv) Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Nominees.
(v) Letter from BancAmerica Robertson Stephens to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees.
(vi) Offer to Purchase dated May 5, 1998 (related to the Offshore
Offer).
(vii) Letter of Transmittal (related to the Offshore Offer).
(viii) Notice of Guaranteed Delivery (related to the Offshore Offer).
(ix) Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Nominees (related to Offshore Offer).
(x) Letter from BA Robertson Stephens International Limited to Brokers,
Dealers, Commercial Banks, Trust Companies and Nominees (related to
the Offshore Offer).
(xi) Form of proposed advertisement to be printed in the Luxemburger
Wort on May 5, 1998.
(xii) Form of Press Release dated May 5, 1998.
(b) Commitment Letter dated March 24, 1998 from The Chase Manhattan Bank,
Chase Securities Inc., Bankers Trust Company, BT Alex.Brown Incorporated,
Merrill Lynch Capital Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated to U.S. Office Products Company, as amended April 22, 1998.
(c) (i) Agreement dated as of January 13, 1998 between U.S. Office
Products Company and Jonathan J. Ledecky (to be filed by
amendment).
3
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(ii) Investment Agreement dated as of January 12, 1998 between U.S.
Office Products Company and CDR-PC Acquisition, L.L.C., as amended
February 3, 1998.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
4
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
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U.S. OFFICE PRODUCTS COMPANY
By: /s/ DONALD PLATT
-----------------------------------------
Donald Platt
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
</TABLE>
Dated: May 5, 1998
5
<PAGE>
[LOGO]
OFFER TO PURCHASE FOR CASH
ANY AND ALL
OF ITS
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
AT
94.5% OF THE PRINCIPAL AMOUNT OF THE NOTES PLUS ACCRUED INTEREST
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE AND
TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
U.S. Office Products Company, a Delaware corporation ("U.S. Office Products"
or the "Company"), hereby offers to Holders (as defined below) to purchase for
cash at the Purchase Price (as defined below) any and all of its outstanding
5 1/2% Convertible Subordinated Notes due 2003 (the "Notes") held in registered
form (other than Registered Regulation S Notes (as defined in the Indenture (as
defined below)), upon the terms and subject to the conditions set forth in this
Offer to Purchase (as it may be supplemented and amended from time to time, the
"Offer to Purchase") and in the accompanying Letter of Transmittal (as it may be
supplemented and amended from time to time, the "Letter of Transmittal" which,
together with the Offer to Purchase, constitutes the "Offer"). Concurrently with
the Offer, the Company is making a separate offer to purchase, on the same terms
and conditions and for the same consideration as the Offer, all Notes held in
bearer form or held in the form of Registered Regulation S Notes (the "Offshore
Offer," and together with the Offer, the "2003 Note Tender Offers"). The 2003
Note Tender Offers will be consummated concurrently. The "Purchase Price" shall
equal 94.5% of the principal amount of each Note tendered, plus accrued and
unpaid interest up to but excluding the date upon which the Company pays for
Notes accepted for tender (the "Payment Date"). The Purchase Price is payable to
holders of the Notes ("Holders") who validly tender (and do not withdraw) their
Notes (as received by the Holders, the "Offer Consideration"). Any Notes not
tendered in the Offer (or tendered and properly withdrawn) shall remain
obligations of the Company until they are subsequently converted into the
Company's Common Stock (as defined below), are redeemed or mature and are repaid
in accordance with their terms.
Any Holder desiring to tender all or any portion of such Holder's Notes must
comply with the procedures for tendering Notes set forth herein in "Procedures
for Tendering Notes" and in the Letter of Transmittal. Tenders of Notes may be
withdrawn at any time prior to the Expiration Date. In the event of a withdrawal
of Notes, the Notes so withdrawn will be returned to the Holder promptly in the
manner chosen by, and at the risk and expense of, the Holder.
[CONTINUED ON THE FOLLOWING PAGE]
------------------------
BancAmerica Robertson Stephens has been retained to act as Dealer Manager in
connection with the Offer. See "The Dealer Manager." The Chase Manhattan Bank
has been retained to act as the Depositary in connection with the Offer.
MacKenzie Partners, Inc. has been retained to act as Information Agent in
connection with the Offer.
------------------------
The Dealer Manager for the Offer is:
BANCAMERICA ROBERTSON STEPHENS
------------------
The date of this Offer to Purchase is May 5, 1998.
<PAGE>
[CONTINUED FROM THE PRECEDING PAGE]
At May 1, 1998, there were outstanding $230.0 million of the Notes, of which
approximately $175.0 million were held in registered form and approximately
$55.0 million were held in bearer form. At May 1, 1998, there were no Registered
Regulation S Notes outstanding.
Tenders of Notes (or any portion of such Notes in integral multiples of
$1,000) may be withdrawn at any time on or prior to the Expiration Date and,
unless accepted by the Company, may be withdrawn at any time after July 1, 1998,
the 40th business day after the date of this Offer to Purchase. If, prior to the
Expiration Date, the Company reduces (i) the principal amount of Notes subject
to the Offer or (ii) the Purchase Price, then previously tendered Notes may be
validly withdrawn until the expiration of ten business days after the date that
notice of either such reduction is first published, given or sent to Holders by
the Company. If the Company makes a material change in the terms of the Offer,
the Company will disseminate additional Offer materials regarding the change and
will extend the Offer, in each case to the extent required by applicable law.
For purposes of the Offer, the term "business day" means any day other than a
Saturday, Sunday or U.S. federal holiday and consists of the time period from
12:01 a.m. through 12:00 midnight, New York City time.
Under no circumstances will any interest be payable because of any delay in
the transmission of funds constituting the Purchase Price to Holders. See "The
Offer--Acceptance for Payment and Payment for Notes" for further details as to
timing of the payment of the Purchase Price.
Subject to applicable securities laws and the terms set forth in the Offer
to Purchase, the Company reserves the right (i) to waive any and all conditions
to the Offer, (ii) to extend or to terminate the Offer or (iii) otherwise to
amend the Offer in any respect. Any amendment applicable to the Offer will apply
to all Notes tendered pursuant to the Offer. See "The Offer--Expiration Date;
Extension; Amendment; Termination."
Notwithstanding any other provision of the Offer, the Company's obligation
to accept for payment, and to pay for, Notes validly tendered pursuant to the
Offer is conditioned upon satisfaction of (i) the Financing Condition, (ii) the
Equity Investment Condition, (iii) the Distribution Condition and (iv) the
General Conditions (each as defined herein). See "The Offer--Conditions of the
Offer."
NONE OF THE COMPANY, THE BOARD OF DIRECTORS OR THE DEALER MANAGER MAKES ANY
RECOMMENDATION AS TO WHETHER OR NOT HOLDERS SHOULD TENDER NOTES IN RESPONSE TO
THE OFFER.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
WITH RESPECT TO THE OFFER. Any questions or requests for assistance may be
directed to the Information Agent or the Dealer Manager at their respective
addresses and telephone numbers set forth on the back cover page of the Offer to
Purchase. Requests for additional copies of the Offer to Purchase, the Letter of
Transmittal, the Notice of Guaranteed Delivery or other related documents may be
directed to the Information Agent. Beneficial owners may also contact their
broker, dealer, commercial bank or trust company for assistance concerning the
Offer.
<PAGE>
IMPORTANT
Any Holder desiring to tender Notes should either (i) in the case of a
Holder who holds physical certificates evidencing Notes, complete and sign the
accompanying Letter of Transmittal (or a facsimile thereof) in accordance with
the instructions set forth therein, have his or her signature thereon guaranteed
(if required by Instruction 1 of the Letter of Transmittal) and send or deliver
such manually signed Letter of Transmittal (or a manually signed facsimile
thereof), together with certificates evidencing such Notes and any other
required documents to The Chase Manhattan Bank, as Depositary (the "Depositary")
at the address set forth on the back cover of this Offer to Purchase, or (ii) in
the case of a Holder who holds Notes in book-entry form, request such Holder's
broker, dealer, commercial bank, trust company or other nominee to effect the
tender of Notes for such Holder pursuant to the procedures for book-entry
delivery set forth herein. See "Procedures for Tendering Notes." A beneficial
owner of Notes that are held of record by a custodian bank, depositary, broker,
trust company or other nominee must instruct such Holder to tender the Notes on
the beneficial owner's behalf. A Letter of Instruction is included in the Offer
materials provided along with this Offer to Purchase, which may be used by a
beneficial owner to give such instructions to its nominee. See "Procedures for
Tendering Notes."
The Depository Trust Company ("DTC") has authorized DTC participants that
hold Notes on behalf of beneficial owners of Notes through DTC to tender their
Notes as if they were Holders. To effect a tender of Notes, DTC participants
should either (i) complete and sign the Letter of Transmittal or a facsimile
thereof, have the signature thereon guaranteed if required by Instruction 1 of
the Letter of Transmittal, and mail or deliver the Letter of Transmittal or such
facsimile thereof pursuant to the procedure set forth in "Procedures for
Tendering Notes" or (ii) transmit their acceptance to DTC through the DTC
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, and follow the procedure for book-entry transfer set forth in
"Procedures for Tendering Notes."
Any Holder who desires to tender Notes but who cannot comply with the
procedures set forth herein for tender on a timely basis or whose certificates
for Notes are not immediately available may tender such Notes by following the
procedures for guaranteed delivery set forth under "Procedures for Tendering
Notes--Tendering Notes--Guaranteed Delivery."
The Letter of Transmittal and the Notes should be sent only to the
Depositary and should not be sent to the Company, the Information Agent, the
Dealer Manager or the Trustee (as defined below).
Tendering Holders will not be obligated to pay brokerage fees or
commissions.
The Offer is not subject to Section 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and Regulation 14D promulgated
thereunder.
The Offer is not being made to (nor will any tender of Notes be accepted
from or on behalf of) Holders in any jurisdiction in which the making of the
Offer or the acceptance of any tender of Notes therein would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary for the Company to make
the Offer in any such jurisdiction and extend the Offer to Holders in such
jurisdiction. In any jurisdiction the securities laws or blue sky laws of which
require the Offer to be made by a licensed broker or dealer, the Offer is being
made on behalf of the Company by the Dealer Manager or one or more registered
brokers or dealers which are licensed under the laws of such jurisdiction.
------------------------
THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY AS TO WHETHER HOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING NOTES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY PERSON
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE
OFFER OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF
TRANSMITTAL. IF GIVEN OR MADE, ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................................................... 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 2
SUMMARY.................................................................................................... 3
The Company............................................................................................ 3
The Strategic Restructuring Plan....................................................................... 4
Investment Considerations.............................................................................. 5
THE OFFER.................................................................................................. 6
General................................................................................................ 6
Purposes of the Offer.................................................................................. 6
Terms of the Offer..................................................................................... 6
Conditions of the Offer................................................................................ 7
Expiration Date; Extension; Amendment; Termination..................................................... 9
Acceptance for Payment and Payment for Notes........................................................... 10
Accounting Treatment of the Offer...................................................................... 10
PROCEDURES FOR TENDERING NOTES............................................................................. 11
Tendering Notes........................................................................................ 11
Withdrawal of Tenders.................................................................................. 13
MARKET AND TRADING INFORMATION............................................................................. 15
The Notes.............................................................................................. 15
The Common Stock....................................................................................... 15
DESCRIPTION OF THE NOTES................................................................................... 16
EFFECT OF THE STRATEGIC RESTRUCTURING PLAN ON THE EXISTING CONVERSION PRICE FOR THE NOTES.................. 16
Equity Self-Tender Adjustment.......................................................................... 16
Spin-off Adjustment.................................................................................... 17
Adjustment for Reverse Stock Split..................................................................... 17
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................................... 17
Sale of Notes Pursuant to the Offer.................................................................... 18
Tax Considerations for Non-Tendering Holders........................................................... 18
Information Reporting.................................................................................. 18
Backup Withholding and Substitute Form W-9............................................................. 19
SOURCE AND AMOUNT OF FUNDS................................................................................. 20
THE DEALER MANAGER......................................................................................... 21
DEPOSITARY AND INFORMATION AGENT........................................................................... 21
FEES AND EXPENSES.......................................................................................... 22
MISCELLANEOUS.............................................................................................. 22
ANNEX A--CERTAIN INFORMATION CONCERNING THE STRATEGIC RESTRUCTURING PLAN AND THE COMPANY
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also may be obtained by mail from the Public Reference Section of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a site on the Internet's World Wide Web at
http://www.sec.gov. that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
Pursuant to the Company's Strategic Restructuring Plan (as defined herein),
the Company has filed with the Commission (i) a proxy statement on Schedule 14A
relating to the Equity Investment (as defined herein) and a one-for-four reverse
stock split, (ii) a registration statement on Form S-4 and a related Schedule
13E-4 relating to the 2001 Note Offer (as defined herein) and (iii) a Schedule
13E-4 relating to the Equity Self-Tender (as defined herein). In addition, each
of the Spin-Off Companies (as defined herein) has filed a registration statement
on Form S-1 relating to the Distributions (as defined herein). These documents
are available at the Commission as described above and can also be obtained upon
written or oral request to U.S. Office Products Company, 1025 Thomas Jefferson
Street, N.W., Suite 600 East, Washington, D.C. 20007, Attention: Mark D.
Director, telephone: (202) 339-6700.
This Offer to Purchase constitutes part of an Issuer Tender Offer Statement
on Schedule 13E-4 (the "Schedule 13E-4") filed with the Commission by the
Company pursuant to Section 13(e) of the Exchange Act and the rules and
regulations promulgated thereunder. The Schedule 13E-4 and all exhibits thereto
are incorporated by reference in this Offer to Purchase.
1
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-25372) pursuant to the Exchange Act are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the fiscal year ended
April 26, 1997, as amended through the date hereof;
b. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended July 26, 1997, October 25, 1997 and January 24, 1998;
c. The Company's Current Reports on Form 8-K filed with the Commission
on April 22, 1998; April 7, 1998; March 12, 1998; March 9, 1998; February
12, 1998; January 16, 1998; December 24, 1997; November 24, 1997; November
6, 1997; and July 21, 1997, as amended;
d. The Company's definitive Proxy Statement filed on Schedule 14A on
April 30, 1998; and
e. The Company's Registration Statement on Form 8-A, as amended, filed
with the Commission on February 13, 1995.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of the Offer to Purchase
and prior to the Expiration Date shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is or was deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part hereof.
THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE OTHER THAN EXHIBITS TO SUCH
DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS OFFER TO PURCHASE HAS BEEN DELIVERED, UPON WRITTEN OR ORAL
REQUEST, TO U.S. OFFICE PRODUCTS COMPANY, 1025 THOMAS JEFFERSON STREET, N.W.,
SUITE 600 EAST, WASHINGTON, D.C. 20007, ATTENTION: MARK D. DIRECTOR, TELEPHONE:
(202) 339-6700. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
EXPIRATION DATE, ANY SUCH REQUEST SHOULD ALLOW FIVE (5) BUSINESS DAYS FOR
DELIVERY.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
OFFER TO PURCHASE, INCLUDING ANNEX A, OR INCORPORATED BY REFERENCE HEREIN.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "U.S. OFFICE PRODUCTS" OR THE
"COMPANY" REFER TO U.S. OFFICE PRODUCTS COMPANY, A DELAWARE CORPORATION, AND ITS
SUBSIDIARIES AFTER COMPLETION OF THE STRATEGIC RESTRUCTURING PLAN (AS DEFINED
BELOW). CERTAIN OTHER CAPITALIZED TERMS ARE DEFINED ELSEWHERE IN THIS OFFER TO
PURCHASE.
THIS OFFER TO PURCHASE CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. WHEN USED IN THIS OFFER TO PURCHASE, THE WORDS
"ANTICIPATE," "ESTIMATE," "INTEND" "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DESCRIBED IN THE COMPANY'S FILINGS WITH THE COMMISSION
UNDER THE EXCHANGE ACT THAT ARE INCORPORATED BY REFERENCE HEREIN (SEE
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE") AND THOSE DESCRIBED IN
ANNEX A OF THIS OFFER TO PURCHASE UNDER THE CAPTION "RISK FACTORS." THIS OFFER
TO PURCHASE ALSO CONTAINS OR INCORPORATES PRO FORMA FINANCIAL INFORMATION THAT
GIVES EFFECT TO CERTAIN EVENTS. SEE ANNEX A. SUCH INFORMATION IS NOT NECESSARILY
INDICATIVE OF THE RESULTS THE COMPANY WOULD HAVE ATTAINED HAD THE EVENTS
OCCURRED AT THE BEGINNING OF THE PERIODS PRESENTED, AS ASSUMED, OR OF THE FUTURE
RESULTS OF THE COMPANY.
FOR ADDITIONAL INFORMATION ABOUT THE COMPANY AND THE STRATEGIC RESTRUCTURING
PLAN, SEE ANNEX A.
THE COMPANY
U.S. Office Products is one of the world's leading suppliers of a broad
range of office products and business services to corporate customers. Through
its North American Office Products Group ("NAOPG"), the Company provides office
supplies, office furniture and office coffee, beverage and vending services
primarily to middle market companies (25 to 500 employees). Based on current
sales, NAOPG is one of the largest contract stationers in the United States.
Outside North America, U.S. Office Products' Blue Star Group Limited ("Blue
Star") is a leading supplier of office products in New Zealand and Australia,
and U.S. Office Products owns a 49% interest in Dudley Stationery Limited
("Dudley"), the second largest contract stationer in the United Kingdom. With
its November 1997 acquisition of Mail Boxes Etc. ("MBE"), the Company has
expanded into the high growth small office and home office market. MBE is the
world's largest franchisor of local postal, packaging, business and
communications service centers with approximately 3,600 outlets worldwide.
Since its founding in October 1994, the Company has grown primarily through
an aggressive acquisition program, which has included the purchase of more than
230 businesses in the United States and internationally. U.S. Office Products
has focused on acquiring successful, established companies with experienced
management and sales presence in specific geographic, product or service
markets. It adheres to a rigorous due diligence and financial review process in
acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth, and improved profit margins. To execute this new strategy, U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and existing distribution channels. U.S.
Office Products continues to pursue strategic alliances with well-known
companies to enable the Company to increase sales by offering a broader
selection of services and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located
3
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within the same geographic areas into large, centrally-located regional
warehouses known as district fulfillment centers ("DFCs"). Through DFCs, the
Company believes it can achieve greater regional efficiencies and economies of
scale in purchasing, distribution and asset utilization. At the same time, U.S.
Office Products continues to encourage entrepreneurial innovation and management
of customer relationships at the local level. U.S. Office Products believes that
its organizational structure combines the best elements of both centralized and
decentralized management for its business.
The Company is a Delaware corporation. Its executive offices are located at
1025 Thomas Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, and
its telephone number is 202-339-6700.
THE STRATEGIC RESTRUCTURING PLAN
The Board of Directors of U.S. Office Products has adopted a comprehensive
restructuring plan. The principal elements of this plan (including modifications
the Board of Directors has made since first adopting this plan, the "Strategic
Restructuring Plan") are as follows:
- EQUITY SELF-TENDER. Pursuant to a self-tender offer, the Company has
offered to purchase 37,037,037 shares of its Common Stock, $.001 par value
("Common Stock"), including shares issuable upon exercise of options
(vested and unvested) to purchase Common Stock, at $27.00 per share (or,
in the case of shares underlying stock options, $27.00 minus the exercise
price of such options) (the "Equity Self-Tender"). The Equity Self-Tender
commenced on May 4, 1998 and will expire on June 1, 1998, unless extended.
- SPIN-OFF DISTRIBUTIONS. The Company will distribute to its stockholders
the shares of four separate companies: Aztec Technology Partners, Inc.,
Workflow Management, Inc., School Specialty, Inc., and Navigant
International, Inc. (collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies are referred to in
this Offer to Purchase as the "Distributions." The Spin-Off Companies will
conduct the Company's former technology solutions, print management,
educational supplies and corporate travel services businesses,
respectively. Each of the Spin-Off Companies plans to issue additional
shares of its common stock in a public offering substantially concurrent
with the Distributions.
- EQUITY INVESTMENT. Pursuant to an investment agreement (the "Investment
Agreement"), an affiliate ("Investor") of an investment fund managed by
Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm, will
acquire for $270.0 million Common Stock representing 24.9% of the
outstanding equity of the Company (after giving effect to the Equity
Self-Tender and such investment) and warrants to purchase additional
Common Stock (the "Equity Investment").
The Strategic Restructuring Plan was adopted in light of the Company's
movement into a new stage of development, less reliant on acquisitions and more
focused on growth through improvements in and expansion of existing operations.
The Company believes that the Strategic Restructuring Plan will benefit the
Company by focusing U.S. Office Products' business on a complementary group of
businesses and permitting management to implement operational improvements in
its core business. It will also bring to the Company's core business the
managerial assistance and support of CD&R. For a more detailed description of
the Strategic Restructuring Plan, see "The Strategic Restructuring Plan" in
Annex A.
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to undertake a one-for-four reverse
stock split to be effective upon completion of all other elements of the
Strategic Restructuring Plan.
In conjunction with the Strategic Restructuring Plan, the Company plans to
undertake the following transactions in addition to the 2003 Note Tender Offers
(together with the 2003 Note Tender Offers, the "Financing Transactions"):
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- NEW CREDIT FACILITY. Pursuant to a commitment letter from a group of
lenders, the Company plans to enter into a new $1.225 billion senior
credit facility (the "Credit Facility").
- SUBORDINATED DEBT OFFERING. The Company plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a private placement (the
"Subordinated Debt Offering" and, together with borrowings under the
Credit Facility, the "New Borrowings").
- 2001 NOTE OFFER. The Company is offering (the "2001 Note Offer") to
exchange its 5 1/2% Convertible Subordinated Notes due 2001 (the "2001
Notes") for Common Stock at an exchange rate of 61.843 shares per $1,000
principal amount of 2001 Notes, which effectively reduces the conversion
price from $19.00 to $16.17 per share for the period during which the 2001
Note Offer is open.
The Company intends to use the proceeds of the Equity Investment and the New
Borrowings to refinance the Company's existing credit facility, to pay the
purchase price of the Equity Self-Tender and the 2003 Note Tender Offers and to
pay fees and expenses incurred in connection with the Strategic Restructuring
Plan and the Financing Transactions. For a more detailed discussion of the
Financing Transactions, see "The Strategic Restructuring Plan--Financing
Transactions" in Annex A.
INVESTMENT CONSIDERATIONS
The Offer represents an opportunity for Holders to receive cash for their
Notes. See "Market and Trading Information--the Notes." Any Notes that remain
outstanding will be subordinated to all borrowings under the Credit Facility and
will rank equally with the Senior Subordinated Notes and any 2001 Notes that are
not exchanged in the 2001 Note Offer.
On January 24, 1998, the Company had $714.5 million of debt, $340.8 million
of which ranked senior to the Notes. If the Strategic Restructuring Plan is
completed, the Company will have significantly more debt. The pro forma
financial statements showing adjustments to reflect the Strategic Restructuring
Plan and the Financing Transactions as if they occurred on January 24, 1998 show
debt of $1,155.5 million, $755.5 million of which would rank senior to the
Notes. The amount of senior debt would be reduced by the amount of any Notes
that are not repurchased. See the pro forma financial information of the Company
provided in Annex A. Increased debt presents risks to the Company. See
"Description of the Notes," "Source and Amount of Funds," "Risk
Factors--Substantial Indebtedness of the Company; Ability to Service Debt" in
Annex A and "Risk Factors--Risks Arising from Restrictions in Agreements
Relating to Indebtedness" in Annex A.
Any Notes that are not tendered will remain convertible into Common Stock.
Accordingly, Holders should also review the information about the Company in
Annex A, especially "Risk Factors."
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THE OFFER
GENERAL
Participation in the Offer is voluntary and Holders should carefully
consider whether to accept. None of the Company, the Board of Directors or the
Dealer Manager makes any recommendation to Holders as to whether to tender or
refrain from tendering in the Offer. Holders are urged to consult their
financial and tax advisors in making their decisions as to what action to take
in light of their particular circumstances.
Concurrently with this Offer, the Company is making the Offshore Offer. The
Offer and the Offshsore Offer will be consummated concurrently.
PURPOSES OF THE OFFER
The primary purposes of the Offer are to (i) reduce the amount of cash the
Company otherwise would be required to pay to retire the Notes in 2003, prior to
the date of maturity of the New Borrowings, and (ii) minimize the dilutive
effect of the issuance of Common Stock upon conversion of the Notes were they
converted after completion of the Strategic Restructuring Plan. The Company
plans to retire all Notes purchased pursuant to the Offer.
TERMS OF THE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in the Offer, to purchase for cash at the Purchase Price any and all Notes
that are properly tendered (and not properly withdrawn), pursuant to the terms
and conditions set forth herein, prior to the Expiration Date. The "Purchase
Price" shall equal 94.5% of the principal amount of each Note tendered, plus
accrued and unpaid interest up to but excluding the date upon which the Company
pays for Notes accepted for tender (the "Payment Date"). The Company will accept
only tenders of Notes or a portion thereof which are in an amount equal to
$1,000 principal amount of Notes or integral multiples thereof (the date of such
acceptance, the "Acceptance Date"). Tenders of Notes may be withdrawn at any
time prior to the Expiration Date. In the event of a termination of the Offer,
the Notes tendered pursuant to the Offer will be returned to the tendering
Holders promptly.
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, the Company will purchase, by accepting for
payment, and will pay for, all Notes validly tendered (and not properly
withdrawn) pursuant to the Offer, on the Acceptance Date and Payment Date,
respectively, both to occur promptly after the Expiration Date. For further
details regarding timing of payment, see "--Acceptance for Payment and Payment
for Notes." The Company shall be deemed to have accepted validly tendered Notes
(or defectively tendered Notes with respect to which the Company has waived such
defect) when, as and if the Company has given oral or written notice thereof to
the Depositary. The Company will make payment for such Notes by depositing
immediately available funds with the Depositary. The Depositary will act as the
agent for tendering Holders for the purpose of receiving payment from the
Company and transmitting such payment to tendering Holders. Subject to Rule
13e-4(f)(5) under the Exchange Act, the Company expressly reserves the right, in
its sole discretion, to delay acceptance for payment of or payment for Notes in
order to comply, in whole or in part, with any applicable law.
If less than all the principal amount of Notes held by a Holder is tendered
and accepted pursuant to the Offer, the Company shall issue, and the Trustee (as
defined below) shall authenticate and deliver, to or on the order of the Holder
thereof, at the expense of the Company, new Notes of authorized denominations,
in a principal amount equal to the portion of the Notes not tendered or not
accepted, as the case may be, as promptly as practicable after the Expiration
Date.
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A Note may be converted, pursuant to its terms, into shares of Common Stock
of the Company until, but not after, such Note is properly tendered to the
Depositary, unless the tender of such Note is properly withdrawn, there is a
default in payment of the Offer Consideration or the Offer is terminated without
the purchase of Notes.
The Company will pay to all Holders who tender Notes pursuant to the Offer
unpaid interest accrued on the Notes up to but excluding the Payment Date,
irrespective of the date on which such Notes are tendered. The unpaid interest
will be paid in immediately available funds on the Payment Date.
After the Expiration Date, the Company may purchase additional Notes in the
open market, in privately negotiated transactions, through subsequent tender or
exchange offers or otherwise, subject to compliance with applicable law. Any
future purchases may be on the same terms or on terms that may be more or less
favorable to Holders than the terms of the Offer. Any future purchases will
depend on various factors in existence at that time.
CONDITIONS OF THE OFFER
Notwithstanding any other provisions of the Offer, and in addition to (and
not in limitation of) the Company's rights to extend and amend the Offer at any
time in its sole discretion, the Company will not be required to accept for
payment, or, subject to any applicable rules and regulations of the Commission,
including Rule 14e-1(c) under the Exchange Act (relating to the Offer), to pay
for, Notes tendered pursuant to the Offer, and may delay the acceptance for
payment of, or, subject to the restriction referred to above, the payment for,
any tendered Notes, and may terminate the Offer if (i) the Financing Condition
(as defined below) has not been satisfied, (ii) the Equity Investment Condition
(as defined below) has not been satisfied, (iii) the Distribution Condition (as
defined below) has not been satisfied or (iv) any of the General Conditions (as
defined below) have not been satisfied.
The Financing Condition will be satisfied upon the availability to the
Company on terms and conditions satisfactory to the Company in its sole
discretion of funds, from the Subordinated Debt Offering, through borrowings
under the Credit Facility, and/or from the Equity Investment, or any combination
of the foregoing, sufficient to pay both (i) the purchase price for 37,037,037
shares of Common Stock (including shares underlying options) and related costs
and expenses of the Equity Self-Tender and (ii) the Purchase Price for all of
the Notes and related costs and expenses of the 2003 Note Tender Offers. See
"The Strategic Restructuring Plan--Financing Transactions" in Annex A.
The Equity Investment Condition will be satisfied when all conditions to
closing under the Investment Agreement have been satisfied or waived other than
conditions relating to consummation of the Distributions and to consummation of
the Equity Self-Tender. See "The Strategic Restructuring Plan--Equity
Investment" in Annex A.
The Distribution Condition will be satisfied when all conditions to the
obligation of the Company to consummate the distributions as provided in the
Distribution Agreement (as defined in Annex A) have been satisfied or waived
(other than the condition relating to consummation of the Equity Self-Tender),
including but not limited to, (i) the registration statements relating to the
distribution of shares in the Distributions having been declared effective by
the Commission and (ii) the Company having received an opinion of Wilmer, Cutler
& Pickering regarding the tax treatment of the Distributions. See "The Strategic
Restructuring Plan--Spin-Off Distributions" in Annex A.
All General Conditions shall be deemed to have been satisfied for purposes
of the Offer unless any of the following conditions occur prior to the
Acceptance Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, that
challenges the making of or the consummation of the transactions
contemplated by the 2003 Note Tender Offers, the Equity Investment, the
Equity Self-Tender or the Distributions; or
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that has, or is reasonably likely to have, in the sole judgment of the
Company, a material adverse effect on the business, operations, properties,
condition (financial or otherwise), assets, liabilities or prospects of the
Company and its subsidiaries taken as a whole; or
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay consummation of the 2003 Note Tender Offers, the Equity
Investment, the Equity Self-Tender or the Distributions or that has, or is
reasonably likely to have, in the sole judgment of the Company, a material
adverse effect on the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company and its
subsidiaries taken as a whole; or
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the 2003 Note Tender Offers, the Equity Investment,
the Equity Self-Tender or the Distributions or that will, or is reasonably
likely to, materially impair the contemplated benefits to the Company of the
2003 Note Tender Offers, the Equity Investment, the Equity Self-Tender or
the Distributions, or otherwise result in the consummation of the 2003 Note
Tender Offers, the Equity Investment, the Equity Self-Tender or the
Distributions not being, or not being reasonably likely to be, in the best
interests of the Company and its subsidiaries taken as a whole; or
(iv) the Trustee under the Indenture (each as defined below) shall have
objected in any respect to, or taken any action that could, in the sole
judgment of the Company, materially adversely affect the consummation of the
2003 Note Tender Offers, or shall have taken any action that challenges the
validity or effectiveness of the procedures used by the Company in (a)
making the 2003 Note Tender Offers or (b) accepting, or paying for, any of
the Notes; or
(v) a tender or exchange offer for some or all of the Common Stock
(other than the Equity Self-Tender) or a proposal with respect to a merger,
consolidation or other business combination with or involving the Company or
any subsidiary shall have been proposed to be made or shall have been made
by another person; or
(vi) (1) any entity, "group" (as that term is used in Section 13(d)(3)
of the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before January
12, 1998, a Schedule 13G or Schedule 13D with respect to the Common Stock)
shall have acquired or proposed to acquire beneficial ownership of more than
5% of the outstanding shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Common Stock prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional shares of Common Stock constituting more than 2% of the
outstanding shares or shall have been granted any option or right to acquire
beneficial ownership of more than 2% of the outstanding shares (other than
the Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
reflecting an intent to acquire the Company or any of its shares of Common
Stock; or
(vii) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the 2003 Note Tender Offers, the Equity
Investment, the Equity Self-Tender, the Distributions or the New Borrowings,
(d) a declaration of a
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banking moratorium or any suspension of payments in respect of banks in the
United States, (e) any limitation (whether or not mandatory) by any
government or governmental, administrative or regulatory authority or
agency, domestic or foreign, on (or other event that, in the reasonable
judgment of the Company, might affect) the extension of credit by banks or
other lending institutions in the United States, (f) a commencement of a war
or armed hostilities or other national or international calamity directly or
indirectly involving the United States, or (g) in the case of any of the
foregoing existing on the date hereof, a material acceleration or worsening
thereof.
The conditions to the Offer are for the sole benefit of the Company and may
be asserted by the Company in its sole discretion regardless of the
circumstances giving rise to such conditions (including any action or inaction
by the Company) or may be waived by the Company, in whole or in part, at any
time and from time to time, in its sole discretion, whether or not any other
condition of the Offer is also waived. The Company's failure at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
rights; the waiver of any such rights with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by the Company
concerning the events described in this section shall be final and binding.
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
Upon the terms of the Offer, the Company will accept for payment and thereby
purchase all Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on Wednesday, June 3, 1998, or if extended by the Company, in
its sole discretion, the latest date and time to which extended (the "Expiration
Date"). The Company expressly reserves the right to extend the Offer on a daily
basis or for such period or periods as it may determine in its sole discretion
from time to time by giving written or oral (followed by written) notice to the
Depositary and by making a public announcement by press release (which shall
include disclosure of the approximate principal amount of Notes deposited to
date) to the Dow Jones News Service no later than 9:00 a.m., New York City time,
the next business day following the previously scheduled Expiration Date. During
any extension of the Offer, all Notes previously tendered and not withdrawn will
remain subject to the Offer.
The Company also expressly reserves the right, in its sole discretion,
subject to applicable law, to (i) terminate the Offer and not accept for payment
any Notes and promptly return all Notes at any time for any reason, including
(without limitation) upon failure of any of the conditions specified in
"---Conditions of the Offer," (ii) waive any condition to the Offer and accept
all Notes previously tendered pursuant to the Offer, or (iii) amend or modify
the terms of the Offer in any manner. Any amendment applicable to the Offer will
apply to all Notes tendered pursuant to the Offer.
If, prior to the Expiration Date, the Company reduces (i) the principal
amount of Notes subject to the Offer or (ii) the Purchase Price, then previously
tendered Notes may be validly withdrawn, and, if necessary, the Expiration Date
will be extended, until the expiration of ten business days after the date that
notice of either such reduction is first published, given or sent to Holders by
the Company. The minimum period during which the Offer must remain open
following a material change in the terms of the Offer or a waiver by the Company
of a material condition of the Offer will depend upon the facts and
circumstances, including the relative materiality of the change or waiver. Any
withdrawal or termination of the Offer will be followed as promptly as
practicable by public announcement by the Company thereof. In the event the
Company withdraws or terminates the Offer, it will give immediate written notice
to the Depositary, and all Notes theretofore tendered pursuant to the Offer will
be returned promptly to the tendering Holders thereof. If the Company makes a
material change in the terms of the Offer, the Company will disseminate
additional Offer materials regarding the change and will extend the Offer, in
each case to the extent required by applicable law. For purposes of the Offer,
the term "business day" means any day other than a Saturday, Sunday or U.S.
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, New York City time.
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ACCEPTANCE FOR PAYMENT AND PAYMENT FOR NOTES
Upon the terms and subject to the conditions of the Offer (including if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, the Company will purchase, by accepting for
payment on the Acceptance Date, and will pay for all Notes validly tendered (and
not properly withdrawn) pursuant to the Offer promptly after the Expiration Date
(the date of such payment, the "Payment Date"). The Company will accept Notes
properly tendered in the Offshore Offer concurrently with its acceptance of
Notes in the Offer. In all cases, payment by the Depositary to tendering Holders
will be made only after timely receipt by the Depositary of the Letter of
Transmittal and all other documentation described under "Procedures for
Tendering Notes--Tendering Notes" and receipt by the Depositary of funds from
the Company.
For purposes of the Offer, the Company shall be deemed to have accepted for
payment (and thereby to have purchased) tendered Notes as, if and when the
Company gives oral or written notice to the Depositary of the Company's
acceptance of such Notes for payment. Subject to the terms and conditions of the
Offer, payment for Notes so accepted will be made by deposit of the Offer
Consideration in immediately available funds by the Company with the Depositary,
which will act as the agent for tendering Holders for the purpose of receiving
payment from the Company and transmitting such payment to tendering Holders.
Under no circumstances will interest be paid by the Company by reason of any
delay in making payment by the Depositary. The Company expressly reserves the
right, in its sole discretion and subject to Rule 14e-1(c) under the Exchange
Act, to delay acceptance for payment of, or payment for, Notes in order to
comply, in whole or in part, with any applicable law.
The Company will not accept Notes tendered in the Offer unless and until the
conditions specified under "--Conditions of the Offer" above have been
satisfied. The Company does not expect that a definitive agreement relating to
the Credit Facility or a definitive agreement relating to the issuance of the
Senior Subordinated Notes will occur until after the Expiration Date, and this
may delay acceptance. In addition, the Company will not pay for accepted Notes
until the closing of the Equity Investment. The closing of the Equity Investment
cannot occur until after the record date for the Distributions occurs, and the
Company does not expect the record date for the Distributions to occur until at
least two trading days after the final proration ratio in the Equity Self-Tender
is announced. The Company does not expect to be able to announce the final
proration ratio until at least three trading days after the Expiration Date of
the Equity Self-Tender (which is two days prior to the Expiration Date of the
Offer), and this determination may take longer. Accordingly, the Company expects
that payment for accepted Notes will not occur until at least the fourth trading
day following the Expiration Date. If determination of the final proration ratio
or the closing of the Equity Investment is delayed, payment for accepted Notes
will also be delayed.
If any tendered Notes are not purchased pursuant to the Offer for any
reason, such Notes not purchased will be returned, without expense, to the
tendering Holder promptly (or, in the case of Notes tendered by book-entry
transfer, such Notes will be credited to the account maintained at DTC from
which such Notes were delivered) after the expiration or termination of the
Offer.
Tendering Holders will not be obligated to pay brokerage fees or commissions
or, except as set forth in the Instructions to the Letter of Transmittal,
transfer taxes on the purchase of Notes pursuant to the Offer.
ACCOUNTING TREATMENT OF THE OFFER
Upon the acceptance of Notes tendered pursuant to the 2003 Note Tender
Offers, the Company will recognize (as to tendered Notes only) an extraordinary
gain on the early extinguishment of debt. This extraordinary gain will be
calculated as the difference between the principal amount of the Notes tendered
as recorded in the Company's accounting records (the "Book Value of the Tendered
Notes") and 94.5% of the Book Value of the Tendered Notes.
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PROCEDURES FOR TENDERING NOTES
TENDERING NOTES
The tender by a Holder of Notes (and subsequent acceptance of such tender by
the Company) pursuant to one of the procedures set forth below will constitute a
binding agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
Only Holders of record are authorized to tender their Notes. The procedures
by which the Notes may be tendered by beneficial owners that are not Holders of
record will depend upon the manner in which the Notes are held.
EXCEPT AS PROVIDED IN "GUARANTEED DELIVERY," UNLESS THE NOTES BEING TENDERED
ARE DEPOSITED BY THE HOLDER WITH THE DEPOSITARY PRIOR TO THE EXPIRATION DATE
(ACCOMPANIED BY A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL OR
A PROPERLY TRANSMITTED AGENT'S MESSAGE (AS DEFINED BELOW)), THE COMPANY MAY, AT
ITS OPTION, REJECT SUCH TENDER. PAYMENT FOR NOTES WILL BE MADE ONLY AGAINST
DEPOSIT OF TENDERED NOTES AND DELIVERY OF ALL OTHER REQUIRED DOCUMENTS.
TENDER OF NOTES HELD IN PHYSICAL FORM. To effectively tender Notes held in
physical form pursuant to the Offer, the Notes, a properly completed Letter of
Transmittal (or a facsimile thereof) duly executed by the Holder thereof and any
other documents required by the Letter of Transmittal, must be received by the
Depositary at its address set forth on the back cover of this Offer to Purchase
(or delivery of Notes may be effected through the deposit of Notes with DTC and
book-entry delivery as set forth below) on or prior to the Expiration Date, or
the tendering Holder may instead comply with the guaranteed delivery procedure
set forth below. LETTERS OF TRANSMITTAL AND NOTES SHOULD BE SENT ONLY TO THE
DEPOSITARY AND SHOULD NOT BE SENT TO THE COMPANY, THE INFORMATION AGENT, THE
DEALER MANAGER OR THE TRUSTEE.
TENDER OF NOTES HELD THROUGH A CUSTODIAN. To effectively tender Notes that
are held of record by a custodian bank, depositary, broker, dealer, trust
company or other nominee, the beneficial owner thereof must instruct such Holder
to tender the Notes on the beneficial owner's behalf. A Letter of Instruction is
included with this Offer to Purchase and may be used by a beneficial owner in
this process to give such instructions. Any beneficial owner of Notes held of
record by DTC or its nominee, through authority granted by DTC, may direct the
DTC Participant through which such beneficial owner's Notes are held in DTC to
tender on such beneficial owner's behalf.
TENDER OF NOTES HELD THROUGH DTC. To effectively tender Notes that are held
through DTC, DTC Participants should transmit their acceptance through the
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, and DTC will then edit and verify the acceptance and send an Agent's
Message to the Depositary for its acceptance. Delivery of tendered Notes must be
made to the Depositary pursuant to the book-entry delivery procedures set forth
below or the tendering DTC participant must comply with the guaranteed delivery
procedures set forth below. No Letters of Transmittal will be required to tender
notes through ATOP.
THE METHOD OF DELIVERY OF NOTES AND LETTERS OF TRANSMITTAL, ANY REQUIRED
SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY
THROUGH DTC AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED THROUGH ATOP,
IS AT THE ELECTION AND RISK OF THE PERSON TENDERING NOTES AND DELIVERING LETTERS
OF TRANSMITTAL AND, EXCEPT AS OTHERWISE PROVIDED IN THE LETTER OF TRANSMITTAL,
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
DEPOSITARY PRIOR TO SUCH DATE.
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BOOK-ENTRY DELIVERY PROCEDURES. The Depositary will establish accounts with
respect to the Notes at DTC for purposes of the Offer within two business days
after the date of this Offer to Purchase, and any financial institution that is
a participant in DTC may make book-entry delivery of the Notes by causing DTC to
transfer such Notes into the Depositary's account in accordance with DTC's
procedures for such transfer. However, although delivery of Notes may be
effected through book-entry transfer into the Depositary's account at DTC, the
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees or an Agent's Message in connection with a book-entry transfer, and
any other required documents, must, in any case, be transmitted to and received
by the Depositary at its address set forth on the back cover of this Offer to
Purchase on or prior to the Expiration Date, or the Holder must comply with the
guaranteed delivery procedures described below. Delivery of documents to DTC
does not constitute delivery to the Depositary. The confirmation of a book-entry
transfer into the Depositary's account at DTC as described above is referred to
herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Depositary and forming a part of the Book-Entry Confirmation,
which states (i) that DTC has received an express acknowledgment from the
participants in DTC described in such Agent's Message, (ii) the aggregate
principal amount of Notes which have been tendered by such participants pursuant
to the Offer, (iii) that such participants have received this Offer to Purchase
and the Letter of Transmittal and agree to be bound by the terms of this Offer
to Purchase and the Letter of Transmittal, and (iv) that the Company may enforce
such agreement against such participants.
SIGNATURE GUARANTEES. Signatures on all Letters of Transmittal must be
guaranteed by a recognized participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (a "Medallion Signature Guarantor"), unless
the Notes tendered thereby are tendered (i) by a registered Holder of Notes (or
by a participant in DTC whose name appears on a security position listing as the
owner of such Notes) who has not completed either the box entitled "Special
Delivery Instructions" or "Special Payment Instructions" on the Letter of
Transmittal, or (ii) for the account of a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc. ("NASD") or a commercial bank or trust company having an office or
correspondent in the United States (each of the foregoing being referred to as
an "Eligible Institution"). See Instruction 1 of the Letter of Transmittal. If
the Notes are registered in the name of a person other than the signer of the
Letter of Transmittal or if Notes not accepted for payment or not tendered are
to be returned to a person other than the registered Holder, then the signatures
on the Letters of Transmittal accompanying the tendered Notes must be guaranteed
by a Medallion Signature Guarantor as described above. See Instructions 1 and 5
of the Letter of Transmittal.
GUARANTEED DELIVERY. If a Holder desires to tender Notes pursuant to the
Offer and time will not permit the Letter of Transmittal, certificates
representing such Notes and all other required documents to reach the
Depositary, or the procedures for book-entry transfer cannot be completed, on or
prior to the Expiration Date, such Notes may nevertheless be tendered, with the
effect that such tender will be deemed to have been received prior to the
Expiration Date, if all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company herewith, or an
Agent's Message with respect to guaranteed delivery, is received by the
Depositary prior to the Expiration Date, as provided below; and
(iii) the certificates for the tendered Notes, in proper form for
transfer (or a Book-Entry Confirmation of the transfer of such Notes into
the Depositary's account at DTC as described above), together with a Letter
of Transmittal (or facsimile thereof) properly completed and duly executed,
with any required signature guarantees and any other documents required by
the Letter of Transmittal, or a properly transmitted Agent's Message, are
received by the Depositary within three business days after the date of
execution of the Notice of Guaranteed Delivery.
12
<PAGE>
The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission or mail to the Depositary and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, payment of the Offer
Consideration for Notes tendered and accepted for payment pursuant to the Offer
will, in all cases, be made only after timely receipt by the Depositary of the
tendered Notes (or Book-Entry Confirmation of the transfer of such Notes into
the Depositary's account at DTC as described above), and a Letter of Transmittal
(or facsimile thereof) with respect to such Notes, properly completed and duly
executed, with any required signature guarantees and any other documents
required by the Letter of Transmittal, or a properly transmitted Agent's
Message.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY THE COMPANY BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON USING THE GUARANTEED DELIVERY PROCEDURES.
THE OFFER CONSIDERATION FOR NOTES PROPERLY TENDERED PURSUANT TO THE GUARANTEED
DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR NOTES DELIVERED TO THE
DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE, EVEN IF THE NOTES TO BE DELIVERED
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES ARE NOT SO DELIVERED TO THE
DEPOSITARY, AND THEREFORE PAYMENT BY THE DEPOSITARY ON ACCOUNT OF SUCH NOTES IS
NOT MADE, UNTIL AFTER THE PAYMENT DATE.
BACKUP U.S. FEDERAL INCOME TAX WITHHOLDING. To prevent backup U.S. federal
income tax withholding, each tendering Holder of Notes must provide the
Depositary with such Holder's correct taxpayer identification number and certify
that such Holder is not subject to backup U.S. federal income tax withholding by
completing the Substitute Form W-9 included in the Letter of Transmittal. For a
discussion of U.S. federal income tax considerations relating to backup
withholding, see "Certain United States Federal Income Tax
Considerations--Backup Withholding and Substitute Form W-9."
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered Notes
pursuant to any of the procedures described above will be determined by the
Company in its sole discretion (whose determination shall be final and binding).
The Company reserves the absolute right to reject any or all tenders of any
Notes determined by it not to be in proper form. The Company also reserves the
absolute right, in its sole discretion, to waive any defect or irregularity in
any tender with respect to Notes of any particular Holder, whether or not
similar defects or irregularities are waived in the case of other Holders. The
Company's interpretation of the terms and conditions of the Offer (including the
Letter of Transmittal and the Instructions thereto) will be final and binding.
No tender of Notes will be deemed to have been validly made until all defects or
irregularities have been cured or expressly waived. None of the Company, the
Depositary, the Dealer Manager, the Information Agent, the Trustee or any other
person will be under any duty to give notification of any defects or
irregularities in tenders or will incur any liability for failure to give any
such notification. If the Company waives its right to reject a defective tender
of Notes, the Holder will be entitled to the tender pursuant to the terms of the
Offer.
WITHDRAWAL OF TENDERS
Tenders of Notes (or any portion of such Notes in integral multiples of
$1,000) may be withdrawn at any time on or prior to the Expiration Date and,
unless accepted by the Company, may be withdrawn at any time after 5:00 p.m.,
New York City time, on July 1, 1998, the 40th business day after the date of
this Offer to Purchase.
For a withdrawal of a tender of Notes to be effective, a written,
telegraphic, telex or facsimile transmission notice of withdrawal must be
received by the Depositary on or prior to the Expiration Date (or such later
date as may be permitted by the preceding paragraph) at its address set forth on
the back cover of this Offer to Purchase. Any such notice of withdrawal must
specify the name of the person who tendered the Notes to be withdrawn, that such
person is withdrawing his or her election to tender such Notes, the aggregate
principal amount of the Notes to be withdrawn, and the name of the registered
Holder of the Notes as set forth on the Notes, if different from that of the
person who tendered such
13
<PAGE>
Notes. If Notes have been delivered or otherwise identified to the Depositary,
then prior to the physical release of such Notes, the tendering Holder must
submit the serial numbers shown on the particular Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by a Medallion
Signature Guarantor, except in the case of Notes tendered for the account of any
Eligible Institution. If Notes have been tendered pursuant to the procedures for
book-entry transfer set forth in "Procedures for Tendering Notes--Tendering
Notes--Book-Entry Delivery Procedures," the notice of withdrawal must specify
the name and number of the account at DTC to be credited with such withdrawal of
Notes and must otherwise comply with such book-entry transfer facility's
procedures, in which case a notice of withdrawal will be effective if delivered
to the Depositary by written, telegraphic, telex or facsimile transmission.
Withdrawals of tenders of Notes may not be rescinded. Notes properly withdrawn
will not be deemed validly tendered for purposes of the Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described above under "Procedures for Tendering Notes."
ALL QUESTIONS AS TO THE VALIDITY (INCLUDING TIME OF RECEIPT) OF NOTICES OF
WITHDRAWAL WILL BE DETERMINED BY THE COMPANY, IN THE COMPANY'S SOLE DISCRETION
(WHOSE DETERMINATION SHALL BE FINAL AND BINDING). NO WITHDRAWAL OF NOTES WILL BE
DEEMED TO HAVE BEEN PROPERLY MADE UNTIL ALL DEFECTS OR IRREGULARITIES HAVE BEEN
CURED OR EXPRESSLY WAIVED. NONE OF THE COMPANY, THE DEPOSITARY, THE DEALER
MANAGER, THE INFORMATION AGENT, THE TRUSTEE OR ANY OTHER PERSON WILL BE UNDER
ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF
WITHDRAWAL, OR INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
14
<PAGE>
MARKET AND TRADING INFORMATION
THE NOTES
The Notes were issued in May 1996 and there currently is a limited trading
market for the Notes. In addition, the Notes are listed on the Luxembourg Stock
Exchange but do not trade regularly on that exchange. Quotations for securities
that are not widely traded, such as the Notes, may differ from actual trading
prices and should be viewed as approximations. Holders are urged to contact
their brokers to obtain the best available information as to current market
prices.
To the extent that Notes are tendered and accepted in the 2003 Note Tender
Offers, the trading market for Notes that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Notes. The extent of the public market and the availability of price quotations
would depend upon a number of factors, including the number of Holders of Notes
remaining at such time. An issue of securities with a smaller outstanding market
value available for trading (the "float") may command a lower price than would a
comparable issue of securities with a greater float. Therefore, the market price
for Notes that are not tendered in the 2003 Note Tender Offers may be affected
adversely to the extent that the amount of Notes purchased in the 2003 Note
Tender Offers reduces the float. The reduced float also may tend to make the
trading prices of the Notes that are not exchanged more volatile.
THE COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"OFIS." On May 1, 1998, the closing price of the Common Stock was $17 15/16 per
share. The following table sets forth, for the fiscal periods indicated, the
range of high bid and low ask prices for the Common Stock on the Nasdaq National
Market. On November 6, 1997, the Company effected a three-for-two split of the
Common Stock. The prices given below are adjusted retroactively to reflect this
stock split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1996
First fiscal Quarter........................................................................... $ 10.58 $ 7.00
Second fiscal Quarter.......................................................................... $ 12.08 $ 9.00
Third fiscal Quarter........................................................................... $ 17.58 $ 10.83
Fourth fiscal Quarter.......................................................................... $ 26.67 $ 14.67
FISCAL YEAR ENDED APRIL 26, 1997
First fiscal Quarter........................................................................... $ 30.33 $ 16.33
Second fiscal Quarter.......................................................................... $ 25.33 $ 16.50
Third fiscal Quarter........................................................................... $ 24.83 $ 17.50
Fourth fiscal Quarter.......................................................................... $ 23.17 $ 13.33
FISCAL YEAR ENDED APRIL 25, 1998
First fiscal Quarter........................................................................... $ 20.58 $ 14.67
Second fiscal Quarter.......................................................................... $ 25.92 $ 17.21
Third fiscal Quarter........................................................................... $ 24.83 $ 14.69
Fourth fiscal Quarter.......................................................................... $ 19.81 $ 16.88
FISCAL YEAR ENDING APRIL 24, 1999
First fiscal Quarter (through May 1, 1998)..................................................... $ 18.50 $ 16.19
</TABLE>
The market price of the Common Stock will be affected by the completion of
the Strategic Restructuring Plan, including the completion of the Equity
Self-Tender and the Distributions. See "Risk Factors--Impact of the Strategic
Restructuring Plan on Trading Prices of Common Stock" in Annex A. The market
price of the Common Stock also may be affected by any failure to complete all or
any elements of the Strategic Restructuring Plan.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE NOTES PRIOR TO
MAKING ANY DECISION WITH RESPECT TO THE OFFER.
15
<PAGE>
DESCRIPTION OF THE NOTES
At May 1, 1998, there was outstanding $230.0 million aggregate principal
amount of the Notes. The terms of the Notes are governed by the Indenture, dated
as of May 22, 1996 (the "Indenture"), between the Company and The Chase
Manhattan Bank as trustee (the "Trustee"). The Notes bear interest at a rate of
5 1/2% per annum payable semi-annually. They are convertible into Common Stock
at any time at the option of the Holder at a rate of one share for each $31.60
in principal amount (the "Existing Conversion Price"). The Existing Conversion
Price is subject to adjustment in the event of certain corporate transactions,
including the Equity Self-Tender and the Distributions. See "Effect of the
Strategic Restructuring Plan on the Existing Conversion Price of the Notes." The
Indenture does not contain any restrictions on the payment of dividends, the
repurchase of securities of the Company or any financial covenants or other
provisions restricting the incurrence of indebtedness. The Notes are subordinate
to senior debt, which is generally defined as secured indebtedness of the
Company. At January 24, 1998, there was $340.8 million of senior debt
outstanding; on a pro forma basis, adjusted to give effect to the Strategic
Restructuring Plan and the Financing Transactions, senior debt was $755.5
million at such date. The amount of senior debt would be reduced by the amount
of any Notes that are not repurchased in the 2003 Note Tender Offers. See "Risk
Factors--Substantial Indebtedness of the Company; Ability to Service Debt" in
Annex A. The Company has the right to redeem the Notes beginning May 22, 1998
for a premium over face amount until May 14, 2003, and thereafter at the face
amount, in each case with accrued interest, PROVIDED, that the Notes are not
redeemable prior to May 15, 1999, unless the Common Stock has traded above 150%
of the Existing Conversion Price for a specified period. This condition has not
been satisfied to date. The Company is required to offer to repurchase the Notes
for 100% of their principal amount plus accrued interest, upon occurrence of
certain change of control events or the termination of trading of the Common
Stock. The Strategic Restructuring Plan does not constitute a change of control
event within the meaning of the Indenture. The Notes, if not previously
converted, mature on May 15, 2003.
The foregoing description of the Notes is qualified in its entirety by
reference to the terms of the Indenture.
EFFECT OF THE STRATEGIC RESTRUCTURING PLAN ON THE
EXISTING CONVERSION PRICE FOR THE NOTES
The Indenture provides for three adjustments to the Existing Conversion
Price of the Notes, as a result of the Equity Self-Tender, the Distributions and
the one-for-four reverse stock split of the Common Stock, respectively. These
adjustments will apply to any Notes that remain outstanding after completion of
the 2003 Note Tender Offers. The adjustments are summarized below. This summary
is qualified in its entirety by reference to the terms of the Indenture.
EQUITY SELF-TENDER ADJUSTMENT
Under the Indenture, the Existing Conversion Price will be adjusted to
account for the purchase by the Company of its shares in the Equity Self-Tender
by multiplying the Existing Conversion Price by a fraction (the "Equity
Self-Tender Adjustment Factor"). The numerator of the fraction will be the
number of shares of Common Stock outstanding (including any tendered shares)
upon expiration of the Equity Self-Tender (the "Expiration Time") multiplied by
the Current Market Price (as defined in the last sentence of this paragraph) of
the Common Stock after the Expiration Time. The denominator will be the sum of
(x) the fair market value of the aggregate consideration payable to stockholders
based on the acceptance (up to the maximum specified in the terms of the Equity
Self-Tender) of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares so accepted, up to any such maximum, being referred
to as the "Purchased Shares") plus (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) on the Expiration Time and
the Current Market Price of the Common Stock. For purposes of the Equity
Self-Tender Adjustment Factor, the "Current Market
16
<PAGE>
Price" is the average of the daily closing prices per share of Common Stock for
three trading days following the Expiration Time. Shares underlying stock
options that are accepted in the Equity Self-Tender will be outstanding for
purposes of calculating the Equity Self-Tender Adjustment Factor.
SPIN-OFF ADJUSTMENT
Under the Indenture, the Existing Conversion Price will also be adjusted to
account for the Distributions by multiplying the Existing Conversion Price (as
adjusted by the Equity Self-Tender Adjustment Factor) by a separate fraction
(the "Spin-Off Adjustment Factor"). The numerator of the fraction will be the
Current Market Price (as defined in the next sentence) on the record date for
the Distributions less the fair market value (as determined by the Board of
Directors) on the record date of the portion of the shares of the Spin-Off
Companies so distributed applicable to one share of Common Stock and the
denominator will be the Current Market Price. For purposes of the Spin-Off
Adjustment Factor, "Current Market Price" is defined as the average of the daily
closing prices per share of Common Stock for the ten consecutive trading days
immediately prior to the record date for the Distributions, except that the
closing price for each trading day prior to or including the Expiration Time for
the Equity Self-Tender will be adjusted by multiplying it by the Equity
Self-Tender Adjustment Factor. Further, for purposes of the Spin-Off Adjustment
Factor, the Board of Directors has determined that the "fair market value" of
each Spin-Off Company will be equal to the price at which the shares of common
stock of the Spin-Off Companies are offered to the public (without reduction for
underwriting discounts or commissions) in underwritten primary offerings on or
about the record date for the Distributions.
Because the Equity Self-Tender Adjustment Factor and the Spin-Off Adjustment
Factor are calculated by reference to closing prices of the Common Stock and the
offering price of the Spin-Off Companies' stock, the actual adjustments cannot
be calculated in advance.
ADJUSTMENT FOR REVERSE STOCK SPLIT
Concurrently with the Distributions, the Company will, subject to
stockholder approval, effect a one-for-four reverse stock split. Under the
Indenture, the Existing Conversion Price (as adjusted by the Equity Self-Tender
Adjustment Factor and the Spin-Off Adjustment Factor) will be proportionately
adjusted to account for the reverse stock split.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material U.S. federal income tax
consequences resulting from the sale of the Notes pursuant to the Offer. This
summary is general in nature, and does not address all of the U.S. federal
income tax consequences that may be relevant to a Holder in light of such
Holder's particular tax situation (such as a Holder subject to the alternative
minimum tax) or to certain classes of Holders subject to special treatment under
the U.S. federal income tax laws (for example, dealers in securities or
currencies, financial institutions, insurance companies, tax exempt entities,
and persons who hold the Notes as a hedge, who have otherwise hedged the risk of
holding Notes, who hold the Notes as part of a straddle with other investments,
who hold the Notes in connection with a conversion transaction or whose
functional currency is not the U.S. dollar). In addition, the discussion does
not consider the effect of any foreign, state, local or other tax laws, or any
U.S. tax considerations (e.g., estate or gift tax) other than U.S. federal
income tax considerations, that may be applicable to particular Holders.
This discussion is directed at Holders who are United States persons and
assumes that the Notes are held as "capital assets" (generally, property held
for investment) within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). A United States person is the beneficial owner
of a Note that is (i) for United States federal income tax purposes a citizen or
resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof,
17
<PAGE>
(iii) an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) a trust with respect to the
administration of which a court within the United States is able to exercise
primary supervision and one or more United States persons have the authority to
control all substantial decisions of the trust.
This summary is based upon the Code, the Treasury Regulations promulgated
thereunder, Internal Revenue Service ("IRS") rulings, and judicial decisions,
all as in effect on the date hereof, and all of which are subject to change or
differing interpretations, possibly with retroactive effect. No assurance can be
given that the treatment described herein of the cash payments pursuant to the
Offer will be accepted by the IRS or, if challenged, by a court.
SALE OF NOTES PURSUANT TO THE OFFER
A sale of Notes by a Holder pursuant to the Offer will be a taxable
transaction to such Holder for U.S. federal income tax purposes. A Holder will
generally recognize capital gain (subject to the market discount rules discussed
below) or loss on the sale of a Note in an amount equal to the difference
between (i) the amount of cash received for such Note, other than the portion of
such amount that is properly allocable to accrued interest, which will be taxed
as ordinary income, and (ii) the Holder's "adjusted tax basis" for such Note at
the time of the sale. While a Holder will recognize long-term capital gain or
loss if, at the time of the sale, the Holder's holding period for the Notes is
more than one year, the lowest capital gains rates will apply to an individual
Holder only if such Holder's holding period in the Notes is more than 18 months
at the time of the sale. Gain or loss will be computed separately for each block
of Notes (Notes purchased at the same time and at the same cost) tendered by a
Holder. Holders should consult their tax advisors with respect to applicable
rates and holding periods, netting rules for capital losses and limitations on
the deduction of capital losses.
Generally, a Holder's "adjusted tax basis" for a Note will be equal to the
cost of the Note to such Holder, less payments (other than interest payments)
received on the Note. If applicable, a Holder's tax basis in a Note also would
be increased by any market discount previously included in income by such Holder
pursuant to an election to include market discount in gross income currently as
it accrues, and would be reduced by the accrual of any amortizable bond premium
which the Holder has previously elected to deduct from gross income on an annual
basis. Amortizable bond premium is present if the Holder's adjusted tax basis in
a Note immediately after the Holder acquired the Note exceeded the sum of all
amounts payable on the Note (other than stated interest payments) after the
acquisition date.
An exception to the capital gain treatment described above may apply to a
Holder who purchased a Note at a "market discount." Subject to a statutory DE
MINIMIS exception, market discount is the excess of the stated principal amount
of the Note over the Holder's tax basis in such Note immediately after its
acquisition by such Holder. In general, unless the Holder has elected to include
market discount in income currently as it accrues, any gain realized by a Holder
on the sale of a Note having market discount will be treated as ordinary income
to the extent of market discount that has accrued (on a straight line basis or,
at the election of the Holder, on a constant yield basis) while such Note was
held by the Holder.
TAX CONSIDERATIONS FOR NON-TENDERING HOLDERS
A Holder who does not sell Notes pursuant to the Offer will not recognize
gain or loss by reason of the Offer.
INFORMATION REPORTING
Information statements will be provided to the IRS and to Holders whose
Notes are sold pursuant to the Offer reporting the payment of the consideration
for the Notes (except with respect to Holders that are exempt from the
information reporting rules, such as corporations).
18
<PAGE>
BACKUP WITHHOLDING AND SUBSTITUTE FORM W-9
Payments to Holders whose tendered Notes are accepted will be subject to
"backup withholding" at a 31% rate unless the Holder is (a) an entity that is
exempt from withholding (including corporations, tax-exempt organizations and
certain qualified nominees) or (b) provides the Depositary with its taxpayer
identification number ("TIN") on Substitute Form W-9, certifying that the TIN
provided to the Depositary is correct and that (i) the Holder has not been
notified by the IRS that the Holder is subject to backup withholding due to
underreporting of interest and dividends or (ii) the IRS has notified the Holder
that the Holder is no longer subject to backup withholding. A Holder who does
not provide the Depositary with the Holder's correct TIN may be subject to
interest and penalties.
Backup withholding is not an additional tax. Rather, the U.S. federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of U.S. federal
income taxes, a refund may be obtained from the IRS provided the required
information is furnished.
THE FOREGOING DESCRIPTION OF MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO HOLDERS IS FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO
COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER.
ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THEM OF THE OFFER.
19
<PAGE>
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by the Company to pay the consideration
in connection with the 2003 Note Tender Offers (excluding accrued and unpaid
interest) is estimated to be approximately $217.4 million (assuming 100% of the
outstanding principal amount of each of the Notes is tendered prior to the
Expiration Date and is accepted for payment). The Company intends to obtain such
funds as shown in the table below.
Set forth below is a summary of the estimated sources and uses of funds in
connection with the Strategic Restructuring Plan and the Financing Transactions
and the application of the net proceeds therefrom as if the foregoing
transactions were completed on January 24, 1998:
<TABLE>
<CAPTION>
(IN
MILLIONS)
------------
<S> <C>
Sources of Funds:
Senior Subordinated Notes(1).................................................. $ 400.0
Revolving Credit Facility(1).................................................. --
Tranche A Term Loan Facility(1)............................................... 72.4
Tranche B Term Loan Facility(1)............................................... 675.0
Equity Investment............................................................. 270.0
Debt Repayments by Spin-Off Companies(2)...................................... 115.0
Available Cash................................................................ 22.6
------------
Total....................................................................... $ 1,555.0
Uses of Funds:
2003 Note Tender Offers(3).................................................... $ 217.4
Repayment of Existing Credit Facility......................................... 332.6
Equity Self-Tender(4)......................................................... 930.0
Estimated Fees and Expenses(5)................................................ 75.0
------------
Total....................................................................... $ 1,555.0
</TABLE>
- ------------------------
(1) For a description of the Financing Transactions, see "The Strategic
Restructuring Plan--Financing Transactions" in Annex A.
(2) Under the Strategic Restructuring Plan, the Company is allocating $130.0
million in debt to the Spin-Off Companies of which $115.0 million will be
repaid by the Spin-Off Companies to the Company at the date of the
Distributions.
(3) Assumes that all outstanding Notes are repurchased in the 2003 Note Tender
Offers at 94.5% of the principal amount of the Notes (excluding accrued
interest).
(4) Assumes that five million Option Shares with an average exercise price of
$14 per Share are tendered and accepted for purchase by the Company in the
Equity Self-Tender. Total consideration paid in the Equity Self-Tender will
depend on the number of Option Shares tendered and the exercise prices of
the options underlying such Option Shares.
(5) Estimated fees and expenses include banking and financial advisory fees,
legal and accounting expenses, a transaction fee payable to CD&R and
Investor's legal and other expenses.
The Company will incur substantial indebtedness in connection with the
Strategic Restructuring Plan and the Financing Transactions and will thereby
become highly leveraged. At January 24, 1998, the Company had outstanding
approximately $714.5 million in indebtedness consisting of bank loans,
convertible subordinated notes and capital leases. As a result of the Strategic
Restructuring Plan and the Financing Transactions, the Company's total
indebtedness will increase by approximately $441.0 million to approximately
$1,155.5 million, assuming that all Notes are accepted for purchase in the 2003
Note Tender Offers
20
<PAGE>
and all 2001 Notes are exchanged for Common Stock in the 2001 Note Offer. Any
Notes and 2001 Notes that remain outstanding will increase the amount of
outstanding debt.
For a description of the risks arising from the Company's leverage after the
Strategic Restructuring Plan, see "Risk Factors--Substantial Indebtedness of the
Company; Ability to Service Debt" and "--Risks Arising from Restrictions in
Agreements Relating to Indebtedness" in Annex A.
THE DEALER MANAGER
The Company has retained BancAmerica Robertson Stephens to act as Dealer
Manager in connection with the Offer. In its capacity as Dealer Manager,
BancAmerica Robertson Stephens may contact Holders regarding the Offer and may
request brokers, dealers, commercial banks, trust companies and other nominees
to forward this Offer to Purchase and related materials to beneficial owners of
Notes. An affiliate of BancAmerica Robertson Stephens, BA Robertson Stephens
International Limited, has been retained as Dealer Manager in connection with
the Offshore Offer. BancAmerica Robertson Stephens and BA Robertson Stephens
International Limited will receive a fee for their services as Dealer Manager in
connection with the 2003 Note Tender Offers that will depend on the percentage
of the aggregate principal amount of the Notes tendered for purchase in the 2003
Note Tender Offers.
No fee will be paid on the first 60% of the aggregate principal amount of
the Notes tendered. Thereafter, a fee will be paid for each $1,000 principal
amount of Notes tendered. The fee is based on a sliding scale, with the higher
fee only paid on the incremental Notes tendered above specified thresholds. The
fees range from $3.75 per $1,000 principal amount up to a maximum of $30 per
$1,000 principal amount if more than 95% of the aggregate principal amount of
the Notes are tendered. Based on the foregoing fee structure, if all outstanding
Notes are tendered in the 2003 Note Tender Offers, BancAmerica Robertson
Stephens and BA Robertson Stephens International Limited together will receive
an aggregate fee of $991,000.
BancAmerica Robertson Stephens will also be reimbursed for its reasonable
out-of-pocket expenses incurred in connection with the Offer (including the
reasonable fees and disbursements of counsel). The Company has also agreed to
indemnify BancAmerica Robertson Stephens and its affiliates against certain
liabilities, including liabilities under the federal securities laws, caused by,
relating to or arising out of the Offer.
BancAmerica Robertson Stephens has also been selected by the Company to act
as Dealer Manager with respect to the 2001 Note Offer. BancAmerica Robertson
Stephens has also been selected as the managing underwriter for the public
offering of common stock of two of the Spin-Off Companies. BancAmerica Robertson
Stephens has in the past provided certain investment banking services to the
Company, for which services BancAmerica Robertson Stephens has received
customary compensation, including acting as placement agent for the Company's
private placement of the Notes and lead manager for the Company's public
offering of the 2001 Notes.
The Dealer Manager does not assume any responsibility for the accuracy or
completeness of the information concerning the Company or its affiliates
contained herein or for any failure by the Company to disclose events which may
have occurred and may affect the significance or accuracy of such information.
Unless otherwise indicated, all information contained in this Offer to Purchase
has been supplied by the Company. The Company assumes full responsibility for
the accuracy or completeness of such information.
DEPOSITARY AND INFORMATION AGENT
The Chase Manhattan Bank has been appointed Depositary for the Offer. All
deliveries and correspondence sent to the Depositary should be directed to its
address set forth on the back cover of this Offer to Purchase. MacKenzie
Partners, Inc. has been appointed Information Agent for the Offer. Requests for
assistance or additional copies of this Offer to Purchase and the Letter of
Transmittal should
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be directed to the Information Agent at its address set forth on the back cover
of this Offer to Purchase. Holders of the Notes may also contact their broker,
dealer, commercial bank or trust company for assistance concerning the Offer.
FEES AND EXPENSES
In addition to the fees and expenses payable to the Dealer Manager, the
Company will pay the Depositary and the Information Agent reasonable and
customary fees for their services (and will reimburse them for their reasonable
out-of-pocket expenses in connection therewith), and will pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Offer to Purchase and
related documents to the beneficial owners of the Notes and in handling or
forwarding tenders for purchase. In addition, the Company has agreed to
indemnify the Depositary and the Information Agent against certain liabilities
in connection with their services, including liabilities under the federal
securities laws.
The Company will pay all transfer taxes, if any, applicable to the purchase
of Notes pursuant to the Offer. If, however, Notes for principal amounts not
accepted for tender are to be delivered to, or are to be registered or issued in
the name of, any person other than the registered Holder of the Notes, or if
tendered Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the purchase of Notes pursuant to the Offer, then the amount
of any such transfer tax (whether imposed on the registered Holder or any other
person) will be payable by the tendering Holder. If satisfactory evidence of
payment of such tax or exemption therefrom is not submitted, then the amount of
such transfer tax will be deducted from the Offer Consideration otherwise
payable to such tendering Holder.
MISCELLANEOUS
In connection with the Offer, directors, officers and employees of the
Company (who will not be specifically compensated for such services) may solicit
tenders by use of the mails, personally or by telephone, telegram or facsimile
transmissions.
None of the officers, directors or affiliates of the Company hold any of the
Notes.
The Company is not aware of any jurisdiction where the making of the Offer
is not in compliance with the laws of such jurisdiction. If the Company becomes
aware of any jurisdiction where the making of an Offer would not be in
compliance with such laws, the Company will make a good faith effort to comply
with any such laws or seek to have such laws declared inapplicable to the Offer.
If, after such good faith effort, the Company cannot comply with any such
applicable laws, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of the Notes residing in such jurisdictions.
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ANNEX A
CERTAIN INFORMATION CONCERNING
THE STRATEGIC RESTRUCTURING PLAN AND THE COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE STRATEGIC RESTRUCTURING PLAN........................................................................... 1
Equity Self-Tender..................................................................................... 1
Spin-Off Distributions................................................................................. 2
Equity Investment...................................................................................... 4
Reverse Stock Split.................................................................................... 6
Financing Transactions................................................................................. 6
Agreements with Jonathan Ledecky....................................................................... 7
Adjustment to Employee Stock Options................................................................... 9
Information About the Board of Directors After the Equity Investment................................... 10
U.S. Federal Income Tax Consequences of the Distributions.............................................. 14
RISK FACTORS............................................................................................... 17
THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING............................................... 25
Company Overview....................................................................................... 25
Market Overview........................................................................................ 26
Business Strategies.................................................................................... 27
North American Office Products Group................................................................... 28
Operations Outside of North America.................................................................... 31
Mail Boxes Etc. ....................................................................................... 33
Competition............................................................................................ 34
Employees.............................................................................................. 35
Properties............................................................................................. 35
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
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NOTE REGARDING DEFINED TERMS
Capitalized terms used in this Annex without definition have the meanings
given them in the accompanying materials.
As used herein, the following capitalized terms shall have the meanings
indicated:
"Equity Self-Tender" means U.S. Office Products' offer to purchase
37,037,037 shares of Common Stock at a price of $27.00 per share, pursuant to a
Schedule 13E-4 and a Schedule 14D-1 filed with the Securities and Exchange
Commission on May 4, 1998.
"2001 Notes" means U.S. Office Products' outstanding 5 1/2% Convertible
Subordinated Notes due 2001.
"2001 Note Exchange Offer" means U.S. Office Products' offer to exchange
shares of its Common Stock for 2001 Notes pursuant to the terms set forth in a
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on May 1, 1998 and the accompanying Letter of Transmittal.
"2003 Notes" means U.S. Office Products' outstanding 5 1/2% Convertible
Subordinated Notes due 2003.
"2003 Note Tender" means U.S. Office Products' offer to purchase any and all
of the 2003 Notes for a purchase price equal to 94.5% of the principal amount of
the 2003 Notes and includes the Offer and the Offshore Offer.
<PAGE>
THE STRATEGIC RESTRUCTURING PLAN
EQUITY SELF-TENDER
U.S. Office Products will offer to purchase 37,037,037 shares of Common
Stock (including shares that may be issued on exercise of vested and unvested
stock options with an exercise price of less than $27.00) at a price of $27.00
per share (or, in the case of shares underlying stock options, at $27.00 minus
the exercise price of the options). The Equity Self-Tender commenced on May 4,
1998 and will expire on June 1, 1998, unless U.S. Office Products extends the
expiration date.
The Board approved the Equity Self-Tender--and borrowing by U.S. Office
Products to finance a substantial portion of the purchase price--to give
stockholders the opportunity to receive cash for a portion of their investment
in U.S. Office Products. The Equity Self-Tender price of $27.00 per share
represents a substantial premium over the trading price of U.S. Office Products
Common Stock immediately prior to the announcement of the Strategic
Restructuring Plan. The Board, after receiving oral confirmation from Morgan
Stanley that this change would not have affected their January 12, 1998 written
opinion as to the fairness of the Strategic Restructuring Plan (as described
under "Opinion of Financial Advisor," below), decided to allow employees to
tender shares underlying options to reduce potential dilution to stockholders of
the Company and the Spin-Off Companies as well as to permit employees to
participate in the Equity Self-Tender without incurring the cost (and potential
tax liability) of exercising their options before they knew whether their
options would be accepted in the Equity Self-Tender. Because shares underlying
options can be tendered, the Company will not make any adjustment to the
exercise price or number of options that will be outstanding after the Equity
Self-Tender, to take account of the effects of the Equity Self-Tender. In
addition, based on information received from management and recommendations of
outside advisers, the Board concluded that after U.S. Office Products is
restructured, it would be able to generate adequate cash flow to service the
additional debt.
U.S. Office Products will not be required to purchase shares of Common Stock
in the Equity Self-Tender unless the following conditions, and other standard
conditions, are satisfied:
- a minimum of 37,037,037 shares of Common Stock (including shares
underlying stock options) are validly tendered and not withdrawn;
- U.S. Office Products has obtained enough financing to pay for the shares
(including shares issuable upon exercise of outstanding employee stock
options) it will purchase in the Equity Self-Tender;
- all conditions to the completion of Investor's purchase of the equity
securities have been satisfied or waived, except completion of the Equity
Self-Tender and Distributions; and
- registration statements covering the shares of the Spin-Off Companies to
be distributed to U.S. Office Products' stockholders in the Distributions
have become effective and all other conditions to the completion of the
Distributions have been satisfied except completion of the Equity
Self-Tender.
U.S. Office Products expects to pay for the shares with a combination of the
money it receives from the Equity Investment described below and money it
obtains in the Financing Transactions.
In the Equity Self-Tender, employees of U.S. Office Products may tender
shares underlying vested (but unexercised) or unvested stock options with an
exercise price of less than $27.00. U.S. Office Products will allow employees to
conditionally exercise unvested options to the extent it purchases shares
underlying such unvested options in the Equity Self-Tender, as long as the
employee tenders all of his or her vested options. In the Equity Self-Tender,
tendered options will be prorated in the same proportion as tendered shares.
Unvested options that are not accepted for purchase in the Equity Self-Tender
will remain unvested after the Equity Self-Tender. U.S. Office Products will
accept for purchase in the Equity Self-Tender shares underlying an employee's
vested options before accepting any shares underlying an employee's unvested
options. Up to approximately 22 million shares are issuable upon exercise of
outstanding options. U.S. Office Products will record a non-cash compensation
expense to reflect the difference between the tender offer price of $27.00 per
share and the exercise price for options that are purchased. The amount of the
compensation expense will depend on the number of shares underlying options that
are accepted in the Equity Self-Tender and the exercise price of the associated
options. If all outstanding shares, plus all shares
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received in exchange for 2001 Notes (and assuming all 2001 Notes are exchanged
for shares in the 2001 Note Exchange Offer) and all shares underlying all
outstanding options are tendered, the Company currently estimates that the
non-cash expense will be approximately $65.0 million.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products stockholders filed an action in the Delaware Chancery
Court. The action claims that the directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity
Self-Tender to include employee stock options. The complaint seeks injunctive
relief, damages, and attorney's fees. U.S. Office Products believes that this
lawsuit is without merit and intends to vigorously contest it.
SPIN-OFF DISTRIBUTIONS
GENERAL. After acceptance of shares of Common Stock in the Equity
Self-Tender, U.S. Office Products will distribute the common stock of the
Spin-Off Companies. These companies will hold substantially all of the
businesses and assets of, and will be responsible for substantially all of the
liabilities associated with, U.S. Office Products' technology solutions (Aztec
Technology Partners, Inc.), print management (Workflow Management, Inc.),
educational supplies (School Specialty, Inc.) and corporate travel services
(Navigant International, Inc.) businesses. Each of the Spin-Off Companies
intends to issue additional common stock in an underwritten public offering that
is expected to occur at approximately the same time as the Distributions. The
Distributions are intended to qualify for tax-free treatment under Section 355
of the Code and will not be completed unless the Company receives an opinion
from Wilmer, Cutler & Pickering that the Distributions will receive tax-free
treatment. See "--U.S. Federal Income Tax Consequences of the Distributions."
The Board determined that the separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would benefit the stockholders because it would
have advantages for the Spin-Off Companies and U.S. Office Products. The
advantages that the Board considered included the following:
- The Distributions will allow each of U.S. Office Products and the Spin-Off
Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries, geographic territories and
stages of growth.
- Each will be able to pursue an independent acquisition program that allows
for a more focused use of resources and, where stock is used as
consideration, provide stock of a public company that is in the same
industry as the businesses being acquired.
- Each can be recognized by the financial community as a distinct business
that can be evaluated more readily and compared more easily to industry
peers.
- Each can implement more focused incentive compensation packages that
respond to specific industry and market conditions and enhance employee
retention objectives.
- After the Distributions, U.S. Office Products will be focused on a more
narrow, complementary group of businesses. Each of the Spin-Off Companies
will be focused primarily on their individual businesses.
In considering the Distributions, the Board also took into account that all
U.S. Office Products' stockholders remaining after the Equity Self-Tender will
receive stock of the Spin-Off Companies. Accordingly, these stockholders will
benefit from any appreciation in value of the stocks of the Spin-Off Companies
after the Distributions. The Board also considered the diversification
opportunities the Distributions would provide stockholders. Stockholders will be
able to retain an interest in those Spin-Off Companies they want to retain and
to dispose of their interests in the others.
U.S. Office Products will distribute shares of the Spin-Off Companies to its
stockholders remaining after completion of the 2001 Note Exchange Offer and the
Equity Self-Tender. U.S. Office Products has not yet determined the number of
shares of each of the Spin-Off Companies that will be distributed for each share
of Common Stock, but U.S. Office Products will distribute all shares of the
Spin-Off Companies it holds. The number of shares of the Spin-Off Companies that
a U.S. Office Products' stockholder
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<PAGE>
receives in the Distributions will be based on the number of shares of Common
Stock that the stockholder holds after the 2001 Note Exchange Offer and the
Equity Self-Tender but prior to the one-for-four reverse stock split.
Investor will not receive shares of the Spin-Off Companies in the
Distributions. At the same time, the Investment Agreement specifies certain
terms of the Distributions, and Investor has the right to reasonably approve
certain other terms of the Distributions. Investor may require terms of the
Distributions (such as responsibility for pre-distribution liabilities) that are
less favorable to the Spin-Off Companies than would be the case if Investor also
had an interest in the Spin-Off Companies. In addition, U.S. Office Products has
agreed to indemnify Investor and its affiliates against losses resulting from
any of the Spin-Off Companies failing to satisfy their obligations to U.S.
Office Products under certain agreements related to the Distributions.
In connection with the Distributions, the Company will enter into a series
of agreements with each Spin-Off Company to provide mechanisms for an orderly
transition and to define certain relationships among the Company and the
Spin-Off Companies after the Distributions. These agreements are: a distribution
agreement (the "Distribution Agreement") among the Company and the Spin-Off
Companies; a tax allocation agreement (the "Tax Allocation Agreement") among the
Company and the Spin-Off Companies; an employee benefits agreement (the
"Employee Benefits Agreement") among the Company and the Spin-Off Companies; and
a tax indemnification agreement (the "Tax Indemnification Agreement") among the
Spin-Off Companies. Each of these agreements is in the process of being
negotiated, and is subject to Investor's reasonable approval. There can be no
assurance that the terms of these agreements will contain the terms described
below.
DISTRIBUTION AGREEMENT. The Distribution Agreement will provide for the
transfer from the Company to the Spin-Off Companies of substantially all of the
equity interests in the Company's subsidiaries that are engaged in the business
of technology solutions, print management, educational supplies and corporate
travel services businesses as well as the transfer, in certain instances, of
other assets related to these businesses. The Distribution Agreement will also
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefit matters which will be
governed by separate agreements) among the Company and the Spin-Off Companies.
It is expected that each Spin-Off Company may be responsible for (i) any
liabilities arising out of or in connection with its respective businesses as
they were formerly conducted by the Company and/or its subsidiaries, (ii) its
liabilities under the Distribution Agreement, the Tax Allocation Agreement and
the Employee Benefits Agreement and related agreements, (iii) its liabilities
for its portion of an aggregate of $130.0 million of debt allocated to the
Spin-Off Companies plus expenditures by such entities for acquisitions after the
date of the Investment Agreement, (iv) certain liabilities under the securities
laws and (v) any liabilities of the Spin-Off Company or its subsidiaries. In
addition, the Distribution Agreement is expected to provide that each of the
Company and the Spin-Off Companies will bear a portion of (i) any liabilities of
the Company under the securities laws arising from events prior to the
Distributions (other than claims relating solely to a specific Spin-Off Company
or relating specifically to the continuing businesses of the Company), (ii) the
Company's general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the management or conduct of a
particular distributed or retained subsidiary's business) and (iii) a portion of
transaction costs (including legal, accounting, investment banking and financial
advisory) and other fees incurred by the Company in connection with the
Strategic Restructuring Plan equal to $1.0 million in the case of each Spin-Off
Company.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT. The Tax
Allocation Agreement will provide that each Spin-Off Company is responsible for
its respective share of the Company's consolidated tax liability for the years
that each such corporation was included in the Company's consolidated U.S.
federal income tax return. The Tax Allocation Agreement will also provide for
sharing, where appropriate, of state, local and foreign taxes attributable to
periods prior to the Distributions. Under the Tax Allocation Agreement, the
Spin-Off Companies will jointly and severally indemnify the Company for any
losses
3
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associated with taxes ("Distribution Taxes") assessed against the Company that
are related to the Distributions if an action or omission (an "Adverse Tax Act")
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. Further, the Spin-Off
Companies, but not the Company, will enter into the Tax Indemnification
Agreement which will require the Spin-Off Company that is responsible for the
Adverse Tax Act to indemnify the other Spin-Off Companies for any liability to
the Company under the Tax Allocation Agreement. If there is a final
determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either the Company or
any of the Spin-Off Companies, each of the Company and the Spin-Off Companies
will be liable for its pro rata portion of such Distribution Taxes based on the
value of each company's common stock after the Distributions. However, the
Company and the Spin-Off Companies have not agreed to indemnify the Company's
stockholders for any taxes resulting from the Distributions failing to qualify
for tax-free treatment.
EMPLOYEE BENEFITS AGREEMENT. In connection with the Distributions, the
Company will enter into the Employee Benefits Agreement with the Spin-Off
Companies to provide for an orderly transition of benefits coverage between the
Company and the Spin-Off Companies. Pursuant to this agreement, the respective
Spin-Off Companies will retain or assume liability for employment-related claims
and severance for persons currently or previously employed by the respective
Spin-Off Companies and their subsidiaries, while the Company and the businesses
which remain part of the Company after the Distributions will retain or assume
responsibility for their current and previous employees.
EQUITY INVESTMENT
Pursuant to the Investment Agreement, the Company will, following the Equity
Self-Tender and Distributions, issue and sell Common Stock and warrants to
purchase Common Stock to Investor for a purchase price of $270.0 million. As a
result of the Equity Investment, Investor will acquire: (a) shares of Common
Stock representing 24.9% of the outstanding shares of Common Stock after giving
effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of Common Stock equal to
24.9% (after giving effect to issuance of such additional shares upon exercise
of the Special Warrants) of the additional shares that are issuable upon
conversion of any 2001 Notes that remain outstanding after the Strategic
Restructuring Plan is completed and certain shares of Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements including the ones referred to in the next sentence; and (c) warrants
representing the right to purchase one share of Common Stock for (i) each share
of Common Stock purchased by Investor at the date of closing under the
Investment Agreement (the "Equity Investment Closing Date") and (ii) each share
of Common Stock into which the Special Warrants become exercisable. The Special
Warrants will permit Investor to buy additional shares of Common Stock to
maintain its 24.9% ownership position in the event that the Company issues
additional shares of Common Stock to a former owner of Blue Star Group Limited
("Blue Star") under the terms of the agreement by which the Company acquired
Blue Star. The former owner is entitled to receive up to 3.0 million more shares
(prior to any adjustment that may be appropriate to take account of the effect
of the Strategic Restructuring Plan) depending on a number of future events,
including the future trading price of Common Stock and the consolidated pre-tax
earnings of Blue Star and its New Zealand subsidiaries for the fiscal year
ending April 1999. In view of the uncertainty of these future events the Company
cannot reasonably estimate what portion, if any, of these additional shares may
be issued. The Special Warrants are exercisable from and after the Equity
Investment Closing Date until the twelfth anniversary thereof, subject to
certain limitations, and the warrants described in clause (c) above are
exercisable from and after the second anniversary of the Equity Investment
Closing Date until such twelfth anniversary thereof. If Investor exercises all
of the warrants described in clause (c) above, it will be required to pay the
Company an aggregate of $405.0 million. If no currently outstanding stock
options are exercised, exercise of these warrants would give Investor ownership
of approximately 39.9% of the Common Stock after implementation of the Strategic
Restructuring Plan (assuming that all of the 2001 Notes are exchanged in the
2001 Note Exchange Offer and all of the 2003 Notes are tendered and accepted for
purchase in the 2003 Note Tender).
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In accordance with the Investment Agreement, the Company's Board of
Directors will consist of nine directors, including the Chief Executive Officer
of the Company, three designees of Investor and five persons initially selected
by the Company's current Board of Directors. Investor's obligation to consummate
the Equity Investment is conditioned on two of the designees to the Company's
Board of Directors initially selected by the Company's current Board of
Directors being satisfactory to Investor. After closing, for so long as Investor
maintains certain levels of ownership of Common Stock, Investor will have the
right to nominate three members of the Company's Board of Directors and to
designate the Chairman of the Board. Certain Company Board of Directors'
decisions will be subject to super-majority voting provisions that, under
certain circumstances, may require the concurrence of at least one director
nominated by Investor. Investor will be subject to certain restrictions and
limitations with respect to transactions in Common Stock. See "--Information
About the Board of Directors After the Equity Investment."
Investor's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of the Company's representations and warranties and compliance by the
Company with its obligations under the Investment Agreement; (ii) receipt of
necessary antitrust and other regulatory clearance; (iii) absence of material
litigation; (iv) Company shareholder approval of the issuance of shares in the
Equity Investment; (v) consummation of the Distributions in accordance with the
Distribution Agreement containing certain terms specified in the Investment
Agreement and otherwise as reasonably approved by Investor; (vi) execution and
delivery of the Tax Allocation Agreement containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by Investor; (vii)
execution of documents relating to financing for the Equity Self-Tender
satisfactory in form and substance to Investor; (viii) consummation of the
Equity Self-Tender; (ix) execution of a consulting agreement with CD&R providing
for payment of an annual consulting fee of $500,000; (x) execution of a
registration rights agreement with Investor; (xi) absence of any development
since October 25, 1997 that would have a material adverse effect on the Company
(after giving effect to the Distributions); (xii) no person or group (other than
Investor) acquiring beneficial ownership of 15% or more of the Common Stock and
no person or group (other than Investor or its affiliates) having entered into
an agreement with the Company with respect to a tender or exchange offer for any
shares of Common Stock, or a merger, consolidation or other business combination
with or involving the Company; and (xiii) the Company's debt existing
immediately following completion of the transactions contemplated by the
Strategic Restructuring Plan shall not exceed $1.4 billion (assuming exchange of
all of the 2001 Notes) and the outstanding debt of the Spin-Off Companies shall
be at least $130.0 million plus expenditures by such entities for acquisitions
after the date of the Investment Agreement. If the Company does not proceed with
the Distributions, or if the Equity Investment does not occur for certain other
reasons, Investor can terminate the Investment Agreement and CD&R would receive
a termination fee of $25.0 million plus Investor's reasonable fees and expenses.
Upon completion of the Equity Investment, CD&R will receive a transaction fee of
$15.0 million and Investor will receive reimbursement for expenses it incurs in
connection with the transaction.
Investor or the Company can terminate the Investment Agreement at any time
if they both agree in writing. Either one can terminate the agreement if
Investor has not purchased the equity securities by September 30, 1998 (if such
failure to close is not the result of a breach by the party seeking
termination), if the Company's shareholders do not approve the transaction, or
if any law or order prohibits the transaction.
In addition, Investor can terminate the Investment Agreement if (i) the
Company materially breaches or makes a material misrepresentation which is not
cured within 30 days after notice from Investor; (ii) the Company's Board of
Directors withdraws, modifies, or publicly announces the intention to withdraw
or modify, its approval of the Investment Agreement or related transactions or
recommends an alternative transaction proposal; (iii) the Board of Directors
publicly announces that it has decided not to complete the Distributions; (iv)
certain conditions--including the accuracy at closing of statements made by the
Company in the Investment Agreement--become impossible to fulfill and Investor
does not waive the conditions; (v) the Company makes substantive amendments to
the agreements setting out the terms of the
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Distributions or the Equity Self-Tender; or (vi) Investor decides in its good
faith reasonable judgment not to proceed with the transaction based on its
review of the agreements relating to the Distributions or the Equity
Self-Tender.
The Company can terminate the Investment Agreement if (i) Investor
materially breaches or makes a material misrepresentation which is not cured
with 30 days after notice from the Company; (ii) certain conditions--including
the accuracy at closing of statements made by Investor in the Investment
Agreement--become impossible to fulfill and the Company does not waive the
conditions or (iii) the Company receives an unsolicited proposal for an
investment in the Company or purchase of assets of the Company that meet certain
criteria including that the proposal provides consideration that the Board of
Directors of the Company determines in good faith contains terms that are
financially superior to the Equity Investment.
The foregoing summary of the Investment Agreement does not purport to be
complete and is qualified in its entirety by reference to the Investment
Agreement, which is hereby incorporated by reference herein.
REVERSE STOCK SPLIT
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to effect a one-for-four reverse stock
split to be effective upon completion of all other elements of the Strategic
Restructuring Plan.
FINANCING TRANSACTIONS
In connection with the Strategic Restructuring Plan, the Company expects to
refinance its existing senior bank debt and to borrow additional funds to
finance the cost of purchasing shares of Common Stock in the Equity Self-Tender,
purchasing 2003 Notes in the 2003 Note Tender, and paying fees and expenses
incurred in connection with the Strategic Restructuring Plan.
NEW CREDIT FACILITY. The Company has agreed to and accepted a commitment
letter from The Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch
Capital Corporation, as agents, and Chase Securities Inc., BT Alex. Brown
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-arrangers, for a new bank loan facility (the "Credit Facility") that will
provide for an aggregate principal amount of $1.225 billion, consisting of (i)
seven-year term loan facilities totaling $300.0 million, (ii) an eight-year term
loan in the principal amount of $675.0 million, and (iii) a revolving credit
facility in the principal amount of $250.0 million. The Company and the banks
may agree to alter the allocated principal amount of two or more of the loan
facilities before signing definitive documents depending on market conditions.
The Credit Facility will be guaranteed by the Company's material domestic
subsidiaries and secured by substantially all assets of the Company and its
material domestic subsidiaries. Each loan will bear interest, at the Company's
option, at a short-term Eurodollar rate plus a margin of 2.25% or 2.50% (in the
case of the eight-year term loan) or a floating alternate base rate plus a
margin of 1.25% or 1.50% (in the case of the eight-year term loan). The
applicable margins will be subject to agreed upon reductions in the future based
on the Company's financial performance. The Company will be required to enter
into arrangements to insure that the effective interest rate paid by the Company
on at least 50% of its outstanding bank debt and subordinated debt will not
exceed a certain rate. The loan documents likely will include financial and
other covenants. These will include, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, transfer
provisions, amendment provisions and indemnification provisions. The Credit
Facility will be subject to mandatory prepayment in a variety of circumstances,
including upon certain asset sales and financing transactions. The Commitment
will terminate unless definitive loan documents are entered into, and the
Strategic Restructuring Plan and Financing Transactions completed, by June 30,
1998. No assurance can be given that the Credit Facility will be completed as
contemplated.
6
<PAGE>
SENIOR SUBORDINATED NOTES. The Company also expects to issue Senior
Subordinated Notes in a principal amount of at least $400.0 million. These
Senior Subordinated Notes will be subordinated in right of payment to the Credit
Facility. U.S. Office Products expects to offer these in a private placement.
The Senior Subordinated Notes will not be registered under the Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The availability of
subordinated debt financing will depend on a number of factors, including market
conditions and interest rates.
2001 NOTES AND 2003 NOTES. In addition to the 2003 Note Tender, U.S. Office
Products will also make the 2001 Note Exchange Offer to exchange the 2001 Notes
for Common Stock at an exchange rate of 61.843 shares per $1,000 principal
amount, which effectively reduces the conversion price on the 2001 Notes from
$19.00 to $16.17 while the offer is open. Holders of the 2001 Notes who accept
the offer will also receive accrued interest through the expiration of the 2001
Note Exchange Offer. The shares of Common Stock issuable on exchange of these
notes will be eligible to be tendered in the Equity Self-Tender and receive the
Distributions. U.S. Office Products will not complete this offer if the
commitment for the Credit Facility has been terminated or if Investor is no
longer obligated to complete the Equity Investment. The 2001 Note Exchange Offer
will also be subject to other conditions.
These transactions will reduce debt that will become due before the expected
due dates for the Credit Facility and the Senior Subordinated Notes. The 2001
Note Exchange Offer and the 2003 Note Tender are also intended to reduce the
number of shares of Common Stock that might be issued after completion of the
Strategic Restructuring Plan. Each of the 2001 Notes and the 2003 Notes are
convertible into Common Stock. If these notes are purchased or exchanged before
completion of the Strategic Restructuring Plan, the number of shares of Common
Stock that might be issued after the Strategic Restructuring Plan will be less.
The indebtedness of the Company after the Strategic Restructuring Plan will
include (i) any 2001 Notes that are not exchanged for Common Stock in the 2001
Note Exchange Offer and (ii) any 2003 Notes that are not purchased in the 2003
Note Tender.
AGREEMENTS WITH JONATHAN LEDECKY
Jonathan J. Ledecky, the founder, Chairman of the Board and former Chief
Executive Officer of U.S. Office Products, will resign as Chairman of U.S.
Office Products when the Distributions are completed. The U.S. Office Products
Board and Mr. Ledecky concluded that it will be important for the Spin-Off
Companies to have greater access to Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into an agreement with Mr. Ledecky.
This agreement will go into effect only if the Distributions are completed. It
will replace Mr. Ledecky's existing employment agreement with U.S. Office
Products. As a result of this agreement, Mr. Ledecky will remain employed with
U.S. Office Products, but his role with U.S. Office Products after the
Distributions will be substantially reduced. The principal terms of this
agreement, as it is expected to be amended prior to completion of the
Distributions, are summarized below.
The new agreement with Mr. Ledecky governs his continuing obligations to
U.S. Office Products. Under that agreement, Mr. Ledecky will report to the U.S.
Office Products Board of Directors and will provide high-level acquisition
negotiation services and business strategic advice. Under the agreement, Mr.
Ledecky will receive an annual salary of $48,000 through June 30, 2001. Mr.
Ledecky will also retain his existing U.S. Office Products options; the number
of shares subject to these options, and their exercise price, will be adjusted
to take account of the Distributions. See "--Adjustment to Employee Stock
Options." As a continuing employee, Mr. Ledecky is entitled to retain his
options despite his reduction in services to U.S. Office Products. U.S. Office
Products can terminate Mr. Ledecky's employment only for "cause." Cause consists
of (i) his conviction of or guilty or nolo contendere plea to a felony, (ii) his
engaging, despite notice, in conduct demonstrably and materially injurious to
U.S. Office Products, or (iii) his violation of the noncompetition agreement as
it relates to U.S. Office Products. If Mr. Ledecky resigns or is terminated, he
will cease to vest in his U.S. Office Products options and will have 90 days to
exercise any vested options (as under his existing options).
7
<PAGE>
It is expected that each Spin-Off Company will enter into an employment
agreement with Mr. Ledecky to implement its assigned portion of the agreement.
Under each employment agreement, Mr. Ledecky will report to the respective
boards of directors and senior management of the Spin-Off Companies. Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice to each of the Spin-Off Companies. Each Spin-Off Company can require his
performance of such services, consistent with his other contractual employment
obligations to Consolidation Capital Corporation (of which Mr. Ledecky is the
founder, chairman and chief executive officer), U.S. Office Products and the
other Spin-Off Companies. As an employee, Mr. Ledecky will also be subject to
the generally applicable personnel policies of each company and will be eligible
for each Spin-Off Company's benefit plans in accordance with their terms. Each
Spin-Off Company is expected to pay Mr. Ledecky an annual salary of up to
$48,000 for up to two years. Each Spin-Off Company may terminate Mr. Ledecky's
employment with or without "cause," where cause has the same definition as in
the agreement with U.S. Office Products, as modified to refer to the Spin-Off
Company. If without cause, the termination would entitle Mr. Ledecky to a
severance payment equal to his salary for the lesser of 12 months or the
remainder of the contract.
The agreement with U.S. Office Products provides for non-competition and
non-solicitation restrictions that continue for four years after the
Distributions have been completed. These provisions generally restrict Mr.
Ledecky from, among other things, investing in or working for or on behalf of
any business that sells products or services in direct competition with U.S.
Office Products or the Spin-Off Companies, within 100 miles of any location
where U.S. Office Products or the Spin-Off Companies conduct business. (For this
purpose, "products or services" are those that U.S. Office Products offered on
January 13, 1998.) The agreement prohibits Mr. Ledecky from trying to hire away
managerial employees of U.S. Office Products or the Spin-Off Companies, or
calling upon customers of U.S. Office Products or the Spin-Off Companies to
solicit or sell products or services in direct competition with U.S. Office
Products or the Spin-Off Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation (of which Mr. Ledecky is the founder, chairman
and chief executive officer) any person then or in the preceding year employed
by U.S. Office Products or the Spin-Off Companies. U.S. Office Products is
permitted to (and will) assign to the Spin-Off Companies the ability to enforce
the non-competition provisions described above as they apply to the Spin-Off
Companies' respective businesses, which will then constitute part of his
employment agreements with the Spin-Off Companies.
Mr. Ledecky will receive options from each Spin-Off Company for each of the
Spin-Off Companies' common stock on the date of the Distributions. The options
are intended to compensate Mr. Ledecky for his services to each of the Spin-Off
Companies as an employee. The options will cover up to 7.5% of each of the
Spin-Off Companies' outstanding common stock, determined as of the date of the
Distributions without regard to any concurrent public offerings. For each
Spin-Off Company, the options will have a per-share exercise price equal to the
initial public offering price for the Spin-Off Company. The estimated value of
these options depends on the initial public offering prices of the Spin-Off
Companies and the trading volatility of the Spin-Off Companies. U.S. Office
Products cannot make a reliable estimate of the value of these options until it
obtains an estimate of the initial public offering prices for the Spin-Off
Companies. U.S. Office Products believes that the value of these options will be
substantially greater than the annual cash compensation paid to officers of the
Spin-Off Companies, but moderate in relation to the total annual expenses of the
Spin-Off Companies. An estimate of the dollar value of the options will be
included in the information statements relating to each Distribution, which U.S.
Office Products will send to stockholders before the Distributions.
It is expected that, for each Spin-Off Company, Mr. Ledecky's options will
be fully vested when granted but will not be exercisable until 12 months after
the Distributions are completed. Mr. Ledecky's options from the Spin-Off
Companies will all become exercisable immediately if he dies before the option
expires or, in the case of a particular Spin-Off Company, if that company
accelerates the exercise schedule of options for substantially all management
option holders. (In this latter case, Mr. Ledecky's option will become
exercisable on the same accelerated schedule as the other management option
holders.) All
8
<PAGE>
unexercised portions of the option will expire ten years after the date of grant
of the option or, if applicable, as of the date Mr. Ledecky violates his
non-competition agreement with a Spin-Off Company.
ADJUSTMENT TO EMPLOYEE STOCK OPTIONS
The Company has previously granted stock options to management and
employees. The Company expects that the number and exercise price of these
options will be adjusted following completion of the Strategic Restructuring
Plan to take account of the effects of the Distributions on the underlying value
of the Common Stock. Options held after the Equity Self-Tender and Distributions
by employees who remain with U.S. Office Products will remain exercisable for
shares of Common Stock. Options held after the Equity Self-Tender and
Distributions by employees who will become employees of a Spin-Off Company will
be converted into options exercisable for shares of that particular Spin-Off
Company. The adjustments will be made by a formula that takes account of the
difference between the price of the Company's Common Stock before and after the
Distributions have been completed (and, in the case of options for Spin-Off
Company shares, the price of Spin-Off Company shares in the public offerings
expected to be completed by the Spin-Off Companies (the "Spin-Off Company
Offering Price")). The formula will not affect when the options vest or when
employees can exercise the options. The respective option exercise prices will
be adjusted by this formula:
<TABLE>
<S> <C> <C>
Trading Price
Post-Distributions
Exercise Price (New) = Exercise Price Trading Price
(Old) X Pre-Distributions
</TABLE>
The respective numbers of shares subject to option will be adjusted by this
formula:
<TABLE>
<S> <C> <C>
Trading Price
Pre-Distributions
Option Shares (New) = Option Shares Trading Price
(Old) X Post-Distributions
</TABLE>
For all optionees, the "Trading Price Pre-Distributions" will be the average
closing price of the Common Stock for the lesser of the ten business days
preceding the Distributions or the business days falling between expiration of
the Equity Self-Tender and the completion of the Distributions. For continuing
employees of the Company, the "Trading Price Post-Distributions" will be the
average closing price of the Common Stock for the ten business days after and
including the date on which the Distributions are completed. For employees of a
Spin-Off Company, the "Spin-Off Company Offering Price" will be substituted for
"Trading Price Post-Distributions" in this formula. The exercise price and
number of options will not be adjusted as result of the Equity Self-Tender, but
instead are adjusted solely for the Distributiuons and the reverse stock split.
The number of shares underlying options for continuing employees of the
Company will also be adjusted to take account of the reverse stock split; that
is, the new number of shares underlying such options will be divided by four and
the exercise price will be multiplied by four. The number of shares underlying
options for employees of a Spin-Off Company will also be adjusted for the
distribution ratio applied in the Spin-Off Company Distributions; that is, the
new number of shares underlying options in the Spin-Off Company will be divided
by the distribution ratio and the exercise price will be multiplied by the
distribution ratio. The intrinsic value of the adjusted options will be no
greater than the intrinsic value of the options immediately before the
Distributions and the reverse stock split, and the ratio of exercise price to
market price will be no less than the ratio immediately before the Distributions
and the reverse stock split.
As a result of the adjustments, employee stock options will likely represent
a greater percentage interest in the Company after these transactions than they
did before. At April 20, 1998, the Company's management and employees held
options to purchase a total of approximately 22.0 million shares, of which
approximately 3.7 million were held by employees that are expected to be
employees of a Spin-Off Company. The number of options that will be outstanding
after the Strategic Restructuring Plan will depend on the number of shares
subject to options that are accepted in the Equity Self-Tender and also on the
trading prices of the Common Stock around the time of the Distributions and the
offering prices of the Spin-Off Companies' shares. As a result, the ultimate
number of such options cannot be determined at this
9
<PAGE>
time. The fair value of the options may also change as a result of these
adjustments, but the fair value as measured by standard models will depend on
the adjusted exercise price, the adjusted number of shares, and the trading
prices and volatility of the Common Stock after completion of the Strategic
Restructuring Plan. Because the adjustments are designed to compensate for the
effects of the transactions in the Strategic Restructuring Plan, U.S. Office
Products does not currently expect that the adjustments will have a significant
effect on the fair value of the options, but cannot assure stockholders that the
change will not be significant.
INFORMATION ABOUT THE BOARD OF DIRECTORS AFTER THE EQUITY INVESTMENT
Investor has the right to designate three members of the Board of Directors
of the Company who will serve from the Equity Investment Closing Date until the
next annual meeting of stockholders. In addition, the Chief Executive Officer of
the Company, Thomas Morgan, will be a director. Two of the remaining directors
at closing must be satisfactory to Investor. Investor has informed the Company
that it intends to designate Charles P. Pieper, Kevin J. Conway and Brian D.
Finn as the three directors it is entitled to designate. Investor has the right
to designate the Chairman of the Board so long as it retains a specified
percentage of shares it acquires in the Equity Investment. Mr. Pieper will serve
as Chairman of the Board after closing. In addition, Michael Dooling, Timothy J.
Flynn, Jonathan J. Ledecky, Clifton B. Phillips and John A. Quelch have advised
the Board that they intend to resign as Directors of the Company effective as of
the Equity Investment Closing Date. The Board intends to appoint Frank P. Doyle
and L. Dennis Kozlowski as two new independent directors, and Investor has
advised the Company that it approves of them. Milton H. Kuyers, Allon H.
Lefever, Edward J. Mathias and Thomas Morgan will remain as directors of the
Company after the Equity Investment Closing Date.
Set forth below is information about the directors of the Company after
consummation of the Strategic Restructuring Plan:
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Kevin J. Conway........... Director 39 Mr. Conway will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Conway has been a principal and a director of
Clayton, Dubilier & Rice since 1994 and March 1998,
respectively. Prior to joining Clayton, Dubilier & Rice in
1994, Mr. Conway worked for 10 years at Goldman, Sachs &
Co., an investment banking firm. He also serves as a
director of Riverwood Inernational Corporation and North
American Van Lines, Inc., companies in which CD&R Fund V
has an investment. Mr. Conway is a graduate of Amherst
College, Columbia University School of Business and
Columbia Law School.
Frank P. Doyle............ Director 66 Mr. Doyle will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Doyle is a private consultant who retired from
his position as Executive Vice President of General
Electric Company on January 1, 1996. As Executive Vice
President, he was one of a three member Corporate Executive
Office to which all of GE's operating businesses and staff
reported. Mr. Doyle served as Executive Vice president of
GE from 1991, and prior to that time he was Senior Vice
President at GE with responsibility for Corporate Marketing
and Advertising from 1981. Mr. Doyle is a
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
director of Digital Equipment Corporation, Paine Webber
Group, Roadway Express and Educational Testing Service.
<S> <C> <C> <C>
Brian D. Finn............. Director 37 Mr. Finn will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Finn has been a principal and a director of
Clayton, Dubilier & Rice since June 1997 and March 1998,
respectively. Prior to joining Clayton, Dubilier & Rice in
1997, Mr. Finn worked for 15 years at Credit Suisse First
Boston, an investment banking firm, most recently as
co-head of the Mergers and Acquisitions division. He holds
a B.S. in Economics from the University of Pennsylvania's
Wharton School.
L. Dennis Kozlowski....... Director 51 Mr. Kozlowski is Chairman and Chief Executive Officer of
Tyco International Ltd., a multinational company involved
in manufacturing, distribution and servicing of fire
protection and security systems, disposable medical
products, flow control and electronic products worldwide.
He has served as Chief Executive Officer of Tyco since July
1, 1992 and as Chairman since January 1, 1993. Prior to
July 1992, he was President and Chief Operating Officer of
Tyco since 1989 and a director of Tyco since 1987. Mr.
Kozlowski is a direcor of RJR Nabisco, Applied Power and
Raytheon Corp.
Milton H. Kuyers.......... Director 60 Mr. Kuyers has been a director of the Company since April
1995. He is a part owner and executive officer of a number
of privately held companies including: Zero Zone, Inc., a
manufacturer of commercial refrigeration units; Desert Air
Corp., a manufacturer of commercial dehumidification
equipment; Northwest Coatings, Inc., a manufacturer of
coating products; Grayline, Inc., a manufacturer of tubing
used in the appliance and electrical industries; Digicorp
Inc., a distributor of business telephone systems and
cellular telephones; and Faustel, Inc., a manufacturer of
custom coating equipment. Prior to 1993, Mr. Kuyers served
as the President of Star Sprinkler Corp., a manufacturer of
sprinkler heads for fire protection systems. Mr. Kuyers
previously served on the board of Medical Advances, Inc., a
manufacturer of parts for medical diagnostic applications,
until its sale in March 1997. Prior to its acquisition by
the Company, Mr. Kuyers also served as a director of The
H.H. West Company, a wholly owned subsidiary of the
Company. Mr. Kuyers holds an undergraduate degree in
business administration and an M.B.A. from the University
of Michigan.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Allon H. Lefever.......... Director 50 Mr. Lefever has served as a director of the Company since
February 1995. He has been Vice President of the Affiliated
Companies for High Industries, Inc., since April 1988. From
1988 until its acquisition by the Company, Mr. Lefever
served as the Chairman of the Board and Chief Executive
Officer of The Office Works, Inc., and he currently serves
on the boards of directors of several private companies. In
addition, he is a director of Red Rose SuperNet and
Goodville Insurance Co. and serves on the Business Advisory
Board of Millersville State University. Mr. Lefever
received his undergraduate degree from Millersville State
University and a Masters in Economics from Pennsylvania
State University.
Edward J. Mathias......... Director 55 Mr. Mathias has been a director of the Company since
February 1995. Currently, Mr. Mathias is a Managing
Director of The Carlyle Group, a merchant bank based in
Washington, D.C. From 1971 through 1993, Mr. Mathias was
employed by T. Rowe Price Associates, Inc., a major
investment management organization, most recently as a
Managing Director. Mr. Mathias presently serves on the
boards of directors of Sirrom Capital Corporation,
Pathogenesis and The Fortress Group, Inc. as well as on the
boards of directors of several private companies. Mr.
Mathias holds an undergraduate degree from The University
of Pennsylvania and an M.B.A. from Harvard Business School.
Thomas Morgan............. President, Chief 44 Mr. Morgan joined the Company in February 1997 as President
Executive Officer of the Company' North American Office Products Group. He
and Director was promoted to Chief Operating Officer in June 1997 and to
Chief Executive Officer in November 1997. Before joining
the Company, he spent more than 20 years with Genuine Parts
Company where he was most recently Executive Vice President
of S.P. Richards Company.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Charles P. Pieper Chairman of the 51 Mr. Pieper will be named Chairman of U.S. Office Products
Board of Directors effective upon completion of the Strategic Restructuring
Plan. Mr. Pieper has been a principal and a director of
Clayton, Dubilier & Rice since March 1997 and March 1998,
respectively. Previously, Mr. Pieper was President and
Chief Executive Office of GE Lighting Europe and GE Japan,
GE Korea, GE Taiwan, GE Medical Systems Asia, Yokogawa
Medical Systems and GE Trading Co. Mr. Pieper is Chairman
of North American Van Lines, Inc., a corporation in which
CD&R Fund V has an investment, and a director of Alliant
Foodservice, Inc. and its parent CDRF Holding, Inc., a
corporation in which a Clayton Dubilier & Rice-managed
investment fund has an investment.
</TABLE>
Pursuant to the Investment Agreement, three-fourths of the directors must
approve certain transactions. These are: (i) the sale by the Company of equity
securities, other than (A) a specified amount made available under employee
benefit plans, such as option plans, or (B) a specified amount issued to acquire
companies or issued in public offerings; (ii) any merger, tender offer or sale,
lease, or disposition of all or substantially all of the Company's assets, or
other business combination involving the Company, unless the consideration for
such sale is all cash or is freely tradable common stock of a public company
with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to shareholder rights plans; (v) any
dissolution or partial liquidation of the Company; or (vi) any modification to
the Company's charter or by-laws that is inconsistent with Investor's rights
under the Investment Agreement or the other agreements described in this Annex
A. The effect of this provision is that so long as Investor can nominate three
directors, at least one of them must vote in favor of any of these actions in
order for it to be approved.
This table shows Investor's rights with respect to the nomination of
directors and how they will change if Investor disposes of equity securities.
This table also shows when the three-fourths majority requirement will apply.
SUMMARY OF CORPORATE GOVERNANCE PROVISIONS
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS INVESTOR THREE-FOURTHS
IS BOARD
PORTION OF SHARES ACQUIRED ENTITLED TO RIGHT TO APPROVAL FOR
AT CLOSING RETAINED BY NOMINATE DESIGNATE CERTAIN
INVESTOR (1) (OUT OF NINE) CHAIRMAN TRANSACTIONS
- ------------------------------------------------------------------- ------------------ --------- ------------
<S> <C> <C> <C>
66 2/3% to 100%.................................................... Three Yes Yes
33 1/3% to 66 2/3%................................................. Two Yes Yes
Less than 33 1/3% but Investor
holds at least 5% of the then-
outstanding voting stock......................................... One No No
Less than 5% of the then-
outstanding voting stock......................................... None No No
</TABLE>
- ------------------------------
(1) This includes shares Investor can acquire by exercising special warrants.
Investor can approve one additional nominee to the Board if the Chief
Executive Officer of the Company is not a member of the Board or is not a Board
nominee. The Company can increase the size of the Board of Directors to as many
as 12 persons, but the number of persons Investor can nominate will increase at
least proportionally. For example, if there are 12 members, Investor could
nominate four directors (assuming it still held all of its shares). Investor
also will be entitled to at least proportionate
13
<PAGE>
representation on all Board committees, unless it is precluded from such
membership by law or stock exchange rules.
All of Investor's corporate governance rights will expire on the earlier of
the fifth anniversary of closing or if Investor ever acquires more than 50% of
the voting power represented by the Company's then-outstanding voting
securities.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
EFFECT ON THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY. Wilmer, Cutler &
Pickering expects to deliver an opinion (the "Spin-Off Opinion") at the time of
the Distributions stating that for U.S. federal income tax purposes the
Distributions will qualify as tax-free spin-offs under Section 355 of the Code
and will not be taxable under Section 355(e) of the Code. The Company will not
complete the Distributions unless it receives the Spin-Off Opinion. The Spin-Off
Opinion will be based on the accuracy as of the time of the Distributions of
factual representations made by the Company, the Spin-Off Companies and
Investor, and certain other information, data, documentation and other materials
that Wilmer, Cutler & Pickering has deemed necessary.
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the IRS or any court. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e) no gain or loss will be recognized by
the Company or the stockholders of the Company (except with respect to cash
received in lieu of fractional shares) as a result of the Distributions.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Spin-Off Opinion is not binding on the IRS or the courts.
Stockholders should be aware that the requirements of Section 355 pertaining to
business purpose, active trade or business, and absence of a device for
distribution of earnings and profits, as well as the requirements of Section
355(e) pertaining to a plan or series of related transactions to acquire 50% or
more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Distributions. Accordingly, the IRS and/or a court could
reach a conclusion that differs from the conclusions in the Spin-Off Opinion.
BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. The Company will represent that the
Distributions were motivated, in whole or substantial part, to allow the Company
and the Spin-Off Companies to adopt strategies and pursue objectives that are
more appropriate to their respective industries and stages of growth; to allow
the Spin-Off Companies to pursue independent acquisition programs with a more
focused use of resources and, where stock is used as consideration, to allow the
Spin-Off Companies to provide stock of a public company that is in the same
industry as the business being acquired; to allow the Company and the Spin-Off
Companies to offer their respective employees more focused compensation
packages; and to make possible the Equity Investment, which the Board of
Directors of the Company concluded would contribute to the Company's
development, based on the skills and experience of CD&R. Based on these
representations and certain other information, data, documentation and other
materials, Wilmer, Cutler & Pickering expects to deliver at the time of the
Distributions an opinion that each Distribution satisfies the business purpose
requirement of Section 355. However, although similar rationales have been
accepted by the IRS in other circumstances as sufficient to meet the business
purpose requirement of Section 355, there can be no assurance that the IRS will
not assert that the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355 both the Spin-Off Company and
the Company must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the Distribution, taking
into account only businesses that
14
<PAGE>
have been acquired in transactions in which no gain or loss was recognized. In
order for the distribution of the stock of Navigant to qualify as a tax-free
spin-off under Section 355, substantially all of the assets of Navigant must
consist of the stock of Professional Travel Corporation ("Professional Travel"),
and Professional Travel and the Company must meet the requirements described in
the preceding sentence. Whether current and historical business activity
constitutes an active trade or business, and whether any gain or loss should
have been recognized in an acquisition structured and reported as a nontaxable
transaction, turn in some instances on the application of subjective legal
standards and on factual determinations, such as intentions of the parties
involved. Based on the representations of the Company and the Spin-Off
Companies, Wilmer, Cutler & Pickering expects to deliver at the time of the
Distributions an opinion that each Distribution will satisfy the active trade or
business requirement. However, because of the inherently subjective nature of
important elements of the active trade or business requirement, and because the
IRS may challenge the representations upon which Wilmer, Cutler & Pickering
relies, there can be no assurance that the IRS will not assert that the active
trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of the Company or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of the Company and the Spin-Off Companies, Wilmer, Cutler &
Pickering expects to deliver at the time of the Distributions an opinion that
none of the Distributions is a transaction used principally as a device for the
distribution of earnings and profits of either the Company or any of the
Spin-Off Companies. However, because of the inherently subjective nature of the
device test (including the subjectivity involved in assigning weight to various
factors), and because the IRS may challenge the representations upon which
Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS will
not assert that any or all of the Distributions are transactions used
principally as a device for the distribution of earnings and profits.
If a Distribution fails to qualify under Section 355 as a tax-free spin-off,
each holder of Common Stock on the record date of the Distributions will be
treated as having received a taxable corporate distribution in an amount equal
to the fair market value (on the Distribution Date) of the Spin-Off Companies'
common stock distributed to such holder of Common Stock, including fractional
shares. In addition, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company (on
the Distribution Date). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or a series of related transactions
that includes the spin-off. Stock acquired by certain related persons is
aggregated in determining whether this 50% test is met. There is a presumption
that any acquisition of 50% or more, by vote or value, of the capital stock of
the company or the subsidiary occurring two years before or after the spin-off
is pursuant to a plan that includes the spin-off. However, the presumption may
be rebutted by establishing that the spin-off and the acquisition are not part
of a plan or a series of related transactions. Based on the representations of
the Company, the Spin-Off Companies and Investor, and the assumption that no
Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of the Company or of any Spin-Off Company, Wilmer, Cutler & Pickering expects to
deliver at the time of the Distributions an opinion that the Distributions will
not be
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taxable under Section 355(e). However, there can be no assurance that the IRS
will not assert that any or all of the Distributions are taxable under Section
355(e).
If the Distributions are taxable under Section 355(e), the Company will
recognize gain equal to the difference between the fair market value of the
common stock of the Spin-Off Company and the Company's adjusted tax basis in the
common stock of the Spin-Off Company (on the Distribution Date). However, no
gain or loss will be attributable to holders of Common Stock (except with
respect to cash received in lieu of fractional shares). If the Company were to
recognize gain on one or more Distributions, such gain would likely be
substantial.
The Company, but not the holders of the Common Stock, will be indemnified by
the Spin-Off Companies if the actions or omissions of the Spin-Off Companies
materially contribute to a determination that the Company is subject to a tax
liability in connection with the Distributions. See "--Distributions-- Tax
Allocation Agreement and Tax Indemnification Agreement." However, there can be
no assurance that the Company will be successful in recovering the full amount
of such tax liability under the indemnification arrangements with the Spin-Off
Companies.
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RISK FACTORS
HOLDERS OF 2003 NOTES WHO ARE CONSIDERING TENDERING THEIR 2003 NOTES IN THE
2003 NOTE TENDER SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL
AS THE OTHER INFORMATION INCLUDED IN THE ACCOMPANYING DOCUMENTS OR INCORPORATED
THEREIN BY REFERENCE, IN EVALUATING WHETHER TO DO SO.
SUBSTANTIAL INDEBTEDNESS OF THE COMPANY; ABILITY TO SERVICE DEBT
The Company will incur substantial indebtedness in connection with the
Strategic Restructuring Plan and the Financing Transactions and will thereby
become highly leveraged. At January 24, 1998, the Company had outstanding
approximately $714.5 million in indebtedness consisting of bank loans,
convertible subordinated notes, and capital leases. As a result of the Strategic
Restructuring Plan and the Financing Transactions, the Company's total
indebtedness will increase by approximately $441.0 million to approximately
$1,155.5 million, assuming that all 2001 Notes are exchanged in the 2001 Note
Exchange Offer and all 2003 Notes are tendered and accepted for purchase in the
2003 Note Tender. Any 2001 Notes that remain outstanding after the 2001 Note
Exchange Offer will increase the amount of outstanding debt.
The Company's high leverage could have material consequences to the Company,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for acquisitions, working capital,
capital expenditures, and general corporate or other purposes may be impaired or
any such financing may not be available on terms favorable to the Company; (ii)
a substantial portion of the Company's cash flow will be required for debt
service and, as a result, will not be available for its operations and other
purposes; (iii) a substantial decrease in net operating cash flows or an
increase in expenses could make it difficult for the Company to meet its debt
service requirements or force it to modify its operations or sell assets; (iv)
the Company's ability to withstand competitive pressures may be limited; and (v)
the Company's level of indebtedness could make it more vulnerable to economic
downturns, and reduce its flexibility in responding to changing business and
economic conditions. In addition, the Company's borrowings under the Credit
Facility are and will continue to be at variable rates of interest, which
exposes the Company to the risk of increased interest rates. If the Company is
unable to service its indebtedness, it may be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience to date operating a business with a substantial amount
of leverage.
Historically, the Company has funded its capital requirements by debt
financings and the sale of Common Stock. Future sales of Common Stock may be
subject to limitations on the number of shares the Company can issue without
jeopardizing the tax-free treatment for the Distributions. See "--Potential
Limitations on Stock Issuances" and "--Potential Liability for Taxes Related to
the Distributions." In addition, the Credit Facility and the indenture governing
the Senior Subordinated Notes are expected to contain restrictions on the
incurrence of additional indebtedness. See "--Risks Arising from Restrictions in
Agreements Relating to Indebtedness."
The ability of the Company to meet its debt service and other obligations
(including compliance with financial covenants) will be dependent upon the
future performance of the Company and its cash flow from operations, which will
be subject to prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. These factors could
include general economic conditions, operating difficulties, increased operating
costs, product pricing pressures, potential revenue instability arising from
cost savings initiatives or other factors, labor relations, the response of
competitors or customers to the Company's business strategy or projects and
delays in implementation of the Company's business strategy.
LIMITED TRADING MARKET
The 2003 Notes were issued in May 1996, and there currently is a limited
trading market for the 2003 Notes. Quotations for securities that are not widely
traded, such as the 2003 Notes, may differ from actual
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trading prices and should be viewed as approximations. Holders are urged to
contact their brokers to obtain the best available information as to current
market prices.
To the extent that 2003 Notes are tendered and accepted for exchange in the
2003 Note Tender Offer, the trading market for 2003 Notes that remain
outstanding may be significantly more limited, which might adversely affect the
liquidity of the 2003 Notes. The extent of the public market and the
availability of price quotations would depend upon a number of factors,
including the number of holders of 2003 Notes remaining at such time. An issue
of securities with a smaller outstanding market value available for trading (the
"float") may command a lower price than would a comparable issue of securities
with a greater float. Therefore, the market price for 2003 Notes that are not
tendered for exchange in the 2003 Note Tender Offer may be affected adversely to
the extent that the amount of 2003 Notes exchanged pursuant to the 2003 Note
Tender Offer reduces the float. The reduced float also may tend to make the
trading prices of the 2003 Notes that are not exchanged more volatile.
RISKS ARISING FROM RESTRICTIONS IN AGREEMENTS RELATING TO INDEBTEDNESS
The Credit Facility and the indenture governing the Senior Subordinated
Notes are expected to impose significant operating and financial restrictions on
the Company. Such restrictions will affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness and certain types of indebtedness, create liens, engage
in transactions with stockholders and affiliates, sell assets, issue capital
stock of subsidiaries or engage in mergers or acquisitions. In addition, the
Credit Facility is expected to require that the Company maintain certain
financial ratios. These restrictions could also limit the ability of the Company
to effect future financings, make needed capital expenditures, withstand a
future downturn in the Company's business or the economy in general, or
otherwise conduct necessary corporate activities.
RISKS RELATED TO CHANGE IN STRATEGIC FOCUS AND BUSINESS AND GROWTH STRATEGIES
The Company was founded in October 1994 and conducted no operations prior to
the acquisition of its founding companies in February 1995. Since that time, the
Company has grown primarily through an aggressive acquisition strategy. The
Company is now transitioning into a new stage of development, less reliant on
acquisitions and more focused on operational efficiencies, organic growth and
improved profit margins. The Company's ability to achieve these objectives will
depend on a number of factors, including its ability to generate increased
revenues and margins in existing businesses, its ability to continue to
integrate existing operations and new acquisitions without substantial delays or
other problems, and achievement of operating improvements and cost reductions.
In particular, the Company's ability to achieve operating improvements will
depend on successful implementation of its plans to establish District
Fulfillment Centers in the United States. There can be no assurance that these
efforts to achieve operating improvements will be successful or will result in
anticipated levels of cost savings and efficiencies or growth in revenues and
margins. See "Business of U.S. Office Products After the Restructuring--Business
Strategies."
CHALLENGES OF BUSINESS INTEGRATION; RISKS RELATED TO ACQUISITIONS
Historically, the Company has grown substantially through acquisitions. The
Company's aggressive acquisition program has produced a significant increase in
revenues, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially require
additional expenditures to expand operational and financial systems and
corporate management administration. Because of the various costs and possible
cost-saving 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-saving and integration strategies and to manage operations and acquisitions
profitably.
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Additionally, attempts to achieve economies of scale through cost cutting and
lay-offs of existing personnel may, at least in the short term, have an adverse
impact upon the Company. Delays in implementing planned integration and
consolidation strategies, or the failure of such strategies to achieve
anticipated cost savings, also could have a material adverse effect on the
Company's results of operations and financial condition. In addition, there can
be no assurance that the Company's management and financial controls, personnel,
computer systems and other corporate support systems will be adequate to manage
the increasing size and scope of the Company's operations and its continuing
acquisition activity.
The Company intends to pursue selected acquisition opportunities; however,
no assurance can be given that the Company will identify, finance and complete
additional suitable acquisitions on acceptable terms, or that future
acquisitions, if completed, will be successful. Moreover, the amount of capital
stock the Company can issue as consideration for future acquisitions without
jeopardizing the tax-free treatment of the Distributions will be limited in the
near-term. See "--Potential Liability for Taxes Related to the Distributions".
The Company will likely incur additional debt to finance any additional
acquisitions. In addition, acquired companies may not achieve future revenues
and profitability levels that justify the prices that the Company paid to
acquire them. Acquisitions also may involve a number of risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill.
RISKS RELATING TO INABILITY TO USE POOLING-OF-INTEREST ACCOUNTING TREATMENT FOR
FUTURE ACQUISITIONS
As a result of the Equity Self-Tender and the Distributions, the Company
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 the Company completes during this period will have to
be accounted for under the purchase method. Under the purchase method of
accounting, the Company 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.
HIGHLY COMPETITIVE MARKETS
The Company operates in a highly competitive environment. It generally
competes with a large number of smaller, independent companies, many of which
are well-established in their markets. In addition, in the United States, the
North American Office Products Group of the Company competes with five large
office products companies, each of which may have greater financial resources
than the Company. Several of the Company's large competitors operate in many of
its geographic and product markets, and other competitors may choose to enter
its geographic and product markets in the future. In addition, as a result of
this competition, the Company may lose customers or have difficulty acquiring
new customers. As a result of competitive pressures in the pricing of products,
the Company's revenues or margins may decline. The highly leveraged nature of
the Company after the Strategic Restructuring Plan and the Financing
Transactions could limit the Company's ability to continue to make necessary or
desirable investments or capital expenditures, to compete effectively and to
respond to market conditions.
The Company faces significant competition to acquire additional businesses
as the office products industry undergoes continuing consolidation. Competition
is expected to increase in the domestic and international markets that the
Company serves or is planning to enter as consolidation occurs (or accelerates)
in those markets. A number of the Company's major competitors are actively
pursuing acquisitions on a global basis.
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FOREIGN OPERATIONS; EXCHANGE RATE FLUCTUATIONS
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 the Company's domestic operations
generally may also affect the Company's foreign operations. In addition, the
Company's foreign operations are subject to a number of other risks, including
fluctuations in currency exchange rates; new and different legal and regulatory
requirements in local jurisdictions; tariffs and trade barriers; potential
difficulties in staffing and managing local operations; credit risk of local
customers and distributors; potential difficulties in protecting intellectual
property; potential imposition of restrictions on investments; potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries; and local
economic, political and social conditions, including the possibility of
hyper-inflationary conditions, in certain countries. There can be no assurance
that one or a combination of these factors will not have a material adverse
impact on the Company's ability to maintain or increase its foreign sales or on
its business, financial condition or results of operations.
Over 34% of the Company's consolidated revenues for the nine months ended
January 24, 1998 were generated from the Company's international operations and
are denominated in currencies other than United States dollars. The Company's
results of operations have been and may continue to be impacted by the exchange
rate of the international operations' currencies into United States dollars.
Devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
The Company expects that it will incur additional costs with respect to
accessing cash flows from international operations, including such items as New
Zealand and Australian withholding taxes and other taxes and foreign currency
hedging costs. In addition, the Company's results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives currently being
evaluated by the Company.
Substantially all of the Company's indebtedness is denominated in U.S.
dollars. As a result, declines relative to the U.S. dollar in the value of the
currencies in which the Company's revenues are generated may materially
adversely affect the Company's business, financial condition and results of
operations and the ability of the Company to meet its obligations under
agreements relating to its indebtedness.
RISKS RELATING TO DEPENDENCE OF MAIL BOXES ETC. ON BUSINESS OF UPS AND FRANCHISE
RELATIONSHIPS
Various factors may affect the Company's Mail Boxes Etc. ("MBE") business.
The Company estimates that a significant percentage of the gross sales of a
typical MBE retail center in the United States are attributable to services
provided by United Parcel Service ("UPS"). In addition, the Company estimates
that the vast majority of general ground shipping from MBE retail centers in the
United States is done through UPS. As such, UPS is a key vendor for MBE. If UPS
were to raise its prices to MBE or otherwise materially adversely change the
terms on which it provides shipping services for MBE Retail Centers or if UPS
cannot provide service or provides limited services as it did during a 1997
strike by UPS employees, the revenues of MBE could be materially and adversely
affected. MBE conducts its business principally through franchisees or
licensees, with the result that MBE has limited control over franchisee
operations and is subject to significant government regulation of its legal
relationships with franchisees that limits the control that MBE has over its
franchisees. MBE also faces growing competition from the United States Postal
Service as it establishes postal service centers located in shopping centers and
other locations to compete against MBE and other similar retail service centers.
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RELIANCE ON KEY PERSONNEL
The Company's operations will depend on the continued efforts of its senior
executive officers, including Thomas Morgan, President and Chief Executive
Officer, and the senior management of certain of its subsidiaries. If any of
these individuals becomes unable to continue in his or her present role, or if
the Company is unable to attract and retain other skilled employees, its
business could be adversely affected. The Company intends to obtain key person
life insurance covering Thomas Morgan, but does not intend to obtain key person
life insurance covering any other members of senior management.
INTANGIBLE ASSETS
As of January 24, 1998, approximately $917.0 million, or 45.4% of the
Company's total assets on a pro forma basis to reflect the Equity Self-Tender,
the Distributions, the Equity Investment, the Financing Transactions and
purchase acquisitions completed subsequent to January 24, 1998 as if such
transactions had occurred on January 24, 1998, represented intangible assets,
the substantial majority of which was goodwill. As a result, a substantial
portion of the value of the Company's assets may not be available to repay
creditors in the event of a bankruptcy or dissolution of the Company.
INCREASE IN OUTSTANDING SHARES AND INABILITY TO DETERMINE CONVERSION PRICE
To the extent that 2001 Notes are exchanged for Common Stock, the number of
shares of Common Stock outstanding will increase. At March 26, 1998, there were
approximately 133.2 million shares of Common Stock outstanding. If all 2001
Notes are exchanged, the total shares outstanding will increase by approximately
8.9 million to 142.1 million. If those shares are tendered in the Equity
Self-Tender, that in turn will decrease the percentage of all outstanding shares
that will be accepted in the Equity Self-Tender. The increase in number of
shares outstanding resulting from the exchange will also increase the number of
shares of each Spin-Off Company that will be issued in the Distributions, which
could result in a reduction in the trading prices of the shares of the Spin-Off
Companies as compared to the trading prices that might have been realized if no
exchanges had occurred before the Distributions. On the other hand, to the
extent 2001 Notes are not exchanged prior to the Equity Self-Tender and the
Distributions, then the number of shares into which they can be converted will
be increased as a result of the anti-dilution provisions in the Indenture. The
number of shares of Common Stock issuable upon conversion of the 2003 Notes
outstanding after the 2003 Note Tender will similarly be adjusted. Accordingly,
the number of shares represented by convertible notes after completion of the
Strategic Restructuring Plan and Financing Transactions cannot be determined at
this time and will not be determined prior to the Expiration Date of the 2003
Note Tender.
Even if the Strategic Restructuring Plan is not completed, the exchange of
2001 Notes pursuant to the 2001 Note Exchange Offer will result in a dilution of
earnings per share and a potential adverse impact on the trading price of the
Common Stock. This dilution will be greater than would otherwise result if the
2001 Notes were converted at the Existing Conversion Price for the 2001 Notes.
As a result of the Strategic Restructuring Plan, the number and exercise
price of existing stock options held by the Company's employees will be adjusted
pursuant to a formula based on the market prices of the Common Stock around the
time of the Distributions and cannot be determined at this time. Nevertheless,
the Company expects that the adjustment will increase the percentage interests
represented by such options. See "The Strategic Restructuring Plan--Adjustment
to Employee Stock Options." However, the Company's employees are eligible to
tender shares underlying options (both vested and unvested) in the Equity
Self-Tender and, to the extent shares underlying tendered options are purchased,
the percentage interest represented by options outstanding after the Strategic
Restructuring Plan will be less than it otherwise would have been.
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IMPACT OF THE STRATEGIC RESTRUCTURING PLAN ON TRADING PRICES OF COMMON STOCK
There can be no assurance as to the prices at which the Common Stock will
trade after the Strategic Restructuring Plan is completed. The plan consists of
a number of elements that involve major changes to the assets and capital
structure of the Company. Upon completion of these transactions, the trading
price of the Common Stock is likely to be substantially lower to reflect the
cash distributions that will occur in the Equity Self-Tender and the
distribution of assets in the Distributions. The actual adjustment that will be
made by the market based on its valuation of the parts of the Strategic
Restructuring Plan cannot be predicted. The Company expects that an active
market for its Common Stock will continue on the Nasdaq National Market System,
but the trading prices may be affected in the short or long run by a number of
factors in addition to those that typically affect the trading prices of stocks.
These special factors may include: reduced public float, trades by investors
seeking to change their relative ownership positions in the stock of the Company
and each Spin-Off Company, uncertainty in the marketplace about the impact of
the Strategic Restructuring Plan on the Company's future operating results,
possible trading strategies by investors seeking to arbitrage disparities in
pricing between the Common Stock and the stock of each Spin-Off Company, and
increased market volatility resulting from market uncertainty or confusion about
the transactions or their impact on the Company.
EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
shares of Common Stock. Investor will hold shares of Common Stock representing
24.9% of shares outstanding after the issuance of such shares to Investor, and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). The Investment Agreement restricts Investor's ability to
sell these shares or warrants, but when these restrictions expire (or if they
are waived) Investor may sell these shares or warrants. Additional shares may be
issued either in connection with acquisitions by the Company or upon exercise of
outstanding options, options that may be issued in the future, and warrants. The
sale of shares upon exercise of options or by Investor, or the perception that
such sales could occur, may have an adverse effect on the trading price of the
Common Stock if a significant number of shares become available over a limited
period of time.
ABILITY OF INVESTOR TO INFLUENCE MANAGEMENT
As part of the Strategic Restructuring Plan, Investor will acquire shares of
Common Stock amounting to 24.9% of the outstanding shares of the Common Stock
after giving effect to the Equity Self-Tender and to the issuance of such
shares. Investor will also purchase various warrants that give it the right to
acquire additional shares of Common Stock in the future. Such warrants will
include warrants that will give it the right to buy one share of Common Stock of
the Company for each share purchased by Investor in the Equity Investment. If no
currently outstanding stock options are exercised, exercise of these warrants
would give Investor ownership of approximately 39.9% of the Common Stock of the
Company after implementation of the Strategic Restructuring Plan (assuming that
all of the 2001 Notes are exchanged in the 2001 Note Exchange Offer and all of
the 2003 Notes are tendered and accepted for purchase in the 2003 Note Tender).
Investor will have, among other things, the right (subject to certain
conditions) to nominate three of the nine members of the Company's Board of
Directors, including the Chairman of the Board. Investor will retain the right
to nominate three members of the Board and to designate the Chairman of the
Board until Investor's level of ownership of Common Stock declines by more than
one-third. In addition, certain Board decisions will be subject to
super-majority voting provisions that, in certain circumstances, may require the
concurrence of at least one director nominated by Investor. The super-majority
voting provisions require the affirmative vote of three-fourths of the Board for
certain decisions such as sale of certain equity securities; any merger, tender
offer involving the Company's equity securities or sale, lease or disposition of
all or substantially all of the Company's assets or other business
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combination involving the Company; any dissolution or partial liquidation of the
Company; and certain changes to the Company's charter and by-laws. These
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
In addition, Investor's significant ownership of the Common Stock may permit
Investor to influence significantly matters requiring the approval of the
Company's stockholders. See "The Strategic Restructuring Plan---Equity
Investment."
POTENTIAL LIABILITY FOR CERTAIN LIABILITIES OF THE SPIN-OFF COMPANIES
As part of the Strategic Restructuring Plan, the Spin-Off Companies are
expected to indemnify the Company for certain liabilities that the Company could
incur relating to the Distributions, the operations of the Spin-Off Companies
and other matters. There can be no assurance that the Spin-Off Companies will be
able to satisfy any such indemnities, and the Company may therefore incur such
liabilities even if they arose out of the activities of the Spin-Off Companies.
The Company could be adversely affected if in the future the Spin-Off Companies
are unable to satisfy these obligations. See "The Strategic Restructuring
Plan--Spin-Off Distributions--Distribution Agreement." In addition, the Company
has agreed to indemnify Investor and its affiliates against losses resulting
from any of the Spin-Off Companies failing to satisfy their indemnity
obligations to the Company. In addition, the Company has agreed to indemnify
Investor and its affiliates against losses resulting from any of the Spin-Off
Companies failing to satisfy their indemnity obligations, to the Company.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Spin-Off
Opinion") at the time of the Distributions stating that for U.S. federal income
tax purposes, the Distributions will qualify as tax-free spin-offs under Section
355 of the Code, and will not be taxable under Section 355(e). The Company will
not complete the Distributions unless it receives the Spin-Off Opinion. The
Spin-Off Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other information, data, documentation and
other materials that Wilmer, Cutler & Pickering has deemed necessary. See "The
Strategic Restructuring Plan--U.S. Federal Income Tax Consequences of the
Distributions."
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the IRS or any court. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Distributions. Accordingly, the IRS and/or a court could reach a conclusion that
differs from the conclusions in the Spin-Off Opinion.
If a Distribution fails to qualify as a tax-free spin-off under Section 355
of the Code, the Company will recognize gain equal to the difference between the
fair market value of the Spin-Off Company's common stock on the Distribution
Date and the Company's adjusted tax basis in the Spin-Off Company's common stock
on the Distribution Date. In addition, each stockholder of the Company will be
treated as having received a taxable corporate distribution in an amount equal
to the fair market value (on the Distribution Date) of the Spin-Off Company's
common stock distributed to such stockholder. If the Company were to recognize
gain on one or more Distributions, such gain would likely be substantial.
If a Distribution is taxable under Section 355(e), but otherwise satisfies
the requirements for a tax-free spin-off, the Company will recognize gain equal
to the difference between the fair market value of the Spin-Off Company's common
stock on the Distribution Date and the Company's adjusted tax basis in the
Spin-Off Company common stock on the Distribution Date. However, no gain or loss
will be recognized by holders of Common Stock (except with respect to cash
received in lieu of fractional shares). If the Company were to recognize gain on
one or more Distributions, such gain would likely be substantial.
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POTENTIAL LIMITATIONS ON STOCK ISSUANCES
Certain limitations under Section 355 of the Code may restrict U.S. Office
Products' ability to issue capital stock after the Distributions. As described
above under "The Strategic Restructuring Plan -- U.S. Federal Income Tax
Consequences of the Distributions," these limitations will generally prevent
U.S. Office Products from issuing capital stock to the extent the issuance is
part of a plan or series of related transactions that includes one or more of
the Distributions and pursuant to which one or more persons acquire capital
stock of U.S. Office Products that represents 50% or more of the voting power or
50% or more of the value of U.S. Office Products' capital stock. These
limitations may restrict U.S. Office Products' ability to undertake transactions
involving issuances of capital stock of U.S. Office Products that management
otherwise believes would be beneficial.
YEAR 2000 COMPLIANCE
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity System, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's operating
subsidiaries are, in some cases, using billing or other software that is not
year 2000 compliant. Based upon information that the Company has collected from
its operating subsidiaries, it expects to be able to achieve year 2000
compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
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THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING
After the Distributions, U.S. Office Products will continue to conduct its
office supply, office furniture, and office coffee, beverage and vending
services businesses (which will operate as the North American Office Products
Group), its MBE business, and its New Zealand and Australia operations. U.S.
Office Products also will continue to own its 49% interest in Dudley Stationery
Limited (a U.K. contract stationer). The Spin-Off Companies will operate U.S.
Office Products' educational supplies, corporate travel services, print
management, and technology solutions businesses.
The businesses that U.S. Office Products will operate after it completes the
Strategic Restructuring Plan are described below.
COMPANY OVERVIEW
U.S. Office Products is one of the world's leading suppliers of a broad
range of office products and business services to corporate customers. Through
its North American Office Products Group ("NAOPG"), U.S. Office Products
provides office supplies, office furniture and office coffee, beverage and
vending services primarily to middle market companies (25 to 500 employees).
Based on current sales, NAOPG is one of the largest contract stationers in the
United States. Outside North America, U.S. Office Products' Blue Star Group
Limited ("Blue Star") is a leading supplier of office products and services in
New Zealand and Australia, and U.S. Office Products owns a 49% interest in
Dudley Stationery Limited ("Dudley"), the second largest contract stationer in
the United Kingdom. With its November 1997 acquisition of MBE, U.S. Office
Products has expanded into the high growth small office and home office ("SOHO")
market. MBE is the world's largest franchisor of local postal, packaging,
business and communications service centers with approximately 3,600 outlets
worldwide.
Since its founding in October 1994, U.S. Office Products has grown primarily
through an aggressive acquisition program, which has included the purchase of
more than 230 businesses in the United States and internationally. U.S. Office
Products has focused on acquiring successful, established companies with
experienced management and sales presence in specific geographic, product or
service markets. It adheres to a rigorous due diligence and financial review
process in acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth and improved profit margins. To execute this new strategy U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and existing distribution channels. U.S.
Office Products continues to pursue strategic alliances with well-known
companies to enable U.S. Office Products to increase sales by offering a broader
selection of services and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located within the same geographic
areas into large, centrally-located regional warehouses known as district
fulfillment centers ("DFCs"). Through DFCs, U.S. Office Products believes it can
achieve greater regional efficiencies and economies of scale in purchasing,
distribution and asset utilization. At the same time, U.S. Office Products
continues to encourage entrepreneurial innovation and management of customer
relationships at the local level. U.S. Office Products believes that its
organizational structure combines the best elements of both centralized and
decentralized management for its business.
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MARKET OVERVIEW
UNITED STATES
The office products and business services market in the United States
includes office supplies, office furniture, and office coffee, beverage and
vending services. Business customers can be generally divided into three
segments: (i) large corporate (more than 500 employees), (ii) middle market (25
to 500 employees) and (iii) SOHO (fewer than 25 employees). Set forth below is
an overview of the major business products supplied by U.S. Office Products and
the customer segments for which it competes.
OFFICE SUPPLIES. According to independent research reports, the office
supplies market in the United States generates over $60.0 billion in annual
sales. Office supplies include a broad array of products including desktop
accessories, writing instruments, paper products, computer consumables and
business machines. Historically, office supplies have been sold through three
distribution channels: (i) traditional retailers (which now include discount
superstores); (ii) mail order (or direct mail) marketers; and (iii)
direct-to-business suppliers ("contract stationers" such as U.S. Office
Products' NAOPG). Independent estimates indicate that retailers generate
approximately $30.0 billion in annual revenues, and contract stationers generate
approximately $30.0 billion in annual revenues.
In recent years, as industry participants have sought to take advantage of
economies of scale, the retail and contract stationer distribution channels have
undergone significant consolidation with several large companies emerging in
each channel. Additionally, while most office supply businesses traditionally
operated in just one of the three distribution channels, more recently U.S.
Office Products and many of its large competitors have sought to enter more than
one of these channels as a way of expanding their revenues and customer bases.
Despite recent consolidation and "cross channel" activity, the office supplies
market remains highly fragmented, with more than 4,300 independent suppliers
representing approximately 50% of the U.S. market. With pro forma revenues of
$1.1 billion in office supplies for the twelve-month period ended January 24,
1998, U.S. Office Products has approximately 3.7% of the approximately $30.0
billion U.S. contract stationer market.
OFFICE FURNITURE. The U.S. office furniture market generates approximately
$12.0 billion in annual revenues and can be divided into three segments:
catalog, middle market and contract furniture. Catalog furniture items include
such office commodities as low-priced chairs, file cabinets and computer stands.
Such furniture is sold by direct marketers, retailers and contract stationers
through catalog mailings. Middle-market furniture is of higher quality and
functionality than commodity furniture items and is available through retailers
and contract stationers. Contract furniture is high quality, includes customized
office configurations, often involves a service component and is usually
purchased on a project basis when offices are opened or remodeled. Contract
furniture is typically sold through dealers affiliated with furniture
manufacturers. U.S. Office Products believes that thousands of companies sell
office furniture to the corporate market. With pro forma revenues of
approximately $570.0 million in office furniture for the twelve month period
ended January 24, 1998, U.S. Office Products has approximately a 4.0% share of
the U.S. market.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. U.S. Office Products believes
that the office coffee services industry in the United States generates
approximately $3.0 billion in annual sales and is highly fragmented. U.S. Office
Products had pro forma revenues in this segment for the twelve-month period
ended January 24, 1998 of approximately $110.0 million (including approximately
$30.0 million in vending services revenues), giving it approximately a 3.7%
share of this market.
BUSINESS RELATED SERVICES. Superstores and a variety of specialty companies
provide business-related services such as copying, graphic arts, printing,
packaging, delivery, fax and computer services. The business services market,
targeted mainly at middle market and SOHO customers, is highly fragmented and
includes many medium- to small-sized independent outlets.
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BUSINESS CUSTOMERS. Customers for office supplies, office furniture and
office coffee can be divided into three segments: middle market corporate, large
corporate and SOHO.
The middle market corporate segment has been the primary focus of NAOPG's
sales efforts because U.S. Office Products believes that it offers greater
growth potential and higher margins than the large corporate segment. U.S.
Office Products believes that, as compared to large corporate customers, middle
market companies place a relatively higher value on the quality of service,
including order fill rates and dependable delivery.
Historically, contract stationers have been the primary providers of office
supplies to middle market customers, with mail order marketers and traditional
retail dealers playing secondary roles. Superstore chains and mail order
marketers have attempted to gain market share in this segment by providing
delivery services and allowing credit card purchases. However, U.S. Office
Products believes that superstores and mail order marketers have achieved only
limited penetration because they do not provide the level of service often
requested by customers in this segment.
Businesses in the large corporate segment often negotiate contract pricing
on many of the office products they routinely purchase, and U.S. Office Products
believes that this segment places a relatively higher value on low product
pricing. As a result, the large corporate segment tends to generate lower gross
profit margins for suppliers. The large corporate segment has historically been
served by contract stationers, and U.S. Office Products believes that this
segment is currently the primary focus of several of its largest competitors.
The SOHO segment consists of home offices, telecommuters and small
businesses. The SOHO market has grown from 25 million people in 1993 to
approximately 47 million people in 1997. According to the U.S. Bureau of Labor
Statistics, the SOHO market for office supplies and related business services is
currently a $54.0 billion market, and is expected to continue to grow. In
addition to office supplies, SOHO customers purchase a variety of business
services such as printing, packaging, fax and computer services. This market is
highly fragmented with products and services offered by superstores, mail order
marketers, medium to small independent outlets, and specialty service providers
such as copy centers and quick print centers. MBE specifically targets this high
growth customer segment.
INTERNATIONAL
U.S. Office Products has operations in New Zealand and Australia and a 49%
ownership interest in Dudley in the United Kingdom. The business products market
is more consolidated in New Zealand and Australia than in the United States.
Additionally, given the relatively small size of these economies, suppliers of
business products often offer a broader range of complementary products and
services than in the United States. Blue Star is the largest office products
supplier in New Zealand and the second largest in Australia. With pro forma
revenues of approximately $1.0 billion for the twelve-month period ended January
24, 1998, Blue Star has a significant share of the office products market in New
Zealand and Australia. In the United Kingdom, contract stationers offer a
similar product offering to that of their counterparts in the United States.
Office products superstores in the United Kingdom have a relatively smaller
share of the office products market than do office products superstores in the
United States. As a result of several recent acquisitions, Dudley currently has
annualized revenues of over $200.0 million, and U.S. Office Products believes
that Dudley is the second largest contract stationer in the United Kingdom.
BUSINESS STRATEGIES
U.S. Office Products' goal is to be the leading provider of office products
and business services in the United States and select international markets with
an emphasis on serving middle market businesses and expanding its role in
serving the high-growth SOHO market. Key elements of U.S. Office Products'
strategies in pursuit of this goal include the following:
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IMPROVE PROFIT MARGINS AND ASSET UTILIZATION. To achieve greater operating
efficiencies, profit margins and asset utilization, U.S. Office Products intends
to:
- Consolidate and eliminate redundant facilities, operating systems and
business functions by developing DFCs to service defined geographic
territories; rationalize overlapping operations; and combine general and
administrative corporate functions.
- Develop and implement strategic pricing plans and improve inventory
selection and turnover, control and distribution systems to reduce
handling, storage and overhead costs.
- Integrate operating, distribution and information systems among business
entities through continued implementation of U.S. Office Products'
proprietary Trinity 2.0 software and other information technology
improvements.
- Continue to seek additional volume discounts and rebates from third-party
vendors through increased sales.
- Dispose of or sublease surplus real estate and fixed assets.
FOCUS ON ORGANIC GROWTH. U.S. Office Products intends to pursue
aggressively the following initiatives to increase sales through organic growth:
- Expand U.S. Office Products' product lines and services in certain markets
through broadened catalog offerings and development of "greenfield"
(start-up) operations.
- Develop customized catalogs, target product offerings and expand catalog
distribution to promote overall revenue growth and the sale of higher
margin products.
- Pursue cross-selling opportunities both within and across business groups
through customer referrals and marketing programs.
- Promote wide-spread use of U.S. Office Products' trade name, both
exclusively and in conjunction with its subsidiaries' local and regional
trade names, to realize the full benefits of a national identity and
reputation.
- Pursue additional strategic alliances with third-party vendors as a way of
enhancing U.S. Office Products' product offerings and fostering additional
cross-selling opportunities.
PURSUE TARGETED ACQUISITIONS AND EXPAND MBE NETWORK. U.S. Office Products
will continue to:
- Grow NAOPG by selectively acquiring additional businesses, focusing
primarily on smaller companies that provide competitive benefits.
- Evaluate and pursue select international acquisition opportunities to
increase its international presence.
- Grant additional MBE master licenses in foreign countries and expand the
MBE network in the United States.
NORTH AMERICAN OFFICE PRODUCTS GROUP
NAOPG is a leading supplier of office supplies, office furniture, and office
coffee, beverage and vending services to corporate customers in the United
States. NAOPG's pro forma revenues for the twelve-month period ended January 24,
1998 were approximately $1.7 billion, accounting for the largest portion of U.S.
Office Products' revenues among its business groups. NAOPG has focused primarily
on middle market businesses which it believes tend to place relatively greater
value on the quality of service than large corporate businesses.
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In late 1997, NAOPG was reorganized into 29 districts divided among four
geographic regions. A district president oversees each district and reports to a
regional vice president who manages each region. NAOPG has continued to
centralize common business functions and has accelerated its efforts to
implement a hybrid organizational structure that uses centralized and
decentralized management. Management believes that this structure allows U.S.
Office Products to achieve certain economies of scale associated with a large
organization while maintaining the kind of flexible and responsive level of
service to its customers that is characteristic of a smaller organization.
Through U.S. Office Products' centralized management (located at corporate
headquarters, larger operating subsidiaries or within the DFCs), U.S. Office
Products can leverage its size and scale in the areas of purchasing, inventory
management and distribution, accounting, human resources and management
information systems. Customer-oriented functions, including sales, marketing,
customer service, credit and collections, are decentralized and managed locally.
PRODUCTS AND SERVICES
NAOPG offers the following categories of products:
OFFICE SUPPLIES. In the contract stationery market, NAOPG offers over 33,000
different items such as desktop accessories, writing instruments, paper
products, computer consumables and business machines. U.S. Office Products
believes that it offers a broader assortment of office supplies than any of its
contract stationer competitors. NAOPG also operates approximately 30 retail
outlets, primarily in Northern California under the McWhorter's name, that sell
office supplies, gifts and related products, primarily to consumers and to the
SOHO market.
U.S. Office Products generally provides next-day delivery of ordered items
and, on request, same-day delivery. This "just in time" service enables
customers to reduce overhead cost by reducing inventory and associated personnel
and space requirements. U.S. Office Products obtains office products from many
sources, including manufacturers and wholesalers, and maintains and warehouses
certain frequently ordered items.
OFFICE FURNITURE. NAOPG sells catalog, middle-market, contract and
remanufactured furniture and provides other related furniture services. Both
contract stationer businesses and specialized dealers principally serve the
office furniture market. NAOPG focuses on products and services that
traditionally have higher profit margins, such as middle-market furniture,
refurbished and remanufactured furniture, moving and storage services, furniture
installation services, furniture rentals and asset management. In 1997, NAOPG
initiated an office furniture rental program which offers customers a limited
catalog selection of lower to medium-priced furniture for rental. This program
is currently being implemented in test markets and is expected to be expanded
nationwide within approximately 12 months.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. NAOPG provides and installs
coffee brewing equipment in a customer's office at no charge but requires
customers to purchase, on an ongoing basis, a minimum volume of coffee and
related items. NAOPG generally also offers a wide assortment of both coffee and
related products, including creamers, sugar, stirrers, teas, sodas, juices and
bottled waters, as well as snack items and all other items that are likely to be
found in an employee "breakroom" or lunch room, including plastic flatware,
napkins, paper cups, straws and similar items. NAOPG also installs, stocks and
maintains a variety of food and beverage vending machines for business
customers.
In September 1996, U.S. Office Products signed an agreement with Starbucks
to act as a major distributor of Starbucks-Registered Trademark- coffee in the
North American office coffee and beverage services market for five years subject
to, among other things, satisfaction of certain minimum purchase requirements.
U.S. Office Products has developed promotional materials (including materials
for its office products catalogs), and its employees have received training from
Starbucks in connection with this strategic alliance. U.S. Office Products
believes that this strategic alliance strengthens its position in the office
coffee and beverage services market and will enhance its ability to cross-sell
products and services to its clients.
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SALES AND MARKETING
NAOPG sells primarily through direct contact with customers through its
approximately 2,200 sales representatives. U.S. Office Products generally
establishes and maintains its relationships with customers by assigning a sales
representative to each customer. Many of U.S. Office Products' representatives
conduct targeted, business segment-specific marketing in their respective sales
areas. U.S. Office Products intends to leverage the skills and relationships of
its sales representatives by encouraging them to cross-sell multiple product
lines to customers.
U.S. Office Products' catalog is a primary marketing tool used by U.S.
Office Products' sales representatives. U.S. Office Products distributed over
1.4 million catalogs in fiscal 1997. Sales materials, including certain
catalogs, are tailored to address customer and market requirements and to take
advantage of pricing and marketing programs intended to maximize gross margins
by product type. U.S. Office Products does not conduct significant mass-market
advertising.
Customer orders are received by U.S. Office Products' sales personnel
primarily by telephone or facsimile. In addition, U.S. Office Products uses an
electronic data interchange ("EDI") system between U.S. Office Products and
certain of its customers. U.S. Office Products has recently developed OFIS NET,
which includes data order capabilities through its web site on the Internet.
Using such systems, customers are able to place orders directly into U.S. Office
Products' computer systems, manage their own inventory and generate customized
usage reports and invoices. Orders to be filled are routed electronically to
either U.S. Office Products' local warehouse or, if the ordered item is not
stocked by U.S. Office Products at its local warehouse, to a wholesaler.
OPERATING AND GROWTH STRATEGIES
NAOPG's operating and growth strategies include: (i) integrating and
consolidating business operations through establishment of DFCs; (ii) installing
operating and technology systems designed to improve its operations; (iii)
implementing cross-selling programs to leverage its 2,200 person national sales
force, (iv) continuing to pursue targeted acquisitions; and (v) developing
"greenfield" (or start-up) operations.
DFCS. DFCs are large centralized warehouses conducting operations that
service entire geographic territories previously served by multiple smaller
business operations. U.S. Office Products believes that the establishment of
DFCs will improve profit margins and asset utilization. U.S. Office Products'
first DFC, opened in Orlando, Florida in late 1997, supports ten NAOPG operating
companies. Within the next 12 months, U.S. Office Products plans to open and/or
reconfigure at least six new DFCs to support multiple operating units.
Ultimately, U.S. Office Products expects to establish approximately 24 DFCs.
DFCs will enhance U.S. Office Products' ongoing efforts to rationalize redundant
facilities and functions, thereby improving profit margins. Additionally,
through proprietary information systems which are being introduced throughout
its operations, U.S. Office Products will be able to identify high-turnover
items and optimize inventory management on a regional basis at DFCs. By using
DFCs and relying on wholesalers to stock and supply slower moving items, U.S.
Office Products believes it can continue to offer the broadest merchandise
assortment in the industry while also reducing inventories of low turnover
products and increasing profit margins on high turnover products.
TECHNOLOGY. The Systems House, Inc. subsidiary of U.S. Office Products has
developed proprietary operating and technology systems including computerized
inventory management and order processing systems, computerized quotation and
job costing systems and computerized logistics and distribution systems. U.S.
Office Products is currently installing Trinity 2.0, an operating system
developed by The Systems House, Inc., and management expects that by the end of
fiscal 1999, more than half of the 29 NAOPG districts will be connected to this
common operating system. NAOPG is also incorporating industry-standard
technology platforms, including frame relay networks, bar coding and radio
frequency technologies, at its existing and planned DFCs. Trinity 2.0 and other
technologies will allow U.S. Office Products to process orders and track
inventory and order fulfillment on a real-time basis, forecast demand
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by specific inventory item or stock keeping unit and generate customized usage
and billing reports for its customers. Management believes that implementation
of these systems throughout U.S. Office Products' operations will significantly
increase the speed and accuracy of order processing and fulfillment, thereby
improving customer satisfaction, while also increasing inventory turns.
CROSS-SELLING. U.S. Office Products expects that its "cross-selling"
program will generate internal growth by increasing sales to existing NAOPG
customers. "Cross-selling" is the practice of having different businesses sell
their products and services to each other's customers. For example, office
supply companies within NAOPG encourage their customers to buy office furniture
and office coffee, beverage, and vending services from other NAOPG companies and
vice-versa. Within NAOPG, management is implementing programs to encourage
customers to buy a full range of products and services from NAOPG companies.
NAOPG programs include customer referrals, joint marketing efforts, and other
efforts designed to demonstrate to customers the advantages of purchasing
multiple lines of products and services from NAOPG companies. At the end of
1997, U.S. Office Products introduced an expanded catalog that promotes
cross-selling and is part of an overall marketing strategy to offer customers a
broader selection of products. NAOPG's cross-selling efforts also include
providing sales representatives with training and selling tools to help them
introduce customers to the broad line of products that is available through U.S.
Office Products.
ACQUISITIONS. U.S. Office Products has historically grown through
acquisitions. Management believes that the vast majority of companies now
available to be acquired are relatively small, with annual revenues of $20.0
million or less. While U.S. Office Products intends to continue to expand NAOPG
by acquiring additional businesses, in the United States it expects to target
primarily smaller companies that are profitable and desirable because of their
geographic location, their customer base, or their management or sales
personnel. Substantially all of NAOPG's operations are in the United States with
the exception of three vending operations in Canada. Although U.S. Office
Products does not expect to acquire significant additional businesses in Canada
in the near future, it will evaluate other opportunities for expansion in other
parts of North America, such as Mexico.
GREENFIELD OPERATIONS. U.S. Office Products also expects to continue to
develop "greenfield" operations where management believes an attractive
acquisition target does not exist to enter a strategic geographic market or
where management believes it can expand sales in an existing market by adding a
new line of business (such as opening a coffee and beverage operation in a
market where U.S. Office Products already has a successful office supply
company). Management believes that this second approach is consistent with, and
will be supported by, U.S. Office Products' cross-selling efforts. U.S. Office
Products expects to continue to focus its greenfield efforts in the office
coffee and beverage operations and the new furniture rental program. As of
January 24, 1998, U.S. Office Products had opened approximately 20 office coffee
and beverage greenfield operations serving approximately 25 markets in the
United States and Canada.
OPERATIONS OUTSIDE OF NORTH AMERICA
U.S. Office Products' operations outside of North America accounted for
approximately 35% of its pro forma revenues in the 12 months ended January 24,
1998. U.S. Office Products sells office products and business services and
certain other products and services in New Zealand and Australia through Blue
Star and its subsidiaries. U.S. Office Products acquired 51% of Blue Star in
February 1996 and the remaining 49% in June 1996. Since its acquisition by U.S.
Office Products, Blue Star has completed 37 acquisitions to become the largest
office products company in New Zealand and the second largest in Australia. In
addition to Blue Star, U.S. Office Products acquired its interest in Dudley in
November 1996.
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PRODUCTS AND SERVICES--BLUE STAR
OFFICE SUPPLIES AND FURNITURE. Blue Star sells office supplies, office
furniture, stationery, packaging supplies and similar products to corporate,
commercial and SOHO customers in New Zealand and Australia. In addition to its
corporate contract stationery business, Blue Star operates more than 250 retail
book and stationery stores throughout New Zealand and Australia (approximately
90 of which are franchises). These stores operate primarily under the Whitcoulls
and Angus & Robertson brand names.
BUSINESS MACHINES AND PERSONAL COMPUTERS. Blue Star's Business Solutions
Group offers a range of office automation products, such as personal computers
and servers, telephone systems, fax machines and photocopiers, as well as
office-related services such as systems integration, project management and
consulting. U.S. Office Products believes that Blue Star is one of New Zealand's
leading direct sellers of personal computers, with Blue Star's consumer market
accounting for the largest portion of sales. Blue Star expects to rationalize
its product offerings in this part of its business and to focus on services and
solutions-based products that respond to customers' particular needs.
COMMERCIAL PRINTING. Blue Star's Print Group has a large commercial print
company in New Zealand. It offers a range of printed products and related
services, including commercial sheet-fed and offset printing, label
manufacturing, and digital and reprographic printing. The group also provides
specialized products and services for certain large customers, such as printing
all of New Zealand's telephone directories and handling the pre-press printing
and distribution of bills, acts and other legislative materials for the New
Zealand Parliament.
PRODUCTS AND SERVICES--DUDLEY
OFFICE SUPPLIES. Dudley sells office products and related business services
throughout the United Kingdom. With annualized revenues of over $200.0 million,
Dudley is the second largest contract stationer in the United Kingdom. Dudley
serves as stationer to Her Majesty the Queen and the Prince of Wales.
SALES AND MARKETING
Blue Star currently employs approximately 2,100 sales representatives in New
Zealand and Australia. Blue Star promotes sales primarily through direct
marketing by its sales representatives. Blue Star is actively pursuing
cross-selling initiatives to increase product sales across business groups.
OPERATING AND GROWTH STRATEGIES
Blue Star intends to leverage its sales force to cross-sell products to its
corporate and consumer customer base. To service its large corporate customers,
Blue Star is establishing a unit to fulfill the single-point procurement
requirements of such customers. Blue Star also will evaluate business
opportunities with governments and additional large corporate accounts. Blue
Star also expects to expand its retail store business through a variety of
strategies, including opening new stores in selected locations, re-branding
certain businesses, refurbishing certain outlets, expanding product offerings,
and introducing coffee shops in selected store locations. Blue Star management
expects that in the near term it will focus primarily on integrating the
operations of several recent acquisitions, expanding product offerings, and
developing joint marketing plans across business units.
U.S. Office Products expects to continue to make strategic acquisitions in
New Zealand and Australia and to evaluate opportunities to enter other foreign
markets. Dudley is continuing to expand through acquisitions in the United
Kingdom, using the funds invested by U.S. Office Products.
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MAIL BOXES ETC.
MBE is the world's largest franchisor of local postal, packaging, business
and communication retail service centers ("MBE Centers"). With approximately
3,600 MBE Centers in 55 countries, MBE's network is approximately ten times
larger than the network of its next largest competitor. MBE's primary sources of
revenues are (i) royalty and marketing fees paid by existing franchisees, (ii)
fees paid by buyers of new franchises, and (iii) sales of supplies and equipment
to MBE Centers.
There are approximately 3,000 MBE Centers operating throughout the United
States and approximately 600 MBE Centers serving customers outside the United
States. MBE has granted master licenses in more than 55 countries abroad which
allow the licensee to control the development of MBE franchises in designated
territories in those countries. MBE's global network of MBE Centers sold a total
of approximately $1.3 billion of products and services during fiscal 1997, a
substantial amount of which was generated by SOHO customers. While MBE's
revenues include only a small percentage of this amount (in the form of royalty
and marketing fees paid to MBE on the sale of products and services), U.S.
Office Products believes that the volume of business which MBE transacts and its
extensive distribution network make it a an important supplier to the SOHO
market.
FRANCHISE ARRANGEMENTS
MBE offers both individual franchises and area franchises in the United
States and master licenses in foreign countries. U.S. area franchisees are
granted the exclusive right to sell individual MBE franchises in their
respective areas and also provide start-up assistance and continuing support for
such individual franchisees. Master licenses in foreign countries provide the
licensee with the exclusive right to develop and operate MBE Centers in
designated territories in those countries and the right to sell individual MBE
franchises to others. MBE provides its franchisees and licensees valuable
services including, among other things, instruction at MBE University,
operational guidance, assistance in site selection, marketing, and advertising
programs.
PRODUCTS AND SERVICES
A typical MBE Center offers mail and parcel receiving, packaging, and
shipping services through a number of carriers and provides small businesses
with a wide range of products and services. These products and services
generally include telephone message service, word processing, copying and
printing, office supplies and communication services. Communications services
typically include fax, voice mail, pagers, and wire transfers of funds. In
addition, MBE Centers usually offer convenience items such as stamps, packaging
supplies, stationery supplies, notary, passport photos, and money orders. Large
corporations that need a national distribution system use MBE as communication
centers for their field-based employees.
SALES AND MARKETING
MBE conducts national advertising campaigns that are designed to market the
MBE brand, including televised ad campaigns during three consecutive Super Bowls
(1996-1998). MBE's marketing strategies are based upon extensive market research
and include campaigns directed at both the consumer and business-to-business
markets. MBE is also developing programs to encourage existing MBE franchisees
to acquire additional MBE franchises. U.S. Office Products is also developing a
program to offer MBE Center customers the convenience of on-site ordering of
office supplies from NAOPG catalogs.
OPERATING AND GROWTH STRATEGIES
MBE's operating and growth strategies include: (i) broadening its product
and services offerings; (ii) growing organically through additional
strategically-located express service centers and improved
33
<PAGE>
technology systems to better serve customers; and (iii) increasing its franchise
base both domestically and internationally.
PRODUCTS AND SERVICES MBE is pursuing several new programs to increase
same-store sales in MBE Centers. First, MBE is developing with NAOPG a special
office products catalog for use in MBE Centers and by MBE customers. Customers
will be able to use the catalog to order office products for delivery to their
local MBE Center, to their offices, or to their homes. Second, MBE is developing
a series of new products related to computer and Internet technology. MBE
expects that these products will have applications both within MBE Centers and
in customers' homes and offices and that they can be developed without material
expense. Third, MBE is pursuing a program that will allow franchise owners to
purchase office supplies, copy paper and other consumables more efficiently.
Management believes this program will allow MBE franchisees to offer their
customers a broader range of competitively priced office products. Fourth, MBE
has entered into strategic alliances with UPS, Spiegel, Microsoft and Bank/One
to offer MBE Center customers a broader range of products and services. MBE
receives fees directly from strategic partners or from franchisees (in the form
of a royalty on sales of products and services offered as a result of the
strategic alliances).
EXPRESS SERVICE CENTERS MBE has recently introduced MBE Business
Express-TM- sites, which are 24-hour self-serve, credit card-activated business
centers designed to serve customers in hotels and hospitality centers, airports,
convention centers, military retail outlets, and academic settings. The MBE
Business Express sites include computer (including Internet access), copying,
printing, and facsimile services. The sites also will allow users to connect
with MBE Centers via direct-dial telephone to order or arrange for additional
services such as package receipt or delivery or document reproduction.
FRANCHISE BASE The global network of MBE Centers has grown dramatically,
with the number of MBE Centers in the United States increasing by 250 to 300
each year since 1991. MBE has implemented several new programs to market its
franchises. These programs include the Conversion Store Program, which targets
potential independent operators in the industry to convert to a MBE franchise;
the Host Store concept, which locates MBE Centers within another retail
environment; the Corporate Tour Program, in which potential franchise owners are
invited to attend a tour of MBE's headquarters in San Diego and receive formal
presentations by key departments; and a multiple center ownership program which
is designed to encourage existing successful MBE franchisees to purchase
additional centers.
INTERNATIONAL EXPANSION MBE plans to continue to expand the number of
master licensees outside of the United States, and to continue to explore
opportunities for new relationships in other countries. MBE expects that
international growth will account for an increasingly significant proportion of
the total growth of MBE Centers. Approximately 600 MBE Centers are currently
open outside the United States, with another 40 MBE Centers under contract as
new foreign outlets.
COMPETITION
NAOPG
NAOPG operates in a highly competitive market. U.S. Office Products
estimates that its NAOPG contract stationery operations have attained
approximately a 3.7% share of the $30.0 billion of annual sales of all contract
stationers in the United States. U.S. Office Products believes that it has five
major competitors and that the combined market share of all five of these
competitors is less than 35%. U.S. Office Products' five major competitors
include: Boise Cascade Office Products Corporation; Corporate Express, Inc.;
Office Depot; BT Office Products International, Inc.; and Staples, Inc. Two of
these five competitors are divisions of discount superstore chains and two
others are primarily owned by large manufacturers of office products. As the
office products industry has undergone rapid consolidation, many smaller office
supply companies have been acquired by larger companies or have closed.
Nevertheless, the
34
<PAGE>
market remains highly fragmented, with more than 4,300 independent suppliers
representing approximately 50% of the U.S. market.
In the contract stationery market, as well as the other markets that it
serves or may in the future seek to serve, U.S. Office Products believes that
customers not only are concerned with the overall reduction of their office
products costs, but also place an emphasis on dependability, superior levels of
service and flexible delivery capabilities. U.S. Office Products believes that
it competes favorably with its five largest competitors in the contract
stationery market on the basis of service and price. However, some of these
companies have greater financial resources than U.S. Office Products.
INTERNATIONAL
The markets in which Blue Star operates are extremely competitive. In New
Zealand, U.S. Office Products believes that its three main competitors are
Corporate Express, Warehouse and Office Products Depots, which together with
Blue Star serve the vast majority of the market. Independent operators and
retail bookstore chains are the primary outlets serving the remaining market.
In Australia, Corporate Express, Boise Cascade and Viking Office Products,
Inc. are Blue Star's major competitors. However, the market remains highly
fragmented with a large number of independent operators.
MAIL BOXES ETC.
The market for ancillary services and products served by MBE, including
office supplies, telecopy and copying services, is highly fragmented with
products and services being provided by national chains, medium to small
independent outlets, and specialty service providers such as copy centers, quick
print centers and office supply companies. In the United States, the U.S. Postal
Service is the primary competitor in the SOHO market for mailing and packaging,
particularly its postal service centers located in shopping centers and other
locations. A growing segment of other domestic business is also being captured
by discount outlets such as Staples and Office Depot. In addition, approximately
10,000 other independent or franchised postal and business service centers are
operating in the United States and compete with MBE.
EMPLOYEES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will have more than 15,000 full-time employees, a small number of which are
members of labor unions. In general, U.S. Office Products considers its
relations with its employees to be satisfactory.
PROPERTIES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will operate 801 facilities in various states and in New Zealand, Australia and
Canada, including one facility located in Washington, D.C. for its corporate
headquarters. Of these facilities, 753 are leased and 48 are owned. The
facilities are used for retail, warehouse and office purposes, or a combination
of these functions. The aggregate square footage for all facilities is
approximately 9.4 million square feet, consisting of approximately 2.1 million
square feet for retail use, approximately 5.5 million square feet for warehouse
use and approximately 1.8 million square feet for office use.
The terms on U.S. Office Products' leases are from one month to 20 years,
with the majority of the terms ranging from five to ten years. U.S. Office
Products generally pays market rates for its leases. U.S. Office Products leases
approximately 7.7 million square feet and owns approximately 1.7 million square
feet. Approximately 280 leases, representing approximately 29% of U.S. Office
Products' total leased space, will expire in the next 12 months. Many of these
leases contain renewal options. Where necessary,
35
<PAGE>
U.S. Office Products intends to seek to renew or extend such expiring leases,
and U.S. Office Products believes that it will be able to do so on terms that
are acceptable to it. When no renewal option exists or the property is no longer
a desirable location for operational purposes, U.S. Office Products will
evaluate the local real estate market and seek to identify alternative space in
sufficient time to negotiate an acceptable lease agreement prior to the
expiration of the existing lease. U.S. Office Products has generally been able
to renew or extend its expiring leases, and enter into new leases where
necessary, on acceptable terms.
U.S. Office Products believes that its facilities are and will be suitable
for their respective purposes and have adequate productive capacity for U.S.
Office Products' present and anticipated needs.
The principal executive offices of U.S. Office Products are 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007.
36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Selected Financial Data................................................................... F-2
Selected Financial Data................................................................................... F-3
Management's Discussion and Analysis of Financial Position and Results of Operations...................... F-5
Pro Forma Combined Financial Information of U.S. Office Products Company
Introduction to Pro Forma Combined Financial Statements................................................. F-21
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)..................................... F-23
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)........... F-25
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)........... F-26
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)........................................................................................... F-27
Notes to Pro Forma Combined Financial Statements........................................................ F-28
Consolidated Financial Statements of U.S. Office Products Company
Report of Price Waterhouse LLP, Independent Accountants................................................. F-32
Report of Ernst & Young LLP, Independent Accountants.................................................... F-33
Report of BDO Seidman, LLP, Independent Accountants..................................................... F-34
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-35
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-36
Report of Rubin, Koehmstedt and Nadler, Independent Accountants......................................... F-37
Report of Deloitte & Touche LLP, Independent Accountants................................................ F-38
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-39
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-40
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)........ F-41
Consolidated Statement of Income for the fiscal years ended April 30, 1995 and 1996, April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)................... F-42
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996, April
26, 1997 and the nine months ended January 24, 1998 (unaudited)....................................... F-43
Consolidated Statement of Cash Flows for the fiscal years ended April 30, 1995 and 1996, April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)............... F-45
Notes to Consolidated Financial Statements.............................................................. F-47
Consolidated Financial Statements of Mail Boxes Etc.
Report of Ernst & Young LLP, Independent Auditors....................................................... F-74
Consolidated Balance Sheets as of April 30, 1997 and 1996............................................... F-75
Consolidated Statements of Income for the fiscal years ended April 30, 1997, 1996 and 1995.............. F-76
Consolidated Statement of Shareholders' Equity for the fiscal years ended April 30, 1997, 1996 and
1995.................................................................................................. F-77
Consolidated Statements of Cash Flows for fiscal years ended April 30, 1997, 1996 and 1995.............. F-78
Notes to Consolidated Financial Statements.............................................................. F-80
Condensed Consolidated Balance Sheet as of October 31, 1997 (unaudited)................................. F-91
Condensed Consolidated Statements of Operations for three months and six months ended October 31, 1997
(unaudited) and October 31, 1996 (unaudited).......................................................... F-92
Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1997 (unaudited)
and October 31, 1996 (unaudited)...................................................................... F-93
Notes to Condensed Consolidated Financial Statements (unaudited)........................................ F-94
</TABLE>
F-1
<PAGE>
INTRODUCTION TO SELECTED FINANCIAL DATA
Set forth below is certain selected financial data for U.S. Office Products
Company (the "Company"). The historical Statement of Income Data for the fiscal
years ended April 30, 1995 and 1996 and April 26, 1997 and the Balance Sheet
Data at April 30, 1996 and April 26, 1997 have been derived from the Company's
consolidated audited financial statements and are included elsewhere in this
Annex A. The historical Statement of Income Data for the years ended April 30,
1993 and 1994 and the Balance Sheet Data at April 30, 1993, 1994, and 1995 have
been derived from unaudited consolidated financial statements which are not
included elsewhere in this Annex A. The Selected Financial Data for the nine
months ended January 25, 1997 and January 24, 1998 (except pro forma amounts)
have been derived from unaudited consolidated financial statements that appear
elsewhere in this Annex A. These unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations for the periods presented. The
financial data have been restated from prior presentations as a result of the
Company's adoption of the Strategic Restructuring Plan.
The pro forma financial data gives effect, as applicable, to the Strategic
Restructuring Plan, the offer to exchange the 2001 Notes for common stock at a
reduced conversion price (the "2001 Note Offer"), the tender offer for the 2003
Notes (the "2003 Note Tender"), the offering of senior subordinated notes ("Note
Offering") and borrowings under the new senior secured credit facilities (the
"Credit Facility"; borrowings under the Note Offering and the Credit Facility
are referred to as the "New Borrowings") and the acquisitions completed by the
Company after May 1, 1996 as if all such transactions had been consummated on
May 1, 1996 for balance sheet purposes as if such transactions had occurred on
January 24, 1998 and for income statement purposes as if such transactions had
occurred at the beginning of the relevant period. In addition, the pro forma
information is based on available information and certain assumptions and
adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the
unaudited pro forma financial information, including the notes thereto, and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Annex A.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6)............................. 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6)............................. 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,120
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company since May 1, 1996 as if such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements included elsewhere in this Annex A.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company subsequent to January 24, 1998 as if such transactions had
been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of the Company's future financial position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS ANNEX A CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS ANNEX A, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED UNDER THE HEADINGS "RISK FACTORS" ABOVE AND "FACTORS AFFECTING THE
COMPANY'S BUSINESS" BELOW.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Annex A. The discussion of the Company's pro forma results of operations
is based on the assumptions and conditions described in the Pro Forma Combined
Financial Statements and the Notes thereto. The Company's audited consolidated
financial statements have been restated to reflect (i) the results of the
businesses to be spun off to shareholders in the Company's recently announced
Strategic Restructuring Plan as discontinued operations; and (ii) the change in
accounting treatment of the 22 business combinations completed during the nine
months ended January 24, 1998, from the pooling-of-interests method to the
purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment by Investor following
acceptance of shares in the Tender Offer and the record date for the
Distributions. In conjunction with the Strategic Restructuring Plan, the Company
plans to undertake the 2001 Note Offer, the 2003 Note Tender and the New
Borrowings. (Capitalized terms not defined herein shall have the meaning given
such term in the text of the Proxy Statement.)
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
F-5
<PAGE>
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing operations and 21 related
to discontinued operations) from its inception through the end of fiscal 1997,
54 of which were accounted for under the pooling-of-interests method (39 related
to continuing operations and 15 related to discontinued operations). During the
nine months ended January 24, 1998, the Company completed an additional 60
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the Strategic
Restructuring Plan, all 60 business combinations completed during the nine
months ended January 24, 1998 are accounted for under the purchase method. Prior
to the adoption of the Strategic Restructuring Plan, 22 of these 60 business
combinations were accounted for under the pooling-of-interests method (12
related to continuing operations and 10 related to discontinued operations).
Following adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method (including the Company's acquisition of
Mail Boxes Etc.) The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
F-6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Strategic Restructuring
Plan, the 2001 Note Offer, the 2003 Note Tender, the New Borrowings and the
results of the companies acquired between May 1, 1996 and March 20, 1998 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.3 0.5 0.3
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.3 4.1 4.6 4.4
Interest expense, net........ 0.4 0.4 1.4 3.7 1.5 1.3 3.8
Other income (loss).......... (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 0.9 2.9 3.6 0.9
Provision for income taxes... 0.4 0.6 1.3 0.7 1.2 1.7 0.7
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.2% 1.7 1.9 0.2%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.8
Other income (loss).......... (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.5
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.5%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisition of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
F-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues for
the nine months ended January 24, 1998 include revenues from 111 companies
acquired in business combinations accounted for under the purchase method after
the beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for the nine months ended January 25, 1997 include revenues from 54 of
the Fiscal 1997 and 1998 Purchased Companies for a portion of such period. This
increase was partially offset by the effect on international revenues of the
devaluation of the New Zealand and Australian dollars versus the USD. Because
revenues generated in New Zealand and Australia contributed approximately
one-third of the Company's consolidated revenues during the nine months ended
January 24, 1998, management estimates that currency devaluation had the effect
of reducing the Company's reported consolidated revenues (in U.S. dollar terms)
by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
F-8
<PAGE>
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company through the negotiation of national or other
large-scale contracts with the providers of certain services affecting these
general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
expects to undertake cost reduction measures including the elimination of
duplicative facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 1997. The
increase in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix resulting in a higher proportion of revenues in
traditionally higher margin products and services, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 110.8%, from $231.6
million, or 21.8% of revenues, in fiscal 1996, to $488.2 million, or 23.1% of
revenues, in fiscal 1997. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues from products and services with
traditionally higher selling, general and administrative expenses, such as
products sold in New Zealand and Australia.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $12.6 million or 39.6%. The
Company believes that the adjustments to the employee stock options as a result
of the Strategic Restructuring Plan will result in a significant increase in the
number of stock options outstanding which may limit the number of stock options
available for grant to employees in the future. The Company believes that it
offers its employees market competitive compensation packages and does not
expect that a reduction in the number of stock options available to employees in
the future will have a material impact on the Company's ability to retain and
attract qualified employees.
Amortization expense increased from $2.7 million in fiscal 1996 to $12.4
million in fiscal 1997. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1997 versus
fiscal 1996.
The Company incurred non-recurring acquisition costs of $8.1 million and
$8.0 million during fiscal 1996 and 1997, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs reflect the completion of 14 and 25 business
combinations accounted for under the pooling-of-interests method during fiscal
1996 and fiscal 1997, respectively. The non-recurring acquisition costs in
fiscal 1996 included a charge of approximately $4.7
F-10
<PAGE>
million related to one business combination which included the payment of
significant transaction-related compensation obligations.
The Company also incurred restructuring costs of approximately $682,000 and
$4.2 million during fiscal 1996 and 1997, respectively. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that the income from its equity investment will increase as
the fiscal 1997 amount represented earnings from November 14, 1996, the date of
the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
F-11
<PAGE>
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were not subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by the Company.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma as adjusted basis, at January 24, 1998, the Company had
working capital of $396.6 million, long-term debt of $1,155.5 million and
capitalization of $1.7 billion. Such pro forma amounts give effect to the
Strategic Restructuring Plan, the 2001 Note Offer, the 2003 Note Tender and the
New Borrowings to be undertaken in conjunction with the Strategic Restructing
Plan and purchase acquisitions completed subsequent to January 24, 1998, and
through March 20, 1998, as if such transactions had occurred on January 24,
1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its existing bank credit facility will be
sufficient to meet its liquidity requirements for its operations and capital
expenditures and for its additional debt service obligations for the remainder
of the calendar year. The Company does not currently anticipate that any
possible restructuring costs related to the Company's planned cost reduction
measures, coupled with the effects of such cost reduction measures, would have a
significant adverse effect on the Company's financial position, liquidity or
cash flows. The Company anticipates capital expenditures of approximately $40.0
million in both fiscal 1999 and fiscal 2000.
The existing credit facility provides the Company with a $500 million line
of credit, bearing interest, at the Company's option, at the bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. At March 20, 1998, the Company had
approximately $362.0 million outstanding under the Credit Facility, at an annual
interest rate of approximately 6.5%, and $138.0 million available under the
Credit Facility for acquisition and working capital purposes. Because certain
elements of the Strategic Restructuring Plan would violate covenants in the
Credit Facility, that facility will either have to be modified with the lenders'
consent or refinanced. The Company currently expects to finance the aggregate
cost of purchasing shares in the Tender Offer with the proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from the
issuance of subordinated debt securities. In connection with the completion of
the Strategic Restructuring Plan, the Company expects to incur approximately
$500 million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses.
U.S. Office Products has agreed to and accepted a commitment letter from The
Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch Capital
Corporation, as agents, and Chase Securities Inc., BT Alex. Brown Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers, for a
new bank loan facility that will provide for an aggregate principal amount of
$1,225.0 million, consisting of (i) seven-year term loan facilities totaling up
to $300.0 million, (ii) an eight-year term loan in the principal amount of
$675.0 million, and (iii) a revolving credit facility in the principal amount of
$250.0 million. U.S. Office Products and the banks may agree to alter the
allocated principal amount of two or more of the loan facilities before signing
definitive documents depending on market conditions. The loan facilities will be
guaranteed by U.S. Office Products' material domestic subsidiaries and secured
by substantially all of the assets of U.S. Office Products and its material
domestic subsidiaries. U.S. Office Products will be required to enter into
arrangements to insure that the effective interest rate paid by U.S. Office
Products on at least 50% of its outstanding bank and subordinated debt will not
go above a certain rate. The loan documents will likely include financial and
other covenants. These will include, among others, restrictions on U.S. Office
Products' ability to incur additional indebtedness, sell assets, pay dividends
or engage in certain other transactions, and requirements that U.S. Office
Products maintain certain financial ratios, and other provisions customary for
loans to highly leveraged companies, including representations by U.S. Office
Products, conditions to funding, cost and yield protections, restricted payment
provisions, transfer provisions, amendment provisions and indemnification
provisions. The loan facilities will be subject to mandatory prepayment in a
variety of circumstances, including upon certain asset sales and financing
transactions. The commitment will terminate unless definitive loan documents are
entered into, and the Strategic Restructuring Plan and Financing Transactions
are completed, by June 30, 1998. As a result of the Company's increased
indebtedness, a portion of the cash flows from the Company's international
operations, will be required to service debt and interest payments. The Company
expects that it will incur additional costs with respect to accessing cash flows
from international operations including
F-13
<PAGE>
such items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. In addition, the results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives being evaluated by the
Company. The Company also expects to issue $400.0 million principal amount
senior subordinated notes in a private placement but has not received any
commitment with respect to such issuance.
The Company expects that the indenture governing the senior subordinated
notes will also place restrictions on the Company's ability to incur
indebtedness, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets to, or merge or
consolidate with, another entity.
On a historical basis, the Company's working capital was $286.0 million at
April 26, 1997 and $134.0 million at January 24, 1998. Long-term debt was $380.2
million and $381.8 million at April 26, 1997 and January 24, 1998, respectively.
The decline in working capital was due primarily to an increase in the Company's
borrowings under its Credit Facility from $140.1 million at April 26, 1997 to
$330.0 million at January 24, 1998. The increase in the borrowings under the
Credit Facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. Long-term debt increased during
the fiscal year ended April 26, 1997 as a result of the sales, in an offshore
offering and in a concurrent private placement in the United States, of the 2003
Notes in the principal amount of $230.0 million. The net proceeds were used for
working capital and acquisition purposes. In addition, the Company completed the
public sale, at a gross price of $22.00 per share, of approximately 13.0 million
shares of common stock. The net proceeds to the Company were approximately
$275.7 million and were used to repay a portion of the balance outstanding under
the Company's Credit Facility.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $0.78 USD at April 27, 1997 to $0.66 USD
at January 24, 1998. This resulted in a reduction in stockholders' equity,
through a cumulative translation adjustment, of approximately $105.5 million,
reflecting the impact of the declining exchange rate on the Company's
investments in its New Zealand and Australian subsidiaries. In addition, the
devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
Subsequent to April 26, 1997 and through March 20, 1998, the Company
completed 67 business combinations (45 related to continuing operations and 22
related to discontinued operations) for an aggregate purchase price of $774.7
million, consisting of approximately $190.8 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $34.9 million. Net cash used in investing activities
was $97.6 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company's 49% equity investment in Dudley. Net borrowings
increased $244.7 million during the nine months ended January 25, 1997,
primarily to fund the purchase prices of acquisitions, to repay higher-cost debt
assumed in acquisitions and to fund the initial equity investment in Dudley. The
Company also received $41.9 million in cash as a result of the sale of common
stock during the period. Discontinued operations used $3.2 million of cash
during the nine months ended January 25, 1997.
F-14
<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's operations in New Zealand and Australia have generally been higher
in the Company's third quarter. As the Company's mix of businesses evolves
through future acquisitions, these seasonal fluctuations may continue to change.
Therefore, results for any quarter are not necessarily indicative of the results
that the Company may achieve for any subsequent fiscal quarter or for a full
fiscal year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands, except for per share
amounts). The information has been derived from unaudited consolidated financial
F-15
<PAGE>
statements that in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
Historically, U.S. Office Products has grown substantially through
acquisitions. U.S. Office Products' aggressive acquisition program has produced
a significant increase in sales, employees, facilities and
F-17
<PAGE>
distribution systems. While the Company's decentralized management strategy,
together with operating efficiencies resulting from the elimination of
duplicative functions and economies of scale, may present opportunities to
reduce costs, such strategies may initially require additional costs and
expenditures to expand operational and financial systems and corporate
management administration. Because of the various costs and possible
cost-savings strategies, historical operating results may not be indicative of
future performance. There also can be no assurance that the pace of the
Company's acquisitions will not adversely affect efforts to implement
cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon U.S. Office Products. Delays in
implementing planned integration and consolidation strategies, or the failure of
such strategies to achieve anticipated cost savings, also could adversely affect
the Company's results. In addition, there can be no assurance that U.S. Office
Products' management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the continuing
increase in the size and scope of the Company's operations and acquisition
activity.
U.S. Office Products intends to pursue future acquisition opportunities;
however, no assurance can be given that U.S. Office Products will identify,
finance and complete additional suitable acquisitions on acceptable terms, or
that future acquisitions, if completed, will be successful. U.S. Office Products
will likely incur additional debt to finance any additional acquisitions. In
addition, acquired companies may not achieve future sales and profitability
levels that justify the prices that U.S. Office Products paid to acquire them.
Acquisitions also may involve a number of special risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill. Tax considerations may also
restrict the amount of stock that U.S. Office Products can use for acquisitions.
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.7% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's 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
F-18
<PAGE>
able to achieve year 2000 compliance in 1999 and does not expect that the cost
of making necessary adaptations will be material to the Company. If the Company
cannot make the necessary adaptations on a timely basis, or if the costs are
greater than expected, the Company's business could be adversely affected.
Management intends to continue to focus significant attention and resources
on international operations and expects foreign sales to continue to represent a
significant portion of U.S. Office Products' total sales. The factors described
in this section that apply to U.S. Office Products' domestic operations also may
affect U.S. Office Products' foreign operations. In addition, U.S. Office
Products' foreign operations are subject to a number of other risks, including
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property,
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on U.S.
Office Products' ability to maintain or increase its foreign sales or on its
business, financial condition or results of operations. See "Managements'
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statements and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that give
it the right to acquire additional shares of common stock in the future. Under
the Investment Agreement that Investor and the Company signed on January 12,
1998 (the "Investment Agreement"),
F-19
<PAGE>
Investor will have, among other things, the right (subject to certain
conditions) to nominate three of the nine members of the U.S. Office Products
Board of Directors, including the Chairman of the Board, and certain Board
decisions will be subject to super-majority voting provisions that, in certain
circumstances, may require the concurrence of at least one director nominated by
Investor. Matters subject to super-majority Board approval include (i) the
issuance of new shares in excess of certain amounts specified in the Investment
Agreement, (ii) certain business combinations, (iii) a disposition by the
Company of all or substantially all of its assets, (iv) a major
recapitalization, dissolution, or liquidation of the Company, or (v) an
amendment of the Company's charter or by-laws that is inconsistent with the
terms of the Investment Agreement. Investor's significant ownership of U.S.
Office Products common stock may permit Investor to influence significantly
matters requiring the approval of the Company's stockholders. The super-majority
Board voting requirements may give Investor the ability to block the approval of
certain actions requiring the super-majority vote of the Board. Together, this
ownership position and the Board voting requirements may have the effect of
discouraging (or possibly preventing) a future change in control of U.S. Office
Products. In addition, the super-majority Board voting requirement may have the
effect of limiting the Company's future use of equity to acquire businesses,
raise capital, or provide employees with long-term incentives.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Code and will not be taxable under Section 355(e) of the Code. The
Company will not complete the Distributions unless it receives the Tax Opinion.
The Tax Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other data, documentation and other
materials that Wilmer, Cutler & Pickering has deemed necessary. See "U.S.
Federal Tax Consequences of the Distributions."
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the Company's stockholders (except with respect to cash received
in lieu of fractional shares) as a result of the Distributions.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
the Company will recognize gain equal to the difference between the fair market
value of the common stock of the Spin-Off Company and the Company's adjusted tax
basis in the common stock of the Spin-Off Company. In addition, holders of U.S.
Office Products common stock will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value of the common
stock of the Spin-Off Company that you receive in the Distribution. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company.
However, no gain or loss will be attributable to holders of U.S. Office
Products' common stock as the result of a Distribution being taxable under
Section 355(e). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
Certain limitations under Section 355 may restrict the Company's ability to
issue capital stock after the Distributions. These limitations will generally
prevent the Company from issuing capital stock to the extent the issuance is
part of a plan, which includes a Distribution, pursuant to which one or more
people or organizations acquire capital stock of the Company that represents 50%
or more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Equity
Self-Tender, (ii) the Distributions, and (iii) the Equity Investment
contemplated by the Strategic Restructuring Plan, (iv) the 2001 Note Offer, (v)
the 2003 Note Tender, (vi) the New Borrowings to be undertaken in conjunction
with the Strategic Restructuring Plan and (vii) all acquisitions completed
through March 20, 1998. The unaudited pro forma combined financial statements do
not give effect to the allocation of corporate overhead to the Spin-Off
Companies.
The pro forma combined balance sheet gives effect to (i) the Equity
Self-Tender, (ii) the Distributions, (iii) the Equity Investment, (iv) the 2001
Note Offer, (v) the 2003 Note Tender, (vi) the New Borrowings and (vii) the
businesses acquired by the Company after January 24, 1998 in business
combinations accounted for under the purchase method (the "Post January 24, 1998
Purchase Acquisitions"), as if all such transactions had occurred as of the
Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; and (vii) the business combinations accounted for under
the purchase method during fiscal 1998 (the "Fiscal 1998 Purchase
Acquisitions"), as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 is comprised of (i) the unaudited financial information of the Company for
the nine months ended January 24, 1998; and (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through their respective acquisition dates, except for the financial
information of the Post January 24, 1998 Purchase Acquisitions which is included
through January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisitions");
and (viii) the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on May 1, 1996. The pro forma combined statement of income for the
nine months ended January 25, 1997 is comprised of (i) the unaudited financial
information of the Company for the nine months ended January 25, 1997; (ii) the
unaudited financial information of the Fiscal 1997 Purchase Acquisitions for the
period from May 1, 1996 through the earlier of January 25, 1997 or their
respective dates of acquisition; and (iii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions,
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the Fiscal 1997 Purchase Acquisition; and (viii)
the Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred
on May 1, 1996. The pro forma combined statement of income for the year ended
April 26, 1997 is comprised of (i) the audited financial information of the
Company for the fiscal year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
April 26, 1997 which were acquired in business combinations accounted for under
the pooling-of-interests method of accounting. The results of the companies
included in the Spin-Off Companies have been reflected as discontinued
operations in the Company's historical statement of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
U.S. JANUARY 24, PRO FORMA ADJUSTMENTS
OFFICE 1998 ---------------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
---------- ------------- ----------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 45,258 $ 108 $(22,754)(a) $ 907,388(b) $
70,000(b)
(1,000,000)(b)
Accounts receivable,
net.................. 324,976 5,077
Inventory, net......... 239,043 2,035
Prepaid and other
current assets....... 103,624 94 (1,447)(b)
---------- ------------- ----------- ------------- -------------
Total current
assets........... 712,901 7,314 (22,754) (24,059)
Property and equipment,
net.................... 217,228 6,144
Intangible assets, net... 903,722 13,255(a)
Other assets............. 174,549 317 (3,739)(b)
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........ 114,959 (114,959)(c)
All other net assets... 346,083 (346,083)(d)
---------- ------------- ----------- ------------- -------------
Total assets....... $2,469,442 $13,775 $ (9,499) $ (27,798) $(461,042)
---------- ------------- ----------- ------------- -------------
---------- ------------- ----------- ------------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
----------- ----------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 270,000(e) $ $ 217,350(h) $
(270,000)(e) (217,350)(h)
Accounts receivable,
net.................. 330,053
Inventory, net......... 241,078
Prepaid and other
current assets....... 102,271
----------- ----------- ----------- ----------
Total current
assets........... 673,402
Property and equipment,
net.................... 223,372
Intangible assets, net... 916,977
Other assets............. 30,000(f) (3,275) (g) (5,518)(h) 192,334
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........
All other net assets...
----------- ----------- ----------- ----------
Total assets....... $ 30,000 $ (3,275) $ (5,518) $2,006,085
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA ADJUSTMENTS
U.S. OFFICE JANUARY 24, 1998 -----------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
----------- ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $ 332,636 $ 640 $ (640)(a) $ $(114,959)(c)
Accounts payable............ 164,229 2,438
Accrued compensation........ 41,262
Other accrued liabilities... 67,654 1,742 (2,074 )(b)
(26,000 )(b)
----------- -------- ---------- ----------- -------------
Total current
liabilities........... 605,781 4,820 (640) (28,074 ) (114,959)
Long-term debt................ 381,844 3,817 (3,817)(a) 907,388 (b)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,050 96
----------- -------- ---------- ----------- -------------
Total liabilities....... 996,520 8,733 (4,457) 879,314 (114,959)
Stockholders' equity:
Common stock................ 133 (37 )(b)
5 (b)
Paid-in capital............. 1,463,523 69,995 (b) (314,514)(d)
(999,963 )(b)
65,000 (b)
Cumulative translation
adjustment................ (113,022)
Retained earnings
(deficit)................. 122,288 (3,112 )(b) (31,569)(d)
(39,000 )(b)
Equity of purchased
companies................. 5,042 (5,042)(a)
----------- -------- ---------- ----------- -------------
Total stockholders'
equity................ 1,472,922 5,042 (5,042) (907,112 ) (346,083)
----------- -------- ---------- ----------- -------------
Total liabilities and
stockholders'
equity................ $2,469,442 $ 13,775 $ (9,499) $ (27,798 ) $(461,042)
----------- -------- ---------- ----------- -------------
----------- -------- ---------- ----------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $(217,677)(e) $ $ $
Accounts payable............ 166,667
Accrued compensation........ 41,262
Other accrued liabilities... (1,311)(g) 2,853(h) 42,864
---------- ---------- ---------- ----------
Total current
liabilities........... (217,677) (1,311) 2,853 250,793
Long-term debt................ (52,323)(e) (143,750)(g) (230,000)(h) 1,155,509
75,000(f) 217,350(h)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,146
---------- ---------- ---------- ----------
Total liabilities....... (195,000) (145,061) (9,797) 1,415,293
Stockholders' equity:
Common stock................ 33(e) 12(g) 146
Paid-in capital............. 269,967(e) 168,897(g) 707,905
(15,000)(f)
Cumulative translation
adjustment................ (113,022 )
Retained earnings
(deficit)................. (30,000)(f) (25,159)(g) 7,590(h) (4,237 )
(1,964)(g) (3,311)(h)
Equity of purchased
companies.................
---------- ---------- ---------- ----------
Total stockholders'
equity................ 225,000 141,786 4,279 590,792
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
equity................ $ 30,000 $ (3,275) $ (5,518) $2,006,085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues........................................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit........................................... 420,912 103,271 75,967 600,150
Selling, general and administrative expenses............... 344,474 93,201 53,931 (7,698)(i) 483,908
Amortization expense....................................... 8,072 10,343(j) 18,415
Non-recurring acquisition costs............................ 7,316 7,316
------------ ----------- ----------- ----------- ------------
Operating income....................................... 61,050 10,070 22,036 (2,645) 90,511
Other (income) expense:
Interest expense......................................... 27,540 3,109 1,855 45,493(k) 77,997
Interest income.......................................... (6,048) (186) (1,017) 7,251(k)
Other.................................................... (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations before provision for
income taxes and extraordinary items..................... 43,631 9,303 21,699 (55,389) 19,244
Provision for income taxes................................. 18,238 3,007 7,341 (14,153)(l) 14,433
------------ ----------- ----------- ----------- ------------
Income from continuing operations before extraordinary
items.................................................... $ 25,393 $ 6,296 $ 14,358 $ (41,236) $ 4,811
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic.................................................... 85,978 146,331(m)
Diluted.................................................. 87,824 148,177(m)
Income per share from continuing operations before
extraordinary items:
Basic.................................................... $ 0.30 $ 0.03
Diluted.................................................. $ 0.29 $ 0.03
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues....................................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit....................................... 597,667 106,268 101,759 805,694
Selling, general and administrative expenses........... 488,215 95,913 70,996 (8,257)(i) 646,867
Amortization expense................................... 12,416 12,722(j) 25,138
Non-recurring acquisition costs........................ 8,001 8,001
Restructuring costs.................................... 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income................................... 84,834 10,355 30,763 (4,465) 121,487
Other (income) expense:
Interest expense..................................... 36,047 3,170 2,552 62,227(k) 103,996
Interest income...................................... (6,857) (212) (1,448) 8,517(k)
Other................................................ (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary items................. 59,877 9,561 30,412 (75,209) 24,641
Provision for income taxes............................. 27,939 3,056 9,933 (22,447)(l) 18,481
------------ ------------ ------------ ------------ ------------
Income from continuing operations before extraordinary
items................................................ $ 31,938 $ 6,505 $ 20,479 $ (52,762) $ 6,160
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic................................................ 90,026 146,331(m)
Diluted.............................................. 91,761 148,066(m)
Income per share from continuing operations before
extraordinary items:
Basic................................................ $ 0.35 $ 0.04
Diluted.............................................. $ 0.35 $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Equity Self-Tender, including the repurchase
of 37,037 shares of common stock (including shares underlying employee
stock options) by the Company for $1,000,000 and reduced by the proceeds
from the exercise of employee stock options related to shares
participating in the Equity Self-Tender of $70,000. The funds to finance
the net $930,000 cost of the Equity Self-Tender are expected to be
obtained from New Borrowings of $907,388 and cash on hand of $22,612. As
a result of the New Borrowings, the adjustment also reflects the
write-off of $5,186 in short-term and long-term capitalized debt issue
costs related to the Company's current credit facility. The Company
estimates that the proceeds from the exercise of employee stock options
will be approximately $70,000 based upon 5,000 employee stock options
exercised at an average exercise price of $14.00 per share. As a result
of the Company allowing for the conditional exercise of employee stock
options tendered pursuant to the Equity Self-Tender, such tendered stock
options take on the characteristics of a combination plan during the
Equity Self-Tender period (the "Deemed Combination Plan"). Combination
plans are those that provide stock appreciation rights ("SARs") in
combination with typical stock options. To the extent that the
optionholder exercises the SAR provisions, the companion stock options
are canceled. Compensation expense is recorded for cash payments made
upon exercise of the deemed SARs. Upon completion of the Equity
Self-Tender, stock options not accepted pursuant to the Equity
Self-Tender revert to fixed option awards with terms identical to those
prior to commencement of the Equity Self-Tender. The terms of the Equity
Self-Tender, including the number of shares to be repurchased in relation
to the total number of shares and options outstanding and the stated
tender price in relation to the current market price of the Company's
common stock, provide persuasive evidence that only a portion of the
Deemed Combination Plan awards will be extinguished via payment under the
deemed SAR provisions. The Company estimates that the compensation
expense related to the option shares purchased in the Equity Self-Tender
will range from $65,000 to $72,000, assuming management's estimate of the
likely range of acceptance rates for the Equity Self-Tender of 22.5% to
25.0% of the total number of shares (including shares underlying options)
tendered. For purposes of the pro forma combined balance sheet, the
Company has reflected the after-tax compensation expense of $39,000
($65,000 before benefit from income taxes) as a reduction to retained
earnings. Additionally, other accrued liabilities has been decreased by
$26,000 to reflect the expected income tax benefit and additional paid-in
capital has been increased by $65,000. The Company has not included this
compensation expense in the unaudited pro forma combined statements of
income because it is of a non-recurring nature and is directly related to
the restructuring transaction.
(c) Adjustment to reflect the collection of $114,959 of receivables from the
Spin-Off Companies at the date of the Distributions.
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(d) Adjustment to remove the remaining net assets of the Spin-Off Companies.
(e) Adjustment to reflect the issuance of 33,489 shares of common stock in
conjunction with the Equity Investment of $270,000. The Company has made
certain preliminary calculations in relation to the allocation of the
proceeds to be received from Investor to the related common stock, the
Warrants and the Special Warrants. These calculations cannot be finalized
until the trading value of the Company's common stock immediately
following the Distributions is available. The Company intends to reflect
any amounts allocated to the Warrants and the Special Warrants in
additional paid-in capital. The preliminary assessment of the fair value
of the Warrants at the future grant date was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
WARRANTS
-----------
<S> <C>
Expected life...................................................................... 9 years
Risk free interest rate............................................................ 5.6%
Expected volatility of Company common stock........................................ 40%
Dividend rate...................................................................... 0%
</TABLE>
With respect to the Special Warrants, the Company's calculations assumed
that all holders of the 2001 Notes accept the 2001 Note Offer. The
Company does not anticipate assigning a value to the Special Warrants at
the time of the Equity Investment by Investor because (i) the 2001 Note
Offer is expected to have been completed prior to such Equity Investment;
and (ii) the other potential events which could give rise to the exercise
of the Special Warrants are considered by the Company to be contingent in
nature.
Based on the above assumptions, the Company's preliminary calculations
indicate that approximately $203,700 of the proceeds from the Equity
Investment will be allocated to the shares of Company common stock issued
to Investor, $66,300 will be allocated to the Warrants and no value will
be allocated to the Special Warrants. In arriving at these values, no
discount was applied to the value of the Warrants to reflect the
illiquidity of the Warrants pursuant to SFAS No. 123 issued by FASB.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Equity Self-Tender, the
Distributions, the Equity Investment and the New Borrowings of $75,000.
Of this amount, $30,000 of debt issue costs will be capitalized. These
fees and expenses have not been reflected in the unaudited pro forma
combined statements of income because they are either capitalizable or
are of a non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(g) Adjustment to reflect the issuance of 11,837 shares of common stock in
conjunction with the 2001 Note Offer, consisting of 8,890 shares of
common stock issued in exchange for 2001 Notes and 2,947 shares of common
stock to Investor in accordance with the provisions of the Special
Warrants. As a result of the 2001 Note Offer, the Company will issue
1,324 shares of common stock over the contractual amount with a market
value of $25,159 to induce conversion of the 2001 Notes. The $25,159 has
been reflected as a reduction in retained earnings as the market value of
the inducement is required to be recorded as an expense. In addition, the
adjustment
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
reflects the write-off of $3,275 in capitalized debt issue costs related
to the 2001 Notes. These expenses have not been reflected in the
unaudited pro forma combined statements of income because they are of a
non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(h) Adjustment to reflect the early extinguishment of the 2003 Notes,
$230,000 principal amount, in exchange for $217,350 in cash in the 2003
Note Tender. The Company believes that it will be able to retire the 2003
Notes at a price of 94.5% of par value, or $217,350, resulting in an
extraordinary gain of $7,590, net of income taxes of $5,060, which has
been reflected as an increase to retained earnings. In addition, the
adjustment reflects the write-off of $5,518 in capitalized debt issue
costs related to the 2003 Notes. The gain and write-off have not been
reflected in the unaudited pro forma combined statements of income
because they are extraordinary items and are directly related to the
Strategic Restructuring Plan.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(i) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
The Company believes that these reductions are expected to remain in
place for the forseeable future and are not reasonably likely to affect
operating performance.
(j) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(k) Adjustment to reflect the increase in interest expense, at a weighted
average rate of 9.0%, resulting from the increase in debt outstanding to
$1,155,509 as a result of the Equity Self-Tender, partially offset by the
proceeds from the Equity Investment, and the effects of the 2001 Note
Offer and the 2003 Note Tender assuming full exchange and tender,
respectively. The weighted average interest rate of 9.0% was determined
based upon $755,509 outstanding under the terms of the new bank loan
facility at annual interest rates of LIBOR plus margins ranging from
2.25% to 2.5% (approximately 7.9% to 8.15%) and the issuance of $400,000
of senior subordinated notes at an annual interest rate of approximately
9.0%, plus commitment fees on unused balances and amortization of the
related debt issue costs. Pro forma interest expense will fluctuate
$5,778 on an annual basis for each 0.5% change in interest rates.
Depending on market conditions at the time the senior subordinated notes
are offered and when funds are borrowed under the new bank loan facility,
the interest rates may vary from those indicated herein.
(l) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 75%, 65%
and 75% for the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 and January 25, 1997, respectively. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and non-deductible goodwill amortization
expense. This adjustment assumes
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
that all companies were taxed at the effective tax rates regardless of
how they were taxed prior to being acquired by the Company, including
those companies that previously paid no taxes under Subchapter S.
(m) Basic pro forma earnings per share is calculated based upon 146,331
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Equity
Self-Tender, the issuance of 36,436 shares as a result of the Equity
Investment, the issuance of 5,000 shares related to employee stock
options participating in the Equity Self-Tender and the issuance of 8,890
shares as a result of the 2001 Note Offer, assuming full conversion. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 26, 1997 and April 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain wholly-owned subsidiaries, which statements reflect net income of $7.4
million and $10.4 million included in the Company's income from discontinued
operations, net of income taxes, for fiscal years ended April 30, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for those wholly-owned subsidiaries, is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 628,355 712,901
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Net assets of discontinued operations:
Amounts to become receivable upon the Distributions..................... 87,700 114,959
All other net assets.................................................... 33,674 83,422 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 319,906 867,039 1,463,523
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 73,991 59,588 122,288
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Undistributed earnings of Subchapter S
corporations acquired in pooling-of-
interests business combinations..... 6,628 (6,628)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 319,906 770 73,991 394,746
</TABLE>
(Continued)
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
------------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,497 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,631 6,859
Capital contributions................ 12,342 1,857
Exercise of warrants and stock
options............................ 478,616 1 1,979
Retirement of common stock........... 102,305 (443) (34)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations......................... 57,640 (57,640)
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------- ----- ------------ ----------- ---------- -----------
Balance at April 26, 1997................ 104,479,004 104 867,039 (5,583) 59,588
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 27,792,099 28 585,509
Repayment of debt.................... 28,179 570
Exercise of stock options, including
tax benefits....................... 609,494 1 7,600
Employee stock purchase plan......... 169,723 2,805
Share adjustments at Pooled
Companies............................ (36,520)
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------- ----- ------------ ----------- ---------- -----------
Balance at January 24, 1998
(unaudited)............................ 133,041,979 $ 133 $ 1,463,523 $ (113,022) $ 122,288
------------- ----- ------------ ----------- ---------- -----------
------------- ----- ------------ ----------- ---------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30, 1996................ $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 1,857
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations.........................
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------
Balance at April 26, 1997................ 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 585,537
Repayment of debt.................... 570
Exercise of stock options, including
tax benefits....................... 7,601
Employee stock purchase plan......... 2,805
Share adjustments at Pooled
Companies............................
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------
Balance at January 24, 1998
(unaudited)............................ $1,472,922
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Payments of restructuring costs........................... (1,900)
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 34,937
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition costs............................... (7,283) (5,343) (4,094) (3,871)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (97,567)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. The fair values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. In order to qualify for
hedge accounting, a foreign currency transaction must be designated as, and
effective as, a hedge of a firm foreign currency commitment or an existing
foreign currency denominated asset or liability. Gains and losses on Exchange
Contracts designated to firm foreign currency commitments are deferred and
accounted for as an adjustment to the purchase price of the asset, while gains
and losses on Exchange Contracts designated
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to an underlying asset or liability are reported as other income or loss in the
Company's financial statements. The offsetting transaction loss or gain
resulting from the foreign currency denominated asset or liability is also
reflected in other income or loss in the Company's financial statements. At
April 26, 1997, the Exchange Contracts, in the notional amount of $3,319, hedge
certain foreign currency denominated firm purchase commitments. The Exchange
Contracts generally have maturity dates of 60 days or less. Discounts or
premiums on the Exchange Contracts are amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. In order to qualify for hedge accounting, an interest rate swap
must be designated to a specific debt and there must be a high correlation
between the interest rate component of the value of the swap and changes in the
variable interest rates on the underlying debt. The Swap Agreements were
specifically designated and were fully correlated with changes in the variable
interest rates on the underlying debt. The notional amount of the Swap
Agreements was $43,000 at April 30, 1996. Amounts to be paid or received under
the Swap Agreements are accrued as interest rates change and are recognized over
the life of the Swap Agreements as an adjustment to interest expense. During
fiscal 1997, the Swap Agreements were terminated at the time of the
extinguishment of the underlying debt, resulting in a loss of $117 and was
included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to short-term leases is recognized
on a monthly basis over the life of the lease. Certain long-term leases qualify
as sales-type leases and, accordingly, the present value of the future lease
payments is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary Mail Boxes Etc. ("MBE"),
enters into area and individual franchise agreements in the United States and
master license agreements in other countries. Area franchise agreements grant
the area franchisee the exclusive right to market individual franchise centers
for the Company in the area franchisee's territory. The area franchisee
generally receives a commission on the individual franchises sold as well as a
share of the royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance costs related to the Company's
employees in accordance with EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the Consolidated Statement of Income as a
component of selling, general and administrative expenses. During fiscal 1995,
1996 and 1997, the Company incurred advertising expenses of $3,309, $7,233 and
$14,355, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Equity Self-Tender") to purchase 37,037 shares of
Company common stock (including shares that may be issued on exercise of stock
options) at $27.00 per share and the incurrence of significant additional debt
to pay a portion of the purchase price of the shares in the Equity Self Tender;
(ii) after acceptance of shares in the Equity Self Tender, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
(the "Spin-Off Companies") that will conduct the Company's current print
management, corporate travel services, educational supplies and technology
solutions businesses (the "Distributions"); and (iii) following acceptance of
shares in the Equity Self Tender and the record date for the Distributions, the
sale to an affiliate of an investment fund managed by Clayton, Dubilier & Rice,
Inc. ("Investor") of equity interests in U.S. Office Products. In these
transactions, Investor will not acquire any equity interest in the Spin-Off
Companies. The Distributions are expected to be tax-free to both the Company and
its stockholders (except for any cash in lieu of fractional shares received by
stockholders). As part of the financing for the Strategic Restructuring Plan,
the Company is expanding its bank credit facility, issuing new subordinated
indebtedness and offering to repurchase or reduce the conversion price on
convertible notes previously issued. The Company expects the Strategic
Restructuring Plan to be completed in the second calendar quarter of 1998. The
transactions are subject to a number of conditions, including financing,
approval of the Company's stockholders and receipt of regulatory approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
of the Company's Print Management, Corporate Travel Services, Educational
Supplies and Technology Solutions divisions for the periods presented and is
summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based upon
the average intercompany debt outstanding during the periods presented.
Intercompany debt allocated to the Spin-Off Companies generally is comprised of
funding provided to the Spin-Off Companies by U.S. Office Products for
acquisitions and acquisition related expenses, repayments of long-term and
short-term debt of acquired companies, payments of direct operating expenses of
the Spin-Off Companies and the net results of daily advances and sweeps of cash
by the Company to keep each Spin-Off Company's cash balance at or near zero on a
daily basis. To the extent that the sum of the intercompany funding and
third-party debt outstanding exceeded the amount of debt to be allocated to the
Spin-Off Companies pursuant to the investment agreement with Investor, such
excess amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from
U.S. Office Products during the periods presented.
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assests of the
Company's Print Management, Corporate Travel Services, Educational Supplies and
Technology Solutions divisions for the periods presented and are summarized as
follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 26, 1997:
Current assets............................... $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net........... 34,175 7,953 14,478 2,164 58,770
Intangible assets, net....................... 705 7,112 20,824 28,641
Other assets................................. 7,807 581 359 2,005 10,752
Current liabilities.......................... (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities........................ (7,208) (5,218) (35,052) (3,218) (50,696)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 50,376 $ 5,477 $ 16,606 $ 10,963 $ 83,422
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 1,995 85,525 94,651 63,891 246,062
Other assets................................. 8,473 1,002 2,595 508 12,578
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
unaudited January 24, 1998 Consolidated Balance Sheet are expected to be
recovered from the Spin-Off Companies in connection with the Distributions.
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for fiscal
1995, 1996 and 1997 by $10,602 (or $0.23 per share), $14,998 (or $0.22 per
share) and $17,811 (or $0.20 per share), respectively. Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
$422.8 million of goodwill, associated with both continuing and discontinued
operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley which is included in other assets on the
Consolidated Balance Sheet. The Company has included its share of Dudley's net
income as a component of other income on the Consolidated Statement of Income.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates
ranging from 7.8% to 10.2% at April 30, 1996.................................... 67,660
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996......... 12,731
Other............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 1999 unless the closing price of the common stock is at least
150% of the conversion price for a period of time prior to the notice of
redemption. Costs incurred in connection with the issuance of the 2003 Notes
are included in other assets and are being amortized over the seven year period
of maturity. The fair value of the 2003 Notes at April 26, 1997, based upon
quoted market prices, totaled $184,000.
The 2001 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after February 3, 1998, but may not be
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the
2001 Notes are included in other assets and are being amortized over the five
year period of maturity. The fair value of the 2001 Notes at April 26, 1997,
based upon quoted market prices, totaled $147,344.
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 782,615 753,254 1,535,869
</TABLE>
The amounts listed above as identifiable assets of continuing operations at
year-end differ from the total asset amounts presented on the Consolidated
Balance Sheet since net assets of discontinued operations of $33,514, $33,674
and $171,122 at April 30, 1995 and 1996 and April 26, 1997, respectively, were
excluded from the above analysis but are included in total assets on the
Company's Consolidated Balance Sheet.
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
F-70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method and as a result of the
reporting of the results of Spin-Off Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,332 11,186
Basic income per share from continuing operations
before extraordinary items........................... 0.08 0.08
Diluted income per share from continuing operations
before extraordinary items........................... 0.08 0.08
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products' stockholders filed an action in the Delaware Chancery
Court. The action claims that the Directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity-Self
Tender to include employee stock options. The complaint seeks injunctive relief,
damages and attorneys fees. The Company believes that this lawsuit is without
merit and intends to vigorously contest it.
F-73
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mail Boxes Etc.
at April 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997,
in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
--------------------------------------------
Ernst & Young LLP
San Diego, California
June 6, 1997
</TABLE>
F-74
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................................. $ 3,992 $ 1,416
Restricted cash--franchisee deposits...................................................................... 1,613 2,073
Short-term investments.................................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April 30, 1997 and
1996, respectively...................................................................................... 6,547 6,799
Receivable from National Media Fund....................................................................... 250 770
Inventories............................................................................................... 447 544
Current portion of notes receivable....................................................................... 6,048 6,756
Current portion of net investment in sales-type leases.................................................... 2,322 2,414
Deferred income taxes..................................................................................... 1,272 1,846
Re-acquired area and center rights held for resale........................................................ 629 638
Other..................................................................................................... 1,394 1,063
--------- ---------
Total current assets.................................................................................. 51,856 46,144
Notes receivable, net..................................................................................... 12,977 10,831
Net investment in sales-type leases....................................................................... 6,067 7,518
Property and equipment:
Land.................................................................................................... 1,200 1,200
Building and improvements............................................................................... 5,076 4,201
Office furniture and equipment.......................................................................... 4,307 4,018
Vehicles................................................................................................ 209 209
--------- ---------
Total property and equipment.......................................................................... 10,792 9,628
Less accumulated depreciation and amortization.......................................................... 4,831 4,247
--------- ---------
Net property and equipment.............................................................................. 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at April 30, 1997
and 1996, respectively.................................................................................. 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997 and 1996,
respectively............................................................................................ 6,443 3,240
Deferred income taxes..................................................................................... 1,249 1,307
Other assets.............................................................................................. 739 904
--------- ---------
Total Assets.......................................................................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................................... $ 1,363 $ 2,096
Franchisee deposits....................................................................................... 2,097 2,619
Royalties, referrals and commissions payable.............................................................. 1,760 2,515
Accrued employee expenses and related taxes............................................................... 2,390 1,963
Other accrued expenses.................................................................................... 1,550 2,012
Income taxes payable...................................................................................... 769 838
Current maturities of long term debt...................................................................... 692 958
--------- ---------
Total current liabilities............................................................................. 10,621 13,001
Long-term debt, net of current maturities................................................................... 3,916 1,402
Commitments and contingencies...............................................................................
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.............
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698 shares issued and
outstanding at April 30, 1997 and 1996, respectively.................................................... 16,728 14,944
Retained earnings......................................................................................... 54,410 46,419
--------- ---------
Total shareholders' equity............................................................................ 71,138 61,363
--------- ---------
Total liabilities and shareholders' equity............................................................ $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
Total Revenues............................................................... 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000
--------- --------- ---------
Total cost and expenses...................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
Net income................................................................... $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
Net income per common share...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-76
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-77
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................ $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements..................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts.......................... (530) 880 1,236
Loss (gain) on disposal of property and equipment............................... (7) 4 122
Deferred income taxes........................................................... 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................. 460 (459) (252)
Accounts and notes receivable................................................... (760) (1,049) (7,386)
Receivable from National Media Fund............................................. 520 830 (1,600)
Assets leased to franchisees and inventories.................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale.............................. 109 378 261
Other current assets............................................................ (331) (58) 421
Other assets.................................................................... (38) 152 173
Accounts payable................................................................ (733) 945 419
Franchisee deposits............................................................. (522) 466 747
Royalties, referrals and commissions payable.................................... (755) 66 610
Accrued employee expenses and related taxes..................................... 427 500 697
Other accrued expenses.......................................................... (369) 838 821
Income taxes payable............................................................ 535 397 730
--------- --------- ---------
Net cash flows provided from operating activities............................. 5,908 10,802 1,090
Investing Activities:
Net change in short-term investments............................................ (5,517) (11,773) 389
Additions to property and equipment............................................. (1,292) (472) (477)
Principal payments received on sales-type leases................................ 3,407 3,628 3,223
Re-acquired area rights......................................................... (439) (185) (887)
--------- --------- ---------
Net cash flows provided from (used in) investing activities..................... (3,841) (8,802) 2,248
Financing Activities:
Borrowing under line of credit.................................................. 1,630 3,720 3,800
Repayments under line of credit................................................. (2,150) (4,550) (2,200)
Repayments on notes payable..................................................... (354) (146) (54)
Repurchase of common stock...................................................... (410) (1,922) (5,681)
Proceeds from the issuance of common stock...................................... 1,793 1,923 937
--------- --------- ---------
Net cash flows provided from (used in) financing activities..................... 509 (975) (3,198)
--------- --------- ---------
Increase in cash and cash equivalents............................................... 2,576 1,025 140
Cash and cash equivalents at beginning of year...................................... 1,416 391 251
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for Income taxes...................................... $ 3,762 $ 6,348 $ 5,479
</TABLE>
F-78
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense.................................................................... $ 261 $ 155 $ 98
Supplemental Schedule of Non-Cash Activities:
Equipment sold under sales-type leases.......................................... $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................. $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................. $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights.......... $ 104 $ 468
Exchange of area rights......................................................... $ 260
</TABLE>
See accompanying notes.
F-79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs.
These advances, including interest, are repaid to the Company based on the
collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund....................................................................... 3,641 77
Short-term investments:
U.S. Government securities.............................................................. 5,842 4,000
Mutual fund preferred equity securities................................................. 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments. Receivables from franchisees include trade
receivables, lease receivables and notes receivable. Credit is extended based on
an evaluation of the franchisee's financial condition. Sales-type leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The Company may also repurchase the
area rights with the primary intention of retaining the royalties normally
shared with the former area franchisees and maintaining such rights as long-term
investments. The area
F-82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repurchases have been accounted for as purchases. The Company records these area
repurchases at cost less accumulated amortization. Periodically the Company
assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 30, 1997 no adjustment is necessary. The Company had an
investment of $6.4 million and $3.2 million in such area rights at April 30,
1997 and 1996, respectively. Area franchise rights held as long-term investments
are amortized over a period of 20 years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building................................................... 31.5 years
12.5--31.5
Building improvements...................................... years
Office furniture and equipment............................. 3-5 years
Vehicles................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:..................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000 -$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
F-84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
4. DEBT (CONTINUED)
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998 ---$442; 1999--$452; 2000--$447; 2001--$457; 2002--$463;
and thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock. Significant components of the Company's deferred tax
assets for federal and state income taxes as of April 30 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................................ 5.0% 5.5% 5.6%
Other................................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
----------------------------
<S> <C> <C>
NUMBER OF WGTD. AVG.
SHARES EXERCISED PRICE
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year...................................................... 1,113 $ 9.85
Granted............................................................................... 489 $ 17.54
Exercised............................................................................. (180) $ 9.97
Forfeited............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year.................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year.................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
----- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
----- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
----- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
----------- -------------
<S> <C> <C>
Adjusted pro forma net income.......................................................... $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.................................................. $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1977 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS
- ------------------------------------------------------------------------------ EXERCISABLE
OPTION WGTD. AVE ---------------------------------------
RANGE OF SHARES REMAINING WGTD. AVE. NUMBER WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- -------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 ...................................... 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$ 8.25..................................... 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50..................................... 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50.................................... 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13.................................... 432 9.1 $ 17.70 18 $ 18.27
----- ----------- ----------- ----- -----------
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
F-89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses................................................ 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes.............................. 1,331 (341) 2,310 1,534
Net income (loss)...................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share.............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses................................................ 10,279 11,804 11,870 11,479
Provision for (benefit from) income taxes.............................. 1,036 1,345 1,751 1,488
Net income (loss)...................................................... 1,622 2,091 2,708 2,308
Earnings (loss) per share.............................................. .14 .18 .24 .20
</TABLE>
F-90
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
1997
------------
<S> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................................... $ 1,059
Restricted cash--franchisee deposits.............................................................. 1,923
Short-term investments............................................................................ 31,354
Accounts receivable, net.......................................................................... 7,806
Inventories....................................................................................... 533
Current portion of notes receivable............................................................... 8,998
Current portion of net investment in sales-type leases............................................ 3,388
Deferred income taxes............................................................................. 1,272
Re-acquired area and center rights held for resale................................................ 612
Other............................................................................................. 1,637
------------
Total current assets............................................................................ 58,582
Notes receivable, net............................................................................. 18,131
Net investment in sales-type leases............................................................... 5,133
Property and equipment, net....................................................................... 6,686
Excess of cost over assets acquired, net.......................................................... 268
Re-acquired area rights........................................................................... 1,157
Deferred income taxes............................................................................. 1,249
Other assets...................................................................................... 958
------------
Total assets.................................................................................... $ 92,164
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 1,952
Franchisee deposits............................................................................... 2,395
Royalties, referrals and commissions payable...................................................... 2,760
Accrued employee expenses and related taxes....................................................... 2,089
Other accrued expenses............................................................................ 2,038
Income taxes payable.............................................................................. 1,523
Current maturities of debt and notes payable...................................................... 274
------------
Total current liabilities....................................................................... 13,031
Long-term debt, net of current maturities........................................................... 2,448
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.....
Common stock, no par value, 40,000,000 shares authorized, with 11,422,091 shares issued
outstanding at October 31, 1997................................................................. 18,340
Retained earnings................................................................................. 58,345
------------
Total shareholders' equity...................................................................... 76,685
------------
Total liabilities and shareholders' equity.................................................... $ 92,164
------------
------------
</TABLE>
See accompanying notes.
F-91
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees........................................ $ 8,466 $ 7,985 $ 17,161 $ 15,586
Franchise fees.................................................... 3,802 2,736 6,144 4,531
Sales of supplies and equipment................................... 3,537 3,899 6,049 6,929
Interest income on leases and other............................... 2,537 2,163 4,413 4,151
Company centers................................................... 204 264 458 630
--------- --------- --------- ---------
Total revenues................................................ 18,546 17,047 34,225 31,827
Cost and Expenses:
Franchise operations.............................................. 4,515 4,328 8,598 8,488
Franchise development............................................. 1,840 1,742 3,316 2,954
Cost of supplies and equipment sold............................... 2,552 2,912 4,396 5,189
Marketing......................................................... 1,773 1,713 3,048 3,061
General and administrative........................................ 3,251 2,099 5,591 4,341
Company centers................................................... 197 284 459 680
Litigation settlement expenses.................................... 5,000 5,000
Non recurring charges............................................. 2,510
--------- --------- --------- ---------
Total cost and expenses....................................... 14,128 18,078 27,918 29,713
--------- --------- --------- ---------
Operating Income (loss)............................................... 4,418 (1,031) 6,307 2,114
Interest on investments and other..................................... 309 220 631 476
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes............. 4,727 (811) 6,938 2,590
Provision for income taxes............................................ 1,881 (341) 3,003 990
--------- --------- --------- ---------
Net income (loss)............................................. $ 2,846 $ (470) $ 3,935 $ 1,600
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:................................... $ .24 $ (.04) $ .33 $ .14
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding...... 12,101 11,198 12,088 11,774
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-92
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities:
Net income................................................................................. $ 3,935 $ 1,600
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization............................................................ 556 523
Gain on sale of re-acquired area rights.................................................. (2,644) (339)
Gain on sale of equipment under sales-type lease agreements.............................. (166) (241)
Changes in assets and liabilities:
Restricted cash.......................................................................... (310) 80
Accounts and notes receivable............................................................ (1,792) 461
Receivable from National Media Fund...................................................... 250 770
Assets leased to franchisees and inventories............................................. (675) (1,032)
Re-acquired area and center rights (held for resale)..................................... (143) (86)
Other current assets..................................................................... (243) (1,447)
Other assets............................................................................. (127) (191)
Accounts payable......................................................................... 589 288
Franchisee deposits...................................................................... 298 89
Royalties, referrals and commissions payable............................................. 1,000 (26)
Accrued employee expenses and related taxes.............................................. (301) (929)
Other accrued expenses................................................................... 488 4,806
Income taxes payable..................................................................... 754 (838)
--------- ---------
Net cash flows provided from operating activities...................................... 1,469 3,488
Investing Activities:
Net change in short-term investments..................................................... (4,012) (2.840)
Additions to property and equipment...................................................... (1,106) (215)
Principal payments received on sales-type leases......................................... 624 1,777
--------- ---------
Net cash flows (used in) investment activities......................................... (4,494) (1,278)
Financing Activities:
Borrowings under revolving loan.......................................................... 930
Repayments under revolving loan.......................................................... (250) (1,700)
Repayments on notes payable.............................................................. (1,270) (136)
Repurchase of common stock............................................................... (112) (283)
Proceeds from the issuance of common stock............................................... 1,724 945
--------- ---------
Net cash flows provided from (used in) financing activities............................ 92 (244)
Increase in cash and cash equivalents........................................................ (2,933) 1,966
Cash and cash equivalents at beginning of period............................................. 3,992 1,416
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,059 $ 3,382
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes............................................. $ 2,240 $ 3,270
Interest................................................................................. 164 85
Supplemental Schedule with Non-Cash Investment and Financing Activities:
Equipment sold under sales-type agreements............................................... $ 755 $ 1,048
Additions to debt for acquisition of Area rights......................................... 597 1,780
</TABLE>
See accompanying notes.
F-93
<PAGE>
MAIL BOXES ETC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. BASIS OF PRESENTATION:
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of October 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
six-month periods ended October 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In addition, certain Risk Factors may also
impact future financial reports. It is suggested that the condensed consolidated
financial statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1997 Annual Report on
Form 10-K, as well as the Risk Factors discussed in the Form 10-K Report. The
results of operations for the quarter ended October 31, 1997 are not necessarily
indicative of the operating results for the full year.
NOTE 2. SUBSEQUENT EVENT
During November 1997, Mail Boxes Etc. was acquired by U.S. Office Products.
U.S. Office Products issued approximately 15.4 million shares of its common
stock in exchange for all the outstanding shares of Mail Boxes Etc.,
representing an exchange ratio of 1.349 shares of U.S. Office Products common
stock for each share of Mail Boxes Etc. common stock.
F-94
<PAGE>
Facsimile copies of the Letter of Transmittal, properly completed and validly
executed, will be accepted. Letters of Transmittal, certificates for Notes and
any other required documents should be sent or delivered by each Holder of Notes
or such Holder's broker, dealer, commercial bank or trust company to the
Depositary at one of its addresses set forth below.
THE DEPOSITARY FOR THE OFFER IS:
THE CHASE MANHATTAN BANK
<TABLE>
<S> <C>
BY MAIL, BY HAND OR BY COURIER: BY FACSIMILE:
55 Water Street, Rm. 234 (212) 638-7380/7381
New York, NY 10041 FOR CONFIRMATION AND/OR INFORMATION CALL:
Attention: Carlos Esteves (212) 638-0828
Telephone: (212) 638-0828
</TABLE>
Requests for assistance or additional copies of this Offer to Purchase, the
Letter of Transmittal, and other related documents should be directed to the
Information Agent at its telephone number and location set forth below. You may
also contact your broker, dealer, commercial bank, trust company or nominee for
assistance concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO]
156 Fifth Avenue
New York, NY 10010
(212) 929-5500
(800) 322-2885
Attention: Bob Marese
THE DEALER MANAGER FOR THE OFFER IS:
BANCAMERICA ROBERTSON STEPHENS
555 California Street, Suite 2600
San Francisco, CA 94104
(415) 693-3215
(800) 234-2663
Attention: Dan White
or
Jeff Winaker
The date of this Offer to Purchase is May 5, 1998.
<PAGE>
CUSIPS 912325 AB 3
912325 AD 9
LETTER OF TRANSMITTAL
TO TENDER 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY,
JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE AND TIME, AS THE SAME MAY BE
EXTENDED, THE "EXPIRATION DATE").
THE DEPOSITARY FOR THE OFFER IS:
BY MAIL, BY HAND OR BY COURIER:
The Chase Manhattan Bank
55 Water Street, Rm. 234
New York, NY 10041
Attention: Carlos Esteves
Telephone: (212) 638-0828
BY FACSIMILE:
(212) 638-7380/7381
FOR CONFIRMATION AND/OR INFORMATION CALL:
(212) 638-0828
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD
BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE OFFER CONSIDERATION PURSUANT
TO THE OFFER MUST VALIDLY TENDER (OR RE-TENDER IF SUCH HOLDERS HAVE PREVIOUSLY
WITHDRAWN) THEIR NOTES TO THE DEPOSITARY PRIOR TO THE EXPIRATION DATE. TENDERS
MAY NOT BE WITHDRAWN AT ANY TIME FOLLOWING THE EXPIRATION DATE, SUBJECT TO
LIMITED EXCEPTIONS.
This Letter of Transmittal should be used only to tender the Notes held in
registered form (other than the Registered Regulation S Notes) as described in
the Offer to Purchase of U.S. Office Products Company, dated May 5, 1998 (as the
same may be amended or supplemented from time to time, the "Offer to Purchase"
and together with this Letter of Transmittal, the "Offer").
This Letter of Transmittal is to be used (i) if Notes are to be physically
delivered to the Depositary, (ii) if delivery of Notes is to be made by
book-entry transfer to the account maintained by the Depositary at the
Depository Trust Company ("DTC") pursuant to the procedures set forth in the
Offer to Purchase under the caption "Procedures for Tendering Notes--Tendering
Notes--Book-Entry Delivery Procedures" or (iii) if Notes are being tendered in
accordance with the guaranteed delivery procedures set forth in the Offer to
Purchase under the caption "Procedures for Tendering Notes--Tendering
Notes--Guaranteed Delivery."
Holders of Notes that are tendering by book-entry transfer to the
Depositary's account at DTC can execute the tender through the DTC Automated
Tender Offer Program ("ATOP"), for which the transaction will be eligible. DTC
participants that are accepting the Offer should transmit their acceptance to
DTC, which will edit and verify the acceptance and execute a book-entry delivery
to the Depositary's
<PAGE>
account at DTC. DTC will then send an Agent's Message to the Depositary for its
acceptance. Delivery of the Agent's Message by DTC will satisfy the terms of the
Offer as to execution and delivery of a Letter of Transmittal by the participant
identified in the Agent's Message, and thus there is no requirement for such
Holder to deliver a Letter of Transmittal to DTC or the Depositary. DTC
participants may also accept the Offer by submitting a notice of guaranteed
delivery through ATOP.
Holders whose Notes are not available or who cannot deliver their Notes and
all other documents required hereby to the Depositary prior to, or on, the
Expiration Date may nevertheless tender their Notes in accordance with the
guaranteed delivery procedures set forth in the Offer to Purchase under the
caption "Procedures for Tendering Notes--Tendering Notes--Guaranteed Delivery."
See Instruction 2 herein.
DELIVERY OF DOCUMENTS TO DTC, THE COMPANY OR THE DEALER MANAGER DOES NOT
CONSTITUTE DELIVERY TO THE DEPOSITARY.
THE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF NOTES BE ACCEPTED FROM
OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE
OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
Holders who wish to tender their Notes must complete the box below entitled
"Method of Delivery" and complete columns (1) through (3) in the box herein
entitled "Description of Notes Tendered" and sign in the appropriate box below.
Holders who complete this Letter of Transmittal will be deemed to have tendered
all Notes listed in the box.
Only registered Holders of Notes may validly tender their Notes pursuant to
the Offer. Only registered Holders of Notes are entitled to receive the Offer
Consideration with respect to the Notes pursuant to the Offer.
2
<PAGE>
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Offer to Purchase.
METHOD OF DELIVERY
/ / CHECK HERE IF CERTIFICATES FOR TENDERED NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A BOOK-ENTRY
TRANSFER FACILITY SPECIFIED ABOVE AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _______________________________
Name of Book-Entry Transfer Facility:
/ / The Depository Trust Company
Account Number: ______________ VOI Number: ______________
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Owner(s): ______________________________________
Window Ticket Number (if any): _______________________________________
Date of Execution of Notice of Guaranteed Delivery: __________________
Name of Eligible Institution which Guaranteed Delivery: ______________
If delivered by a Book-Entry Transfer Facility, check box of
Book-Entry Transfer Facility:
/ / The Depository Trust Company
Account Number: ______________ VOI Number: ______________
DESCRIPTION OF NOTES TENDERED*
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF
HOLDER(S)
(PLEASE FILL IN, IF BLANK,
EXACTLY AS NAME(S) APPEAR(S)
ON NOTES) NOTES TENDERED (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY)
(1) (2) (3)
<S> <C> <C>
<CAPTION>
PRINCIPAL AMOUNT OF NOTES
SECURITY NUMBER(S)** TENDERED***
<S> <C> <C>
</TABLE>
* Completion of this Letter of Transmittal will constitute the tender of all
Notes delivered.
** Need not be completed by Holders tendering by book-entry transfer.
*** Unless otherwise specified, the entire aggregate principal amount
represented by the Notes described above will be deemed to be tendered.
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Offer to Purchase dated May 5, 1998 (as the same may be supplemented or amended
from time to time, the "Offer to Purchase") of U.S. Office Products Company (the
"Company") and this Letter of Transmittal and instructions hereto (as the same
may be supplemented or amended from time to time, the "Letter of Transmittal,"
which, together with the Offer to Purchase, constitutes the "Offer") relating to
the Company's offer to purchase any and all of its outstanding 5 1/2%
Convertible Subordinated Notes due 2003 (the "Notes") held in registered form
(other than the Registered Regulation S Notes) upon the terms and subject to the
conditions set forth in the Offer.
Upon the terms and subject to the conditions of the Offer as set forth in
the Offer, the undersigned hereby tenders to the Company the principal amount of
Notes indicated above.
Subject to, and effective upon, the acceptance for payment of the principal
amount of Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to, and any and all claims in respect of or arising or having arisen as a
result of the undersigned's status as a Holder of, all Notes tendered hereby.
The undersigned hereby irrevocably constitutes and appoints the Depositary as
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that the Depositary also acts as the agent of the Company) with
respect to such Notes, with full power of substitution (such power of attorney
being deemed to be an irrevocable power coupled with an interest) to (a) deliver
such Notes, or transfer ownership of such Notes on the account books maintained
by DTC, together with all accompanying evidences of transfer and authenticity,
to or upon the order of the Company, (b) present such Notes for transfer on the
register and (c) receive all benefits and otherwise all rights of beneficial
ownership of such Notes, all in accordance with the terms of the Offer as
described in the Offer to Purchase.
The undersigned understands that tenders of Notes may be withdrawn by
written notice of withdrawal received by the Depositary at any time on or prior
to the Expiration Date. In the event of a termination of the Offer, the Notes
tendered pursuant to the Offer will be returned to the tendering Holders
promptly (or, in the case of Notes tendered by book-entry transfer, such Notes
will be credited to the account maintained at DTC from which such Notes were
delivered). Tenders of Notes (or any portion of such Notes in integral multiples
of $1,000) may be withdrawn at any time on or prior to the Expiration Date and,
unless accepted by the Company, may be withdrawn at any time after 40 business
days after the date of this Offer to Purchase. If, prior to the Expiration Date,
the Company reduces (i) the principal amount of Notes subject to the Offer or
(ii) the Purchase Price, then previously tendered Notes may be validly withdrawn
until the expiration of ten business days after the date that notice of either
such reduction is first published, given or sent to Holders by the Company. If
the Company makes a material change in the terms of the Offer, the Company will
disseminate additional Offer materials regarding such change and will extend the
Offer, in each case to the extent required by applicable law.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Notes tendered
hereby, and that when such Notes are accepted for payment by the Company, the
Company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that none of
such Notes will be subject to any adverse claim or right. The undersigned, upon
request, will execute and deliver all additional documents deemed by the
Depositary or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Notes tendered hereby.
4
<PAGE>
The undersigned understands that tenders of Notes pursuant to any of the
procedures described in the Offer to Purchase under the caption "Procedures for
Tendering Notes" and in the instructions hereto will constitute the
undersigned's acceptance of the terms and conditions of the Offer. The Company's
acceptance of such Notes for payment will constitute a binding agreement between
the undersigned and the Company upon the terms and subject to the conditions of
the Offer. For purposes of the Offer, the undersigned understands that validly
tendered Notes (or defectively tendered Notes with respect to which the Company
has waived such defect) will be deemed to have been accepted by the Company if,
as and when the Company gives oral or written notice thereof to the Depositary.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives.
The undersigned understands that the delivery and surrender of any Notes is
not effective, and the risk of loss of the Notes does not pass to the
Depositary, until receipt by the Depositary of this Letter of Transmittal (or a
manually signed facsimile hereof), properly completed and duly executed,
together with all accompanying evidences of authority and any other required
documents in form satisfactory to the Company. All questions as to the form of
all documents and the validity (including the time of receipt) and acceptance of
tenders and withdrawals of Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding.
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions," please issue the check for the Offer Consideration with respect
to Notes accepted for payment, and return any certificates for Notes not
tendered or not accepted for payment, in the name(s) of the registered holder(s)
appearing above under "Description of Notes Tendered." Similarly, unless
otherwise indicated herein in the box entitled "Special Delivery Instructions,"
please mail the check for the Offer Consideration with respect to Notes accepted
for payment, together with any certificates for Notes not tendered or not
accepted for payment (and any accompanying documents, as appropriate) to the
address(es) of the registered holder(s) appearing above under "Description of
Notes Tendered." If both the "Special Payment Instructions" box and the "Special
Delivery Instructions" box are completed, please issue the check for the Offer
Consideration with respect to any Notes accepted for payment, and return any
certificates for Notes not tendered or not accepted for payment, in the name(s)
of, and mail the check and any such certificates to, the person(s) at the
address(es) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Payment Instructions" box or "Special
Delivery Instructions" box provisions of this Letter of Transmittal to transfer
any Note from the name of the registered holder(s) thereof if the Company does
not accept for payment any of the principal amount of such Note.
5
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if certificates for Notes in a principal amount not
tendered or not accepted for payment and/or the check for the Offer
Consideration are to be issued in the name of someone other than the
undersigned, or if Notes are to be returned by credit to an account maintained
by DTC.
Issue Check and/or Notes to:
Name: __________________________________________________________________________
(PLEASE PRINT)
Address: _______________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
ZIP CODE
________________________________________________________________________________
TAXPAYER IDENTIFICATION NUMBER
(YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 BELOW)
Requires Signature Guarantee
Credit unaccepted Notes tendered by book-entry transfer to:
/ / The Depository Trust Company account set forth below:
________________________________________
(ACCOUNT NUMBER)
6
<PAGE>
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if certificates for Notes in a principal amount not
tendered or not accepted for payment and/or the check for the Offer
Consideration are to be sent to someone other than the undersigned at an address
other than that shown above.
Deliver Check and/or Notes to:
Name: __________________________________________________________________________
(Please print)
Address: _______________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Zip Code
________________________________________________________________________________
TAXPAYER IDENTIFICATION NUMBER
(YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 BELOW)
Requires Signature Guarantee
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING
HOLDERS OF NOTES REGARDLESS OF WHETHER
NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Signature(s) of Holder(s) or Authorized Signatory)
Dated: __________________________________, 1998
Must be signed by the registered holder(s) of Notes exactly as their name(s)
appear(s) on certificate(s) for the Notes or by person(s) authorized to become
registered holder(s) by endorsements and documents transmitted with this Letter
of Transmittal. If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person acting in a
fiduciary or representative capacity, please provide the following information
and see Instruction 5 herein.
Name(s): _______________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title): _________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
(Including Zip Code)
Area Code and Telephone No.: ___________________________________________________
7
<PAGE>
SIGNATURE GUARANTEE (SEE INSTRUCTIONS 1 AND 5 BELOW)
______________________________________________________________________________
(Name of Medallion Signature Guarantor Guaranteeing Signature(s) )
______________________________________________________________________________
(Address (including zip code) and Telephone No. (including area code) of Firm)
______________________________________________________________________________
(Authorized Signature)
______________________________________________________________________________
(Printed Name)
______________________________________________________________________________
(Title)
Dated: __________________________________, 1998
8
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal or
a notice of withdrawal must be guaranteed by a Medallion Signature Guarantor (as
defined in the Offer to Purchase) unless (i) this Letter of Transmittal is
signed by the registered holder(s) (which term, for purposes of this Letter of
Transmittal, shall include DTC) of the Notes tendered herewith and neither the
"Special Payment Instructions" box nor the "Special Delivery Instructions" box
of this Letter of Transmittal has been completed or (ii) such Notes are tendered
for the account of an Eligible Institution (as defined in the Offer to
Purchase). See Instruction 5 herein.
2. DELIVERY OF LETTER OF TRANSMITTAL AND NOTES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed by Holders (other
than Holders transmitting instructions through ATOP) if (i) certificates
representing Notes are to be physically delivered to the Depositary herewith by
such Holders; (ii) tender of Notes is to be made by book-entry transfer to the
Depositary's account at DTC pursuant to the procedures set forth under the
caption "The Offer--Procedures for Tendering Notes-- Book-Entry Delivery
Procedures" in the Offer to Purchase; or (iii) tender of Notes is to be made
according to the guaranteed delivery procedures set forth under the caption
"Procedures for Tendering Notes-- Tendering Notes--Guaranteed Delivery" in the
Offer to Purchase. All physically delivered Notes, or a confirmation of a
book-entry transfer into the Depositary's account at DTC of all Notes delivered
electronically, as well as a properly completed and duly executed Letter of
Transmittal (or manually signed facsimile thereof) and any other documents
required by this Letter of Transmittal must be received by the Depositary at its
address set forth herein prior to the Expiration Date or the tendering Holder
must comply with the guaranteed delivery procedures set forth below. Delivery of
documents to DTC does not constitute delivery to the Depositary.
If a Holder desires to tender Notes pursuant to the Offer and time will not
permit this Letter of Transmittal, certificates representing such Notes and all
other required documents to reach the Depositary, or the procedures for
book-entry transfer cannot be completed, on or prior to the Expiration Date,
then such Holder must tender such Notes pursuant to the guaranteed delivery
procedures set forth under the caption "Procedures for Tendering
Notes--Tendering Notes--Guaranteed Delivery" in the Offer to Purchase. Pursuant
to such procedures, (i) such tender must be made by or through an Eligible
Institution, (ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company, or an Agent's
Message with respect to guaranteed delivery, must be received by the Depositary,
either by hand delivery, mail, or facsimile transmission prior to the Expiration
Date, and (iii) the certificates for all tendered Notes, in proper form for
transfer (or confirmation of a book-entry transfer of all Notes delivered
electronically into the Depositary's account at DTC pursuant to the procedures
for such transfer set forth in the Offer to Purchase), together with a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any required signature guarantees and any other documents required
by this Letter of Transmittal, or a properly transmitted Agent's Message, must
be received by the Depositary within three business days after the date of the
execution of such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE NOTES AND ALL
OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC AND ANY ACCEPTANCE OR
AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE OPTION AND RISK OF THE
TENDERING HOLDER. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. In all cases, sufficient time
should be allowed for such documents to reach the Depositary. Except as
otherwise provided in this Instruction 2, delivery will be deemed made only when
actually received by the Depositary.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their Notes
for payment.
9
<PAGE>
If Holders wish to tender less than the entire principal amount evidenced by
any Note submitted, such Holders must fill in the principal amount that is to be
tendered in the column entitled "Principal Amount of Notes Tendered," but only
in integral multiples of $1,000. In the case of a partial tender of Notes, as
soon as practicable after the Expiration Date, new certificates for the
remainder of the Notes that were evidenced by such Holder's old certificates
will be sent to such Holder, unless otherwise provided in the appropriate box on
this Letter of Transmittal. The entire amount that is represented by Notes
delivered to the Depositary will be deemed to have been tendered, unless
otherwise indicated. (This paragraph does not apply to tender by book-entry
transfer.)
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Notes will be
resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders and withdrawals
of Notes that are not in proper form or the acceptance of which would, in the
opinion of the Company or counsel for the Company, be unlawful. The Company also
reserves the right to waive any irregularities or conditions of a tender as to
particular Notes. The Company's interpretation of the terms and conditions of
the Offer (including the instructions in this Letter of Transmittal) will be
final and binding. Unless waived, any irregularities in connection with tenders
and withdrawals of Notes must be cured within such time as the Company shall
determine. Tenders and withdrawals of Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Notes received by the
Depositary that are not properly tendered or delivered and to which the
irregularities have not been cured or waived will be returned by the Depositary
to the tendering Holder unless otherwise provided in this Letter of Transmittal
as soon as practicable following the Expiration Date.
None of the Company, the Depositary, the Information Agent, the Dealer
Manager, the Trustee or any other person shall be obligated to give notification
of defects or irregularities in any tender or withdrawal or shall incur any
liability for failure to give any such notification.
3. INADEQUATE SPACE. If the space provided herein under "Description of
Notes Tendered " is inadequate, the certificate numbers of the Notes and the
principal amount of Notes tendered should be listed on a separate schedule and
attached hereto.
4. WITHDRAWAL OF TENDERS. Tenders of Notes (or any portion of such Notes in
integral multiples of $1,000) may be withdrawn at any time on or prior to the
Expiration Date and, unless accepted by the Company, may be withdrawn at any
time after 40 business days after the date of the Offer to Purchase.
For a withdrawal of a tender of Notes to be effective, a written,
telegraphic, or facsimile transmission of a notice of withdrawal must be
received by the Depositary on or prior to the Expiration Date (or such later
date as may be permitted by the preceding paragraph) at its address set forth on
the back cover of this Offer to Purchase. Any such notice of withdrawal must
specify the name of the person who tendered the Notes to be withdrawn, that such
person is withdrawing his or her election to tender such Notes, the aggregate
principal amount of the Notes to be withdrawn, and the name of the registered
Holder of the Notes as set forth on the Notes, if different from that of the
person who tendered such Notes. If Notes have been delivered or otherwise
identified to the Depositary, then prior to the physical release of such Notes,
the tendering Holder must submit the serial numbers shown on the particular
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Notes tendered for
the account of any Eligible Institution. If Notes have been tendered pursuant to
the procedures for book-entry transfer set forth in "Procedures for Tendering
Notes--Tendering Notes--Book-Entry Delivery Procedures," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with such withdrawal of Notes and must otherwise comply with such book-entry
transfer facility's procedures, in which case a notice of withdrawal will be
effective if delivered to the Depositary by written, telegraphic, or facsimile
transmission. Withdrawals of tenders of Notes may not be rescinded. Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by
10
<PAGE>
following any of the procedures described in the Offer to Purchase under
"Procedures for Tendering Notes."
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, in the Company's sole discretion
(whose determination shall be final and binding). No withdrawal of Notes will be
deemed to have been properly made until all defects or irregularities have been
cured or expressly waived. None of the Company, the Depositary, the Dealer
Manager, the Information Agent, the Trustee or any other person will be under
any duty to give notification of any defects or irregularities in any notice of
withdrawal, or incur any liability for failure to give any such notification.
Withdrawal of Notes can only be accomplished in accordance with the
foregoing procedures.
5. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered Holder(s) of the Notes
tendered hereby, the signature(s) must correspond to the name(s) as written on
the face of the Notes without alteration, enlargement or any other change
whatsoever. If this Letter of Transmittal is signed by a participant in DTC
whose name is shown as the owner of the Notes tendered hereby, the signature
must correspond with the name shown on the security position listing as the
owner of the Notes.
If any Notes tendered hereby are owned of record by two or more persons, all
such persons must sign this Letter of Transmittal.
If any Notes tendered hereby are registered in the names of different
Holders, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal, and any necessary accompanying documents, as there are
different registrations of such Notes.
If this Letter of Transmittal is signed by the registered Holder of Notes
tendered hereby, no endorsements of such Notes or separate bond powers are
required, unless payment is to be made to, or Notes not tendered or not accepted
for payment are to be issued in the name of, a person other than the registered
Holder(s), in which case the Notes tendered hereby must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name(s) of the registered Holder(s) appear(s) on such Notes. Signatures on such
Notes and bond powers must be guaranteed by a Medallion Signature Guarantor. See
Instruction 1 herein.
If this Letter of Transmittal or any Notes or bond powers are signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
the Company of such person's authority so to act must be submitted with this
Letter of Transmittal.
6. TRANSFER TAXES. Except as set forth in this Instruction 6, the Company
will pay all transfer taxes, if any, applicable to the purchase of Notes
pursuant to the Offer. If, however, Notes for principal amounts not accepted for
tender are to be delivered to, or are to be registered or issued in the name of,
any person other than the registered Holder of the Notes, or if tendered Notes
are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the purchase of Notes pursuant to the Offer, then the amount of any such
transfer tax (whether imposed on the registered Holder or any other person) will
be payable by the tendering Holder. If satisfactory evidence of payment of such
tax or exemption therefrom is not submitted, then the amount of such transfer
tax will be deducted from the Offer Consideration otherwise payable to such
tendering Holder.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the payment of
the Offer Consideration with respect to any Notes tendered hereby is to be
issued, or if Notes not tendered or not accepted for payment are to be issued,
in the name of a person other than the person(s) signing this Letter of
Transmittal or if such check or any such Note is to be sent to someone other
than the person(s) signing this
11
<PAGE>
Letter of Transmittal or to the person(s) signing this Letter of Transmittal but
at an address other than that shown in the box entitled "Description of Notes
Tendered," the appropriate boxes in this Letter of Transmittal must be
completed. If no such instruction is given, the Offer Consideration and/or Notes
not accepted for payment or not tendered as the case may be, will be sent to the
person signing this Letter of Transmittal. All Notes tendered by book-entry
transfer and not accepted for payment will be returned by crediting the account
at DTC designated above as the account from which such Notes were delivered.
8. CONFLICTS. In the event of any conflict between the terms of the Offer
to Purchase and the terms of this Letter of Transmittal, the terms of the Offer
to Purchase will control.
9. WAIVER OF CONDITIONS. The Company reserves the absolute right, subject
to applicable law, to amend in any respect or waive any of the specified
conditions of the Offer in the case of any particular Note tendered.
10. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. If a Holder desires to
tender Notes pursuant to the Offer, but any such Note has been mutilated, lost,
stolen or destroyed, such Holder should write to or telephone the Trustee, at
the address listed below, concerning the procedures for obtaining replacement
certificates for such Note, arranging for indemnification or any other matter
that requires handling by the Trustee:
The Chase Manhattan Bank
450 West 33rd Street
15th Floor
New York, New York 10001
Attention: Karen Vera
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the Offer
to Purchase and the related Letter of Transmittal, may be directed to the
Information Agent, MacKenzie Partners, Inc., 156 Fifth Avenue, New York, New
York 10010, (800) 322-2885, or collect (212) 929-5500. A Holder may also contact
the Dealer Manager at its telephone number set forth on the back cover page of
this Letter of Transmittal or such Holder's broker, dealer, commercial bank or
trust company or nominee for assistance concerning the Offer.
12. U.S. FEDERAL INCOME TAX BACKUP WITHHOLDING. To prevent backup
withholding on any consideration paid to an owner or other payee with respect to
Notes purchased pursuant to the Offer, the owner is required to notify the
Depositary of the owner's current Taxpayer Identification Number ("TIN") (or the
TIN of any other payee) by completing the Substitute Form W-9 below, certifying
that the TIN provided on such form is correct (or that such owner is awaiting a
TIN), and that (i) the owner has not been notified by the Internal Revenue
Service that the owner is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the owner that the owner is no longer subject to backup withholding. If
such owner is an individual, the TIN is his or her social security number. If
the Depositary is not provided with the correct TIN, the owner or other payee
may be subject to a $50 penalty imposed by the Internal Revenue Service. In
addition, any consideration paid to such owner or other payee with respect to
Notes purchased pursuant to the Offer may be subject to 31% backup withholding
tax.
Certain owners of Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. If backup withholding applies, the Depositary is
required to withhold 31% of any consideration paid to the owner or other payee.
Backup withholding is not an additional tax. Rather, the U.S. federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service provided the required information
is furnished.
12
<PAGE>
13. WHAT NUMBER TO GIVE THE DEPOSITARY. The Holder is required to give the
Depositary the TIN (e.g., social security number or employer identification
number) of the owner of the Notes. If the Notes are registered in more than one
name or are not registered in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
THE FOREGOING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
DOES NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY HOLDER'S
SITUATION OR STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE INTERNAL
REVENUE CODE, REGULATIONS, PROPOSED REGULATIONS, RULINGS AND JUDICIAL DECISIONS
NOW IN EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE
BASIS. HOLDERS OF NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER LAWS, OF THE SALE OF THE NOTES. FOR ADDITIONAL
INFORMATION, SEE "CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS" IN
THE OFFER TO PURCHASE.
13
<PAGE>
<TABLE>
<S> <C> <C>
PAYER'S NAME [ ]
SUBSTITUTE Part 1-- PLEASE PROVIDE YOUR TIN IN Social Security Number
THE
BOX AT RIGHT AND CERTIFY BY SIGNING or
AND DATING BELOW Employer Identification
FORM W-9 Number
DEPARTMENT OF THE TREASURY Part 2--Certification-Under penalties of perjury, I certify
that:
(1) The number shown on this form is my correct taxpayer
INTERNAL REVENUE SERVICE identification number
(or I am waiting for a number to be issued to me) and
PAYER'S REQUEST FOR (2) I am not subject to backup withholding because: (a) I am
exempt from backup
TAXPAYER IDENTIFICATION withholding, or (b) I have not been notified by the Internal
Revenue Service
(IRS) that I am subject to backup withholding as a result of
NUMBER "TIN" a failure to report all interest or dividends, or (c) the
IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS--You must cross out Item (2)
above if you have been notified by the IRS that you are
currently subject to backup withholding because of under
reporting interest or dividends on your tax return.
SIGNATURE: Part 3
Awaiting TIN / /
DATE:
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31
PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW
THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me thereafter will be withheld until I provide
a taxpayer identification number.
Signature ______________________________________________________________________
Date ___________________________________________________________________________
<PAGE>
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
or
(800) 322-2885
Attention: Bob Marese
THE DEALER MANAGER FOR THE OFFER IS:
BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, CA 94104
(415) 693-3215
or
(800) 234-2663
Attention: Dan White
or
Jeff Winaker
<PAGE>
CUSIPS 912325 AB 3
912325 AD 9
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THIS NOTICE OF GUARANTEED DELIVERY OR A FORM SUBSTANTIALLY EQUIVALENT HERETO
MUST BE USED TO ACCEPT THE OFFER BY U.S. OFFICE PRODUCTS COMPANY (THE "COMPANY")
TO PURCHASE FOR CASH ANY AND ALL OF ITS OUTSTANDING 5 1/2% CONVERTIBLE
SUBORDINATED NOTES DUE 2003 (THE "NOTES") HELD IN REGISTERED FORM (OTHER THAN
THE REGISTERED REGULATION S NOTES), IF TIME WILL NOT PERMIT THE LETTER OF
TRANSMITTAL, CERTIFICATES REPRESENTING THE NOTES OR ANY OTHER REQUIRED DOCUMENTS
TO REACH THE DEPOSITARY, OR THE PROCEDURES FOR BOOK-ENTRY TRANSFER CANNOT BE
COMPLETED, ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED BELOW). THIS FORM MAY
BE DELIVERED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN THE OFFER TO PURCHASE) BY
HAND DELIVERY, TELEGRAM, FACSIMILE TRANSMISSION OR MAIL TO THE DEPOSITARY AS SET
FORTH BELOW. ALL CAPITALIZED TERMS USED HEREIN BUT NOT DEFINED HEREIN SHALL HAVE
THE MEANINGS ASCRIBED TO THEM IN THE OFFER TO PURCHASE OF THE COMPANY DATED MAY
5, 1998 (AS THE SAME MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME, THE
"OFFER TO PURCHASE").
THE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF NOTES FOR PURCHASE BE
ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING
OR ACCEPTANCE OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY, JUNE
3, 1998, UNLESS EXTENDED (SUCH DATE AND TIME, AS THE SAME MAY BE EXTENDED, THE
"EXPIRATION DATE"). TENDERS OF NOTES MUST BE RECEIVED BY THE EXPIRATION DATE TO
RECEIVE THE OFFER CONSIDERATION (AS DEFINED IN THE OFFER TO PURCHASE). TENDERS
OF NOTES MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE OFFER TO
PURCHASE.
<TABLE>
<S> <C>
THE DEPOSITARY FOR THE OFFER IS:
BY MAIL, BY HAND OR BY COURIER: BY FACSIMILE:
The Chase Manhattan Bank (212) 638-7380/7381
55 Water Street, Rm. 234
New York, NY 10041 FOR CONFIRMATION AND/OR INFORMATION CALL:
Attention: Carlos Esteves (212) 638-0838
Telephone: (212) 638-0828
</TABLE>
FOR INFORMATION, CALL THE INFORMATION AGENT:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(212) 929-5500
(800) 322-2885
Attention: Bob Marese
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION, OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by a Medallion Signature
Guarantor under the instructions thereto, such signature guarantee must appear
in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Offer to Purchase and Letter of Transmittal,
receipt of which is hereby acknowledged, the principal amount of Notes set forth
below, pursuant to the guaranteed delivery procedures set forth in the Offer to
Purchase under the heading "Procedures for Tendering Notes--Tendering
Notes--Guaranteed Delivery."
The undersigned understands that tenders of Notes may be withdrawn by
written notice of withdrawal received by the Depositary at any time on or prior
to the Expiration Date. In the event of termination of the Offer, the Notes
tendered pursuant to the Offer will be returned to the tendering Holders
promptly (or, in the case of Notes tendered by book-entry transfer, such Notes
will be credited to the account maintained at DTC from which such Notes were
delivered). If the Company makes a material change in the terms of the Offer or
the information concerning the Offer, the Company will disseminate additional
Offer materials and extend such Offer, to the extent required by law.
The undersigned understands that payment by the Depositary for Notes
tendered and accepted for payment pursuant to the Offer will be made only after
timely receipt by the Depositary of such Notes (or Book-Entry Confirmation of
the transfer of such Notes into the Depositary's account at DTC) and a Letter of
Transmittal (or facsimile thereof) with respect to such Notes properly completed
and duly executed with any required signature guarantees and any other documents
required by the Letter of Transmittal, or a properly transmitted Agent's
Message.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<S> <C>
Signature(s) of Registered Holders or Authorized Address(es):
Signatory: Area Code and Telephone No.:
Name(s) of Registered Holder(s): If Notes will be delivered by a book-entry
Principal Amount of Notes Tendered: transfer:
Certificate No(s). of Notes (if available) The Depository Trust Company
Depository Account No.:
</TABLE>
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Notes exactly as their name(s) appear(s) on the Notes or by
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, guardian, attorney-in-fact, officer of a corporation, executor,
administrator, agent or other representative, such person must provide the
following information:
Please print name(s) and address(es)
Name(s) and address(es): ______________________________________________________
________________________________________
________________________________________
Capacity: _____________________________________________________________________
________________________________________
DO NOT SEND NOTES WITH THIS FORM. NOTES SHOULD BE SENT TO THE DEPOSITARY,
TOGETHER WITH A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL.
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock Exchange
Medallion Signature Program, or an Eligible Institution (as defined in the Offer
to Purchase) hereby guarantees that, within three business days from the date of
this Notice of Guaranteed Delivery, a properly completed and validly executed
Letter of Transmittal (or a facsimile thereof), together with Notes tendered
hereby in proper form for transfer (or confirmation of the book-entry transfer
of such Notes into the Depositary's account at DTC pursuant to the procedures
for book-entry transfer set forth in the Offer to Purchase under the caption
"Procedures for Tendering Notes--Tendering Notes--Book-Entry Delivery
Procedures") and all other required documents will be deposited by the
undersigned with the Depositary at its address set forth above.
The institution that completes this form must communicate the guarantee to
the Depositary and must deliver the Letter of Transmittal or Agent's Message and
Notes to the Depositary within the time period shown herein. Failure to do so
could result in a financial loss to the undersigned.
<TABLE>
<S> <C>
Name of Firm: -------------------------------------------
Address: Authorized Signature
- ------------------------------------------- Name:
Area Code and Title:
Telephone No.: Date:
</TABLE>
3
<PAGE>
CUSIPS 912325 AB 3
912325 AD 9
U.S. OFFICE PRODUCTS COMPANY
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE
AND TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
To Our Clients:
Enclosed for your consideration is the Offer to Purchase dated May 5, 1998
(as the same may be amended or supplemented from time to time, the "Offer to
Purchase") and the related Letter of Transmittal and instructions thereto (the
"Letter of Transmittal" and, together with the Offer to Purchase, the "Offer")
relating to the offer by U.S. Office Products Company (the "Company") to
purchase any and all of its outstanding 5 1/2% Convertible Subordinated Notes
due 2003 (the "Notes") held in registered form (other than the Registered
Regulation S Notes).
The consideration payable pursuant to the Offer (the "Offer Consideration")
to a Holder who validly tenders Notes prior to the Expiration Date (and does not
validly withdraw such Notes) shall be 94.5% of the aggregate principal amount of
the Notes so tendered, plus accrued and unpaid interest, if any, up to, but not
including, the date upon which the Company pays for Notes tendered and accepted
pursuant to the Offer.
Consummation of the Offer is subject to certain conditions described in the
Offer to Purchase. Capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Offer to Purchase.
THIS MATERIAL RELATING TO THE OFFER IS BEING FORWARDED TO YOU AS THE
BENEFICIAL OWNER OF NOTES CARRIED BY US FOR YOUR ACCOUNT OR BENEFIT BUT NOT
REGISTERED IN YOUR NAME. A TENDER OF ANY SUCH NOTES WITH RESPECT THERETO CAN BE
MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE
LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT
BE USED BY YOU TO TENDER NOTES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender any
or all such Notes held by us for your account pursuant to the terms and
conditions set forth in the Offer. We urge you to read the Offer to Purchase and
the Letter of Transmittal carefully before instructing us to tender your Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Notes on your behalf in accordance with the provisions of
the Offer. The Offer will expire at 5:00 p.m., New York City time, on Wednesday,
June 3, 1998, unless extended. Notes tendered pursuant to the Offer may only be
withdrawn under the circumstances described in the Offer to Purchase.
Your attention is directed to the following:
1. The Offer is for any and all outstanding Notes held in registered form
(other than Registered Regulation S Notes).
2. Holders must tender (and not validly withdraw) their Notes on or prior to
the Expiration Date in order to receive the Offer Consideration.
<PAGE>
3. Consummation of the Offer is conditioned upon, among other things,
satisfaction of the (a) the Financing Condition, (b) the Equity Investment
Condition, (c) the Distribution Condition and (d) the General Conditions (each
as defined in the Offer to Purchase).
4. Tendering holders may withdraw their tender at any time prior to the
Expiration Date.
5. Any transfer taxes incident to the transfer of Notes from the tendering
holder to the Company will be paid by the Company, except as provided in the
Offer to Purchase and the instructions to the Letter of Transmittal.
6. The Offer is not being made to (nor will the surrender of Notes for
purchase be accepted from or on behalf of) holders in any jurisdiction in which
the making or acceptance of the Offer would not be in compliance with the laws
of such jurisdiction.
7. The acceptance for payment of Notes validly tendered and not validly
withdrawn and the payment of the Offer Consideration will be made as promptly as
practicable after the Expiration Date. Subject to rules promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company, however, expressly reserves the right to delay acceptance of any of the
Notes or to terminate the Offer and not accept for payment any Notes not
theretofore accepted if any of the conditions set forth in the Offer to Purchase
under the caption "The Offer--Conditions of the Offer" shall not have been
satisfied or waived by the Company. The Company will pay the Offer Consideration
promptly following acceptance of the Notes.
8. The Company expressly reserves the right, subject to applicable law and
the terms of the Offer, (i) to delay acceptance for purchase of any Notes or,
regardless of whether such Notes were theretofore accepted for payment, to delay
the purchase of any Notes pursuant to the Offer and to terminate the Offer and
not accept for payment any Notes not theretofore accepted for purchase, upon the
failure of any of the conditions to the Offer specified herein to be satisfied,
by giving oral or written notice of such delay or termination to the Depositary
and (ii) at any time, or from time to time, to amend the Offer in any respect.
Except as otherwise provided in the Offer to Purchase, withdrawal rights with
respect to Notes tendered pursuant to the Offer will not be extended or
reinstated as a result of an extension or amendment of the Offer. The
reservation by the Company of the right to delay acceptance for payment of Notes
is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which
requires that the Company pay the consideration offered or return the Notes
deposited by or on behalf of holders thereof promptly after the termination or
withdrawal of the Offer.
9. Consummation of the Offer may have adverse consequences to non-tendering
holders, including that the reduced amount of outstanding Notes as a result of
the Offer may adversely affect the trading market, liquidity and market price of
the Notes.
If you wish to have us tender any or all of the Notes held by us for your
account, please so instruct us by completing, executing and returning to us the
instruction form that follows.
2
<PAGE>
INSTRUCTIONS REGARDING THE OFFER TO PURCHASE ANY AND ALL
OF THE 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
The undersigned acknowledge(s) receipt of your letter and the enclosed documents
referred to therein relating to the Offer of U.S. Office Products Company.
This will instruct you whether to tender the principal amount of Notes indicated
below held by you for the account of the undersigned, pursuant to the terms of
and conditions set forth in the Offer to Purchase and the Letter of Transmittal.
Box 1 ____ -Please tender the indicated Notes held by you for my account.
Box 2 ____ -Please do not tender any Notes held by you for my account.
Date: __________________, 1998
____________________________
____________________________
Signature(s)
____________________________
____________________________
Please print name(s) here
Principal amount of Notes to Be Tendered:
$ ________________________ *
(must be in principal amounts equal to $1,000 or
integral multiples thereof)
____________________________
____________________________
____________________________
Please type or print address
____________________________
Area Code and Telephone
Number
____________________________
Taxpayer Identification or
Social
Security Number
____________________________
My Account Number with You
- ------------------------
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL
CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL NOTES OF SUCH
BENEFICIAL OWNER(S).
3
<PAGE>
CUSIPS 912325 AB 3
912325 AD 9
U.S. OFFICE PRODUCTS COMPANY
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE
AND TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Enclosed for your consideration is an Offer to Purchase (the "Offer to
Purchase") and a form of Letter of Transmittal (the "Letter of Transmittal" and,
together with the Offer to Purchase, the "Offer"), relating to the Offer by U.S.
Office Products Company (the "Company") to purchase for cash all of its
outstanding 5 1/2% Convertible Subordinated Notes due 2003 (the "Notes") held in
registered form (other than Registered Regulation S Notes). Capitalized terms
used herein but not defined herein shall have the meanings ascribed to such
terms in the Offer to Purchase.
The consideration payable pursuant to the Offer to a Holder who validly
tenders Notes prior to the Expiration Date (and does not validly withdraw such
Notes) shall be 94.5% of the principal amount of the Notes so tendered, plus
accrued and unpaid interest, if any, up to, but not including, the date upon
which the Company pays for the Notes tendered and accepted pursuant to the
Offer.
We are asking you to contact your clients for whom you hold Notes registered
in your name or in the name of your nominee. In addition, we ask you to contact
your clients who, to your knowledge, hold Notes registered in their own names.
The Company will pay all transfer taxes, if any, applicable to the tender of
Notes to it or to its order, except as otherwise provided in the Offer.
Enclosed herewith are copies of the following documents:
1. An Offer to Purchase dated May 5, 1998;
2. A Letter of Transmittal for your use and for the information of your
clients, together with "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" providing information relating
to U.S. federal income tax backup withholding;
3. A Notice of Guaranteed Delivery to be used to accept the Offer if (i)
the Notes and all other required documents cannot be delivered to The Chase
Manhattan Bank as Depositary or (ii) the required procedures for book-entry
transfer cannot be completed on or prior to the Expiration Date; and
4. A form of a letter which may be sent to your clients for whose
account you hold the Notes in your name or in the name of a nominee, with
space provided for obtaining such clients' instructions with regard to the
Offer.
DTC participants will be able to tender Notes through the DTC Automated
Tender Offer Program ("ATOP").
<PAGE>
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting tenders of the Notes pursuant to the Offer. You will
be reimbursed for customary mailing and handling expenses incurred by you in
forwarding the enclosed materials to your clients as described in the Offer to
Purchase under the caption "Fees and Expenses."
PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED. WE URGE YOU TO
CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE IN ORDER TO OBTAIN THEIR
INSTRUCTIONS.
Additional copies of the enclosed materials may be obtained from the
Information Agent, at its address and telephone number set forth on the back
cover of the enclosed Offer to Purchase.
Very Truly Yours,
BancAmerica Robertson Stephens
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON AS THE AGENT OF THE COMPANY, THE DEPOSITARY, THE INFORMATION
AGENT, THE TRUSTEE OR THE DEALER MANAGER OR AUTHORIZE YOU OR ANY OTHER PERSON TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH
RESPECT TO THE OFFER WHICH IS NOT CONTAINED IN THE OFFER TO PURCHASE OR THE
LETTER OF TRANSMITTAL.
<PAGE>
[LOGO]
OFFER TO PURCHASE FOR CASH
ANY AND ALL
OF ITS
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
AT
94.5% OF THE PRINCIPAL AMOUNT OF THE NOTES PLUS ACCRUED INTEREST
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 3:00 P.M.,
LONDON TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE
AND TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
U.S. Office Products Company, a Delaware corporation ("U.S. Office Products"
or the "Company"), hereby offers to Holders (as defined below) who are not U.S.
Persons (as defined below) to purchase for cash at the Purchase Price (as
defined below) any and all of its outstanding 5 1/2% Convertible Subordinated
Notes due 2003 (the "Notes") held in bearer form or held in the form of
Registered Regulation S Notes (as defined in the Indenture (as defined below)),
upon the terms and subject to the conditions set forth in this Offer to Purchase
(as it may be supplemented and amended from time to time, the "Offer to
Purchase") and in the accompanying Letter of Transmittal (as it may be
supplemented and amended from time to time, the "Letter of Transmittal" which,
together with the Offer to Purchase, constitutes the "Offer"). Concurrently with
the Offer, the Company is making a separate offer to purchase, on the same terms
and conditions and for the same consideration as the Offer, all Notes held in
registered form (other than the Registered Regulation S Notes) (the "U.S. Offer"
and, together with the Offer, the "2003 Note Tender Offers"). The 2003 Note
Tender Offers will be consummated concurrently. The "Purchase Price" shall equal
94.5% of the principal amount of each Note tendered, plus accrued and unpaid
interest up to but excluding the date upon which the Company pays for Notes
accepted for tender (the "Payment Date"). The Purchase Price is payable to
holders of the Notes ("Holders") who validly tender (and do not withdraw) their
Notes (as received by the Holders, the "Offer Consideration"). Any Notes not
tendered in the Offer (or tendered and properly withdrawn) shall remain
obligations of the Company until they are subsequently converted into the
Company's Common Stock (as defined below), are redeemed or mature and are repaid
in accordance with their terms.
Any Holder desiring to tender all or any portion of such Holder's Notes must
comply with the procedures for tendering Notes set forth herein in "Procedures
for Tendering Notes" and in the Letter of Transmittal. Tenders of Notes may be
withdrawn at any time prior to the Expiration Date. In the event of a withdrawal
of Notes, the Notes so withdrawn will be returned to the Holder promptly in the
manner chosen by, and at the risk and expense of, the Holder.
[CONTINUED ON THE FOLLOWING PAGE]
------------------------
BA Robertson Stephens International Limited has been retained to act as
Dealer Manager in connection with the Offer. See "The Dealer Manager." The Chase
Manhattan Bank London Office and Chase Manhattan Bank Luxembourg S.A. have each
been retained to act as Tender Agent in connection with the Offer. The Chase
Manhattan Bank London Office and Chase Manhattan Bank Luxembourg S.A. are
referred to in this Offer to Purchase collectively as the "Tender Agent."
------------------------
The Dealer Manager for the Offer is:
BA ROBERTSON STEPHENS INTERNATIONAL LIMITED
------------------
The date of this Offer to Purchase is May 5, 1998.
<PAGE>
[CONTINUED FROM PRECEDING PAGE]
At May 1, 1998, there were outstanding $230.0 million of the Notes, of which
approximately $175.0 million were held in registered form and approximately
$55.0 million were in bearer form (the "Bearer Notes"). At May 1, 1998, there
were no Registered Regulation S Notes outstanding, and all of the Bearer Notes
were held in accounts at either Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear system ("Euroclear"), or Cedel
Bank societe anonyme ("Cedel").
The Offer is not being made, directly or indirectly, in or into, or by use
of the mails of, or by any means or instrumentality (including, without
limitation, facsimile transmissions, telex and telephone) of interstate or
foreign commerce of, or of any facility of a national securities exchange of,
the United States and tenders cannot be made by any such use, means or
instrumentality or from within the United States.
Accordingly, copies of this Offer to Purchase, the Letter of Transmittal and
any related documents are not being and must not be mailed or otherwise
distributed or sent in or into the United States, including to Holders with
addresses in the United States. Persons receiving such documents (including,
without limitation, custodians, nominees and trustees) should not distribute or
send them in, into or from the United States or use such mails or any such means
or instrumentality in connection with the Offer, and so doing will render
invalid any related purported acceptance of the Offer. Persons wishing to tender
their Notes should not use such mails or any means, instrumentality or facility
for any purpose directly or indirectly relating to acceptance of the Offer.
Envelopes containing Letters of Transmittal should not be postmarked in the
United States or otherwise dispatched from the United States and all tendering
Holders must provide addresses outside of the United States for the receipt of
payment in respect of the Offer or the return of Notes.
Tenders of Notes pursuant to the Offer may be made only to the Tender Agent
at one of the offices outside of the United States specified on the back cover
page of this Offer to Purchase. The Company will deliver the Offer Consideration
to the relevant office of the Tender Agent, and such office of the Tender Agent
shall deliver, on behalf of the Company, the Offer Consideration only to an
account or address outside the United States.
Tenders of Notes (or any portion of such Notes in authorized denominations)
may be withdrawn at any time on or prior to the Expiration Date and, unless
accepted by the Company, may be withdrawn at any time after July 1, 1998, the
40th business day after the date of this Offer to Purchase. If, prior to the
Expiration Date, the Company reduces (i) the principal amount of Notes subject
to the Offer or (ii) the Purchase Price, then previously tendered Notes may be
validly withdrawn until the expiration of ten business days after the date that
notice of either such reduction is first published, given or sent to Holders by
the Company. If the Company makes a material change in the terms of the Offer,
the Company will disseminate additional Offer materials regarding the change and
will extend the Offer, in each case to the extent required by applicable law.
For purposes of the Offer, the term "business day" means any day other than a
Saturday, Sunday or U.S. federal holiday and consists of the time period from
12:01 a.m. through 12:00 midnight, New York City time.
Under no circumstances will any interest be payable because of any delay in
the transmission of funds constituting the Purchase Price to Holders. See "The
Offer--Acceptance for Payment and Payment for Notes" for further details as to
timing of the payment of the Purchase Price.
Subject to applicable securities laws, other applicable regulations and the
terms set forth in this Offer to Purchase, the Company reserves the right (i) to
waive any and all conditions to the Offer, (ii) to extend or to terminate the
Offer or (iii) otherwise to amend the Offer in any respect. Any amendment
applicable to the Offer will apply to all Notes tendered pursuant to the Offer.
See "The Offer--Expiration Date; Extension; Amendment; Termination."
Notwithstanding any other provision of the Offer, the Company's obligation
to accept for payment, and to pay for, Notes validly tendered pursuant to the
Offer is conditioned upon satisfaction of (i) the Financing Condition, (ii) the
Equity Investment Condition (iii) the Distribution Condition and (iv) the
General Conditions (each as defined herein). See "The Offer--Conditions of the
Offer."
<PAGE>
NONE OF THE COMPANY, THE BOARD OF DIRECTORS OR THE DEALER MANAGER MAKES ANY
RECOMMENDATION AS TO WHETHER OR NOT HOLDERS SHOULD TENDER NOTES IN RESPONSE TO
THE OFFER.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
WITH RESPECT TO THE OFFER. Any questions with respect to the terms and
conditions of the Offer may be directed to the Dealer Manager at its address and
telephone numbers set forth on the back cover page of the Offer to Purchase.
Requests for assistance with respect to the procedures for tendering Notes or
requests for additional copies of the Offer to Purchase, the Letter of
Transmittal, the Notice of Guaranteed Delivery or other related documents may be
directed to the Tender Agent. Beneficial owners may also contact their broker,
dealer, commercial bank or trust company for assistance concerning the Offer.
In this Offer to Purchase, references to "dollars," "$," and "US$" are to
United States dollars, the term "United States" means the United States of
America (including the States and the District of Columbia), its possessions,
its territories and other areas subject to its jurisdiction, and the term "U.S.
Person" shall have the meaning set forth in Sections 230.901 through .904 of
Title 17 of the United States Code of Federal Regulations ("Regulation S").
<PAGE>
IMPORTANT
Any Holder desiring to tender Notes should either (i) in the case of a
Holder (other than a depositary or other custodian) who holds physical
certificates evidencing Bearer Notes or Registered Regulation S Notes, complete
and sign the accompanying Letter of Transmittal (or a facsimile thereof) in
accordance with the instructions set forth therein and physically deliver such
manually signed Letter of Transmittal (or a manually signed facsimile thereof),
together with certificates evidencing such Notes and any other required
documents to the Tender Agent at one of its offices specified on the back cover
of this Offer to Purchase, or (ii) in the case of a Holder who holds Notes in
book-entry form, request such Holder's broker, dealer, commercial bank, trust
company or other nominee to effect the tender of Notes for such Holder pursuant
to the procedures for book-entry delivery set forth herein. See "Procedures for
Tendering Notes." Beneficial owners of Notes held in Euroclear or Cedel who are
not accountholders in Euroclear or Cedel must arrange through their broker,
dealer, commercial bank, trust company or other nominee to contact their
accountholders in Euroclear or Cedel and instruct such accountholders to take
such steps as are required in order to tender the Notes. Such beneficial owners
should give such directions to their broker, dealer, commercial bank, trust
company or other nominee sufficiently in advance of the Expiration Date to
ensure receipt by the Tender Agent of (i) any documents required by this Offer
to Purchase and (ii) confirmation of the amount of Notes tendered and of
blockage of an account in respect of such tendered Notes, taking into account
the deadlines required by Euroclear and Cedel. A Letter of Instruction is
included in the Offer materials provided along with this Offer to Purchase,
which may be used by a beneficial owner to give such instructions. See
"Procedures for Tendering Notes."
Euroclear or Cedel participants that hold Notes on behalf of beneficial
owners of Notes through Euroclear or Cedel are eligible to tender Notes on
behalf of such Holders. To effect a tender of Notes, Euroclear or Cedel
participants should instruct Euroclear or Cedel, as the case may be, in
accordance with such clearing system's procedures, to block the account with
respect to the Notes tendered and follow the procedure for book-entry delivery
set forth in "Procedures for Tendering Notes."
Any Holder who desires to tender Notes but who cannot comply with the
procedures set forth herein for tender on a timely basis or whose certificates
for Notes are not immediately available may tender such Notes by following the
procedures for guaranteed delivery set forth under "Procedures for Tendering
Notes--Tendering Notes--Guaranteed Delivery."
The Letter of Transmittal and the Notes should be sent only to the Tender
Agent at one of its specified offices outside of the United States and should
not be sent to the Company, the Tender Agent's offices in the United States, the
Dealer Manager or the Trustee (as defined below).
Tendering Holders will not be obligated to pay brokerage fees or
commissions.
The Offer is not being made to (nor will any tender of Notes be accepted
from or on behalf of) Holders in any jurisdiction in which the making of the
Offer or the acceptance of any tender of Notes therein would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary for the Company to make
the Offer in any such jurisdiction and extend the Offer to Holders in such
jurisdiction. In any jurisdiction the securities laws of which require the Offer
to be made by a licensed broker or dealer, the Offer is being made on behalf of
the Company by the Dealer Manager or one or more registered brokers or dealers
which are licensed under the laws of such jurisdiction.
BA Robertson Stephens International Limited is acting for the Company in the
Offer. BA Robertson Stephens International Limited will not be offering advice
and will not otherwise be responsible for providing customer protections in
respect of the Offer. Holders are advised to seek independent financial advice
concerning the Offer.
------------------------
i
<PAGE>
THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY AS TO WHETHER HOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING NOTES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY PERSON
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE
OFFER OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF
TRANSMITTAL. IF GIVEN OR MADE, ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 2
SUMMARY.................................................................................................... 3
The Company.............................................................................................. 3
The Strategic Restructuring Plan......................................................................... 4
Investment Considerations................................................................................ 5
THE OFFER.................................................................................................. 6
General.................................................................................................. 6
Purposes of the Offer.................................................................................... 6
Terms of the Offer....................................................................................... 6
Conditions of the Offer.................................................................................. 7
Expiration Date; Extension; Amendment; Termination....................................................... 9
Acceptance for Payment and Payment for Notes............................................................. 10
Accounting Treatment of the Offer........................................................................ 11
PROCEDURES FOR TENDERING NOTES............................................................................. 11
Tendering Notes.......................................................................................... 11
Withdrawal of Tenders.................................................................................... 13
MARKET AND TRADING INFORMATION............................................................................. 15
The Notes................................................................................................ 15
The Common Stock......................................................................................... 15
DESCRIPTION OF THE NOTES................................................................................... 16
EFFECT OF THE STRATEGIC RESTRUCTURING PLAN ON THE EXISTING CONVERSION PRICE FOR THE NOTES.................. 16
Equity Self-Tender Adjustment............................................................................ 16
Spin-off Adjustment...................................................................................... 17
Adjustment for Reverse Stock Split....................................................................... 17
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS.......................................... 17
SOURCE AND AMOUNT OF FUNDS................................................................................. 20
THE DEALER MANAGER......................................................................................... 22
TENDER AGENT............................................................................................... 22
FEES AND EXPENSES.......................................................................................... 23
MISCELLANEOUS.............................................................................................. 23
</TABLE>
ANNEX A--CERTAIN INFORMATION CONCERNING THE STRATEGIC RESTRUCTURING
PLAN AND THE COMPANY
iii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also may be obtained by mail from the Public Reference Section of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a site on the Internet's World Wide Web at http://
www.sec.gov. that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company.
Pursuant to the Company's Strategic Restructuring Plan (as defined herein),
the Company has filed with the Commission (i) a proxy statement on Schedule 14A
relating to the Equity Investment (as defined herein) and a one-for-four reverse
stock split, (ii) a registration statement on Form S-4 and a related Schedule
13E-4 relating to the 2001 Note Offer (as defined herein) and (iii) a Schedule
13E-4 relating to the Equity Self-Tender (as defined herein). In addition, each
of the Spin-Off Companies (as defined herein) has filed a registration statement
on Form S-1 relating to the Distributions (as defined herein). These documents
are available at the Commission as described above and can also be obtained upon
written or oral request to U.S. Office Products Company, 1025 Thomas Jefferson
Street, N.W., Suite 600 East, Washington, D.C. 20007, Attention: Mark D.
Director, telephone: (202) 339-6700.
This Offer to Purchase constitutes part of an Issuer Tender Offer Statement
on Schedule 13E-4 (the "Schedule 13E-4") filed with the Commission by the
Company pursuant to Section 13(e) of the Exchange Act and the rules and
regulations promulgated thereunder. The Schedule 13E-4 and all exhibits thereto
are incorporated by reference in this Offer to Purchase.
1
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-25372) pursuant to the Exchange Act are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the fiscal year ended
April 26, 1997, as amended through the date hereof;
b. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended July 26, 1997, October 25, 1997 and January 24, 1998;
c. The Company's Current Reports on Form 8-K filed with the Commission
on April 22, 1998; April 7, 1998; March 12, 1998; March 9, 1998; February
12, 1998; January 16, 1998; December 24, 1997; November 24, 1997; November
6, 1997; and July 21, 1997, as amended;
d. The Company's definitive Proxy Statement filed on Schedule 14A on
April 30, 1998; and
e. The Company's Registration Statement on Form 8-A, as amended, filed
with the Commission on February 13, 1995.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of the Offer to Purchase
and prior to the Expiration Date shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is or was deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part hereof.
THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE OTHER THAN EXHIBITS TO SUCH
DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS OFFER TO PURCHASE HAS BEEN DELIVERED, UPON WRITTEN OR ORAL
REQUEST, TO U.S. OFFICE PRODUCTS COMPANY, 1025 THOMAS JEFFERSON STREET, N.W.,
SUITE 600 EAST, WASHINGTON, D.C. 20007, ATTENTION: MARK D. DIRECTOR, TELEPHONE:
(202) 339-6700. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
EXPIRATION DATE, ANY SUCH REQUEST SHOULD ALLOW FIVE (5) BUSINESS DAYS FOR
DELIVERY.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
OFFER TO PURCHASE, INCLUDING ANNEX A, OR INCORPORATED BY REFERENCE HEREIN.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "U.S. OFFICE PRODUCTS" OR THE
"COMPANY" REFER TO U.S. OFFICE PRODUCTS COMPANY, A DELAWARE CORPORATION, AND ITS
SUBSIDIARIES AFTER COMPLETION OF THE STRATEGIC RESTRUCTURING PLAN (AS DEFINED
BELOW). CERTAIN OTHER CAPITALIZED TERMS ARE DEFINED ELSEWHERE IN THIS OFFER TO
PURCHASE.
THIS OFFER TO PURCHASE CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. WHEN USED IN THIS OFFER TO PURCHASE, THE WORDS
"ANTICIPATE," "ESTIMATE," "INTEND" "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DESCRIBED IN THE COMPANY'S FILINGS WITH THE COMMISSION
UNDER THE EXCHANGE ACT THAT ARE INCORPORATED BY REFERENCE HEREIN (SEE
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE") AND THOSE DESCRIBED IN
ANNEX A OF THIS OFFER TO PURCHASE UNDER THE CAPTION "RISK FACTORS." THIS OFFER
TO PURCHASE ALSO CONTAINS OR INCORPORATES PRO FORMA FINANCIAL INFORMATION THAT
GIVES EFFECT TO CERTAIN EVENTS. SEE ANNEX A. SUCH INFORMATION IS NOT NECESSARILY
INDICATIVE OF THE RESULTS THE COMPANY WOULD HAVE ATTAINED HAD THE EVENTS
OCCURRED AT THE BEGINNING OF THE PERIODS PRESENTED, AS ASSUMED, OR OF THE FUTURE
RESULTS OF THE COMPANY.
FOR ADDITIONAL INFORMATION ABOUT THE COMPANY AND THE STRATEGIC RESTRUCTURING
PLAN, SEE ANNEX A.
THE COMPANY
U.S. Office Products Company is one of the world's leading suppliers of a
broad range of office products and business services to corporate customers.
Through its North American Office Products Group ("NAOPG"), the Company provides
office supplies, office furniture and office coffee, beverage and vending
services primarily to middle market companies (25 to 500 employees). Based on
current sales, NAOPG is one of the largest contract stationers in the United
States. Outside North America, U.S. Office Products' Blue Star Group Limited
("Blue Star") is a leading supplier of office products in New Zealand and
Australia, and U.S. Office Products owns a 49% interest in Dudley Stationery
Limited ("Dudley"), the second largest contract stationer in the United Kingdom.
With its November 1997 acquisition of Mail Boxes Etc. ("MBE"), the Company has
expanded into the high growth small office and home office market. MBE is the
world's largest franchisor of local postal, packaging, business and
communications service centers with approximately 3,600 outlets worldwide.
Since its founding in October 1994, the Company has grown primarily through
an aggressive acquisition program, which has included the purchase of more than
230 businesses in the United States and internationally. U.S. Office Products
has focused on acquiring successful, established companies with experienced
management and sales presence in specific geographic, product or service
markets. It adheres to a rigorous due diligence and financial review process in
acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth and improved profit margins. To execute this new strategy, U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and existing distribution channels. The
Company continues to pursue strategic alliances with well-known companies to
enable the Company to increase sales by offering a broader selection of services
and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located within the same
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geographic areas into large, centrally-located regional warehouses known as
district fulfillment centers ("DFCs"). Through DFCs, the Company believes it can
achieve greater regional efficiencies and economies of scale in purchasing,
distribution and asset utilization. At the same time, U.S. Office Products
continues to encourage entrepreneurial innovation and management of customer
relationships at the local level. U.S. Office Products believes that its
organizational structure combines the best elements of both centralized and
decentralized management for its business.
The Company is a Delaware corporation. Its executive offices are located at
1025 Thomas Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, and
its telephone number is 202-339-6700.
THE STRATEGIC RESTRUCTURING PLAN
The Board of Directors of U.S. Office Products has adopted a comprehensive
restructuring plan. The principal elements of this plan (including modifications
the Board of Directors has made since first adopting this plan, the "Strategic
Restructuring Plan") are as follows:
- EQUITY SELF-TENDER. Pursuant to a self-tender offer, the Company has
offered to purchase 37,037,037 shares of its Common Stock, $.001 par value
("Common Stock"), including shares issuable upon exercise of options
(vested and unvested) to purchase Common Stock, at $27.00 per share (or,
in the case of shares underlying stock options, $27.00 minus the exercise
price of such options) (the "Equity Self-Tender"). The Equity Self-Tender
commenced on May 4, 1998, and will expire on June 1, 1998, unless
extended.
- SPIN-OFF DISTRIBUTIONS. The Company will distribute to its stockholders
the shares of four separate companies: Aztec Technology Partners, Inc.,
Workflow Management, Inc., School Specialty, Inc., and Navigant
International, Inc. (collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies are referred to in
this Offer to Purchase as the "Distributions." The Spin-Off Companies will
conduct the Company's former technology solutions, print management,
educational supplies and corporate travel services businesses,
respectively. Each of the Spin-Off Companies plans to issue additional
shares of its common stock in a public offering substantially concurrent
with the Distributions.
- EQUITY INVESTMENT. Pursuant to an investment agreement (the "Investment
Agreement"), an affiliate ("Investor") of an investment fund managed by
Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm, will
acquire for $270.0 million Common Stock representing 24.9% of the
outstanding equity of the Company (after giving effect to the Equity
Self-Tender and such investment) and warrants to purchase additional
Common Stock (the "Equity Investment").
The Strategic Restructuring Plan was adopted in light of the Company's
movement into a new stage of development, less reliant on acquisitions and more
focused on growth through improvements in and expansion of existing operations.
The Company believes that the Strategic Restructuring Plan will benefit the
Company by focusing U.S. Office Products' business on a complementary group of
businesses and permitting management to implement operational improvements in
its core business. It will also bring to the Company's core business the
managerial assistance and support of CD&R. For a more detailed description of
the Strategic Restructuring Plan, see "The Strategic Restructuring Plan" in
Annex A.
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to undertake a one-for-four reverse
stock split to be effective upon completion of all other elements of the
Strategic Restructuring Plan.
In conjunction with the Strategic Restructuring Plan, the Company plans to
undertake the following transactions in addition to the 2003 Note Tender Offers
(together with the 2003 Note Tender Offers, the "Financing Transactions"):
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- NEW CREDIT FACILITY. Pursuant to a commitment letter from a group of
lenders, the Company plans to enter into a new $1.225 billion senior
credit facility (the "Credit Facility").
- SUBORDINATED DEBT OFFERING. The Company plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a private placement (the
"Subordinated Debt Offering" and, together with borrowings under the
Credit Facility, the "New Borrowings").
- 2001 NOTE OFFER. The Company is offering (the "2001 Note Offer") to
exchange its 5 1/2% Convertible Subordinated Notes due 2001 (the "2001
Notes") for Common Stock at an exchange rate of 61.843 shares per $1,000
principal amount of 2001 Notes, which effectively reduces the conversion
price from $19.00 to $16.17 per share for the period during which the 2001
Note Offer is open.
The Company intends to use the proceeds of the Equity Investment and the New
Borrowings to refinance the Company's existing credit facility, to pay the
purchase price of the Equity Self-Tender and the 2003 Note Tender Offers and to
pay fees and expenses incurred in connection with the Strategic Restructuring
Plan and the Financing Transactions. For a more detailed discussion of the
Financing Transactions, see "The Strategic Restructuring Plan--Financing
Transactions" in Annex A.
INVESTMENT CONSIDERATIONS
The Offer represents an opportunity for Holders to receive cash for their
Notes. See "Market and Trading Information--the Notes." Any Notes that remain
outstanding will be subordinated to all borrowings under the Credit Facility and
will rank equally with the Senior Subordinated Notes and any 2001 Notes that are
not exchanged in the 2001 Note Offer.
On January 24, 1998, the Company had $714.5 million of debt, $340.8 million
of which ranked senior to the Notes. If the Strategic Restructuring Plan is
completed, the Company will have significantly more debt. The pro forma
financial statements showing adjustments to reflect the Strategic Restructuring
Plan and the Financing Transactions as if they occurred on January 24, 1998 show
debt of $1,155.5 million, $755.5 million of which would rank senior to the
Notes. The amount of senior debt would be reduced by the amount of any Notes
that are not repurchased in the 2003 Note Tender Offers. See the pro forma
financial information of the Company provided in Annex A. Increased debt
presents risks to the Company. See "Description of the Notes," "Sources and
Amount of Funds," "Risk Factors--Substantial Indebtedness of the Company;
Ability to Service Debt" in Annex A and "Risk Factors--Risks Arising from
Restrictions in Agreements Relating to Indebtedness" in Annex A.
Any Notes that are not tendered will remain convertible into Common Stock.
Accordingly, Holders should also review the information about the Company in
Annex A, especially "Risk Factors."
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THE OFFER
GENERAL
Participation in the Offer is voluntary and Holders should carefully
consider whether to accept. None of the Company, the Board of Directors or the
Dealer Manager makes any recommendation to Holders as to whether to tender or
refrain from tendering in the Offer. Holders are urged to consult their
financial and tax advisors in making their decisions as to what action to take
in light of their particular circumstances.
Concurrently with this Offer, the Company is making the U.S. Offer. The
Offer and the U.S. Offer will be consummated concurrently.
PURPOSES OF THE OFFER
The primary purposes of the Offer are to (i) reduce the amount of cash the
Company otherwise would be required to pay to retire the Notes in 2003, prior to
the date of maturity of the New Borrowings, and (ii) minimize the dilutive
effect of the issuance of Common Stock upon conversion of the Notes were they
converted after completion of the Strategic Restructuring Plan. The Company
plans to retire all Notes purchased pursuant to the Offer.
TERMS OF THE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in the Offer, to purchase for cash at the Purchase Price any and all Notes
that are properly tendered (and not properly withdrawn), pursuant to the terms
and conditions set forth herein, prior to the Expiration Date. The "Purchase
Price" shall equal 94.5% of the principal amount of each Note tendered, plus
accrued and unpaid interest up to but excluding the date upon which the Company
pays for Notes accepted for tender (the "Payment Date"). The Company will accept
only tenders of Notes or a portion thereof which are in authorized denominations
(the date of such acceptance, the "Acceptance Date"). Tenders of Notes may be
withdrawn at any time prior to the Expiration Date. In the event of a
termination of the Offer, the Notes tendered pursuant to the Offer will be
returned to the tendering Holders promptly or, in the case of Notes held through
Euroclear or Cedel, the Tender Agent shall promptly request Euroclear and Cedel
to rescind the blocking of accounts with respect to Notes tendered.
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, the Company will purchase, by accepting for
payment, and will pay for, all Notes validly tendered (and not properly
withdrawn) pursuant to the Offer, on the Acceptance Date and Payment Date,
respectively, both to occur promptly after the Expiration Date. For further
details regarding timing of payment, see "--Acceptance for Payment and Payment
for Notes." The Company shall be deemed to have accepted validly tendered Notes
(or defectively tendered Notes with respect to which the Company has waived such
defect) when, as and if the Company has given oral or written notice thereof to
the Tender Agent. The Company will make payment for such Notes by depositing
immediately available funds with the Tender Agent at one of its specified
offices outside of the United States. The Tender Agent, through its specified
offices outside of the United States, will act as the agent for tendering
Holders for the purpose of receiving payment from the Company and transmitting
such payment to tendering Holders. Subject to Rule 13e-4(f)(5) under the
Exchange Act, the Company expressly reserves the right, in its sole discretion,
to delay acceptance for payment of or payment for Notes in order to comply, in
whole or in part, with any applicable law.
If less than all the principal amount of Notes held by a Holder is tendered
and accepted pursuant to the Offer, the Company shall issue, and the Trustee (as
defined below) shall authenticate and deliver, to or
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on the order of the Holder thereof, at the expense of the Company, new Notes of
authorized denominations, in a principal amount equal to the portion of the
Notes not tendered or not accepted, as the case may be, as promptly as
practicable after the Expiration Date.
A Note may be converted, pursuant to its terms, into shares of Common Stock
of the Company until, but not after, such Note is properly tendered to the
Tender Agent, unless the tender of such Note is properly withdrawn, there is a
default in payment of the Offer Consideration or the Offer is terminated without
the purchase of Notes.
The Company will pay to all Holders who tender Notes pursuant to the Offer
unpaid interest accrued on the Notes up to but excluding the Payment Date,
irrespective of the date on which such Notes are tendered. The unpaid interest
will be paid in immediately available funds on the Payment Date.
After the Expiration Date, the Company may purchase additional Notes in the
open market, in privately negotiated transactions, through subsequent tender or
exchange offers or otherwise, subject to compliance with applicable law. Any
future purchases may be on the same terms or on terms that may be more or less
favorable to Holders than the terms of the Offer. Any future purchases will
depend on various factors in existence at that time.
CONDITIONS OF THE OFFER
Notwithstanding any other provisions of the Offer, and in addition to (and
not in limitation of) the Company's rights to extend and amend the Offer at any
time in its sole discretion, the Company will not be required to accept for
payment, or, subject to any applicable rules and regulations of the Commission,
including Rule 14(e)-1(c) under the Exchange Act (relating to the Offer), to pay
for, Notes tendered pursuant to the Offer, and may delay the acceptance for
payment of, or, subject to the restrictions referred to above, the payment for,
any tendered Notes, and may terminate the Offer if (i) the Financing Condition
(as defined below) has not been satisfied, (ii) the Equity Investment Condition
(as defined below) has not been satisfied, (iii) the Distribution Condition (as
defined below) has not been satisfied or (iv) any of the General Conditions (as
defined below) have not been satisfied.
The Financing Condition will be satisfied upon the availability to the
Company on terms and conditions satisfactory to the Company in its sole
discretion of funds, from the Subordinated Debt Offering, through borrowings
under the Credit Facility, and/or from the Equity Investment, or any combination
of the foregoing, sufficient to pay both (i) the purchase price for 37,037,037
shares of Common Stock (including shares underlying options) and related costs
and expenses of the Equity Self-Tender and (ii) the Purchase Price for all of
the Notes and related costs and expenses of the 2003 Note Tender Offers. See
"The Strategic Restructuring Plan--Financing Transactions" in Annex A.
The Equity Investment Condition will be satisfied when all conditions to
closing under the Investment Agreement have been satisfied or waived other than
the conditions relating to consummation of the Distributions and to consummation
of the Equity Self-Tender. See "The Strategic Restructuring Plan-- Equity
Investment" in Annex A.
The Distribution Condition will be satisfied when all conditions to the
obligation of the Company to consummate the Distributions as provided in the
Distribution Agreement (as defined in Annex A) have been satisfied or waived
(other than the condition relating to consummation of the Equity Self-Tender),
including but not limited to, (i) the registration statements relating to the
distribution of shares in the Distributions having been declared effective by
the Commission and (ii) the Company having received an opinion of Wilmer, Cutler
& Pickering regarding the tax treatment of the Distributions. See "The Strategic
Restructuring Plan--Spin-Off Distributions" in Annex A.
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All General Conditions shall be deemed to have been satisfied for purposes
of the Offer unless any of the following conditions occur prior to the
Acceptance Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, that
challenges the making of or the consummation of the transactions
contemplated by the 2003 Note Tender Offers, the Equity Investment, the
Equity Self-Tender or the Distributions; or that has, or is reasonably
likely to have, in the sole judgment of the Company, a material adverse
effect on the business, operations, properties, condition (financial or
otherwise), assets, liabilities or prospects of the Company and its
subsidiaries taken as a whole; or
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay consummation of the 2003 Note Tender Offers, the Equity
Investment, the Equity Self-Tender or the Distributions or that has, or is
reasonably likely to have, in the sole judgment of the Company, a material
adverse effect on the business, operations, properties, condition (financial
or otherwise), assets, liabilities or prospects of the Company and its
subsidiaries taken as a whole; or
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the 2003 Note Tender Offers, the Equity Investment,
the Equity Self-Tender or the Distributions or that will, or is reasonably
likely to, materially impair the contemplated benefits to the Company of the
2003 Note Tender Offers, the Equity Investment, the Equity Self-Tender or
the Distributions, or otherwise result in the consummation of the 2003 Note
Tender Offers, the Equity Investment, the Equity Self-Tender or the
Distributions not being, or not being reasonably likely to be, in the best
interests of the Company and its subsidiaries taken as a whole; or
(iv) the Trustee under the Indenture (each as defined below) shall have
objected in any respect to, or taken any action that could, in the sole
judgment of the Company, materially adversely affect the consummation of,
the 2003 Note Tender Offers, or shall have taken any action that challenges
the validity or effectiveness of the procedures used by the Company in (a)
making the 2003 Note Tender Offers or (b) accepting, or paying for, any of
the Notes; or
(v) a tender or exchange offer for some or all of the Common Stock
(other than the Equity Self-Tender) or a proposal with respect to a merger,
consolidation or other business combination with or involving the Company or
any subsidiary shall have been proposed to be made or shall have been made
by another person; or
(vi) (1) any entity, "group" (as that term is used in Section 13(d)(3)
of the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before January
12, 1998, a Schedule 13G or Schedule 13D with respect to the Common Stock)
shall have acquired or proposed to acquire beneficial ownership of more than
5% of the outstanding shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Common Stock prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional shares of Common Stock constituting more than 2% of the
outstanding shares or shall have been granted any option or right to acquire
beneficial ownership of more than 2% of the outstanding shares (other than
the Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
reflecting an intent to acquire the Company or any of its shares of Common
Stock; or
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(vii) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the 2003 Note Tender Offers, the Equity
Investment, the Equity Self-Tender, the Distributions or the New Borrowings,
(d) a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (e) any limitation (whether or not
mandatory) by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, on (or other event that, in the
reasonable judgment of the Company, might affect) the extension of credit by
banks or other lending institutions in the United States, (f) a commencement
of a war or armed hostilities or other national or international calamity
directly or indirectly involving the United States, or (g) in the case of
any of the foregoing existing on the date hereof, a material acceleration or
worsening thereof.
The conditions to the Offer are for the sole benefit of the Company and may
be asserted by the Company in its sole discretion regardless of the
circumstances giving rise to such conditions (including any action or inaction
by the Company) or may be waived by the Company, in whole or in part, at any
time and from time to time, in its sole discretion, whether or not any other
condition of the Offer is also waived. The Company's failure at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
rights; the waiver of any such rights with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by the Company
concerning the events described in this section shall be final and binding.
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
Upon the terms of the Offer, the Company will accept for payment and thereby
purchase all Notes validly tendered and not withdrawn prior to 3:00 p.m., London
time, on Wednesday, June 3, 1998, or if extended by the Company, in its sole
discretion, the latest date and time to which extended (the "Expiration Date").
The Company expressly reserves the right to extend the Offer on a daily basis or
for such period or periods as it may determine in its sole discretion from time
to time by giving written or oral (followed by written) notice to the Tender
Agent and by making a public announcement by press release (which shall include
disclosure of the approximate principal amount of Notes deposited to date) to
the Dow Jones News Service no later than 9:00 a.m., New York City time, and an
announcement through the Deadline and Corporate Event System ("DACE") at
Euroclear and Cedel no later than 9:00 a.m., London time, the next business day
following the previously scheduled Expiration Date. During any extension of the
Offer, all Notes previously tendered and not withdrawn will remain subject to
the Offer.
The Company also expressly reserves the right, in its sole discretion,
subject to applicable law, to (i) terminate the Offer and not accept for payment
any Notes and promptly return all Notes at any time for any reason, including
(without limitation) upon failure of any of the conditions specified in
"--Conditions of the Offer," (ii) waive any condition to the Offer and accept
all Notes previously tendered pursuant to the Offer, or (iii) amend or modify
the terms of the Offer in any manner. Any amendment applicable to the Offer will
apply to all Notes tendered pursuant to the Offer.
If, prior to the Expiration Date, the Company reduces (i) the principal
amount of Notes subject to the Offer or (ii) the Purchase Price, then previously
tendered Notes may be validly withdrawn, and, if necessary, the Expiration Date
will be extended, until the expiration of ten business days after the date that
notice of either such reduction is first published, given or sent to Holders by
the Company. The minimum period during which the Offer must remain open
following a material change in the terms of the Offer or a waiver by the Company
of a material condition of the Offer will depend upon the facts and
circumstances, including the relative materiality of the change or waiver. Any
withdrawal or termination of the Offer will be followed as promptly as
practicable by public announcement by the Company thereof. In the event the
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Company withdraws or terminates the Offer, it will give immediate written notice
to the Tender Agent, and all Notes theretofore tendered pursuant to the Offer
will be returned promptly to the tendering Holders thereof. If the Company makes
a material change in the terms of the Offer, the Company will disseminate
additional Offer materials regarding the change and will extend the Offer, in
each case to the extent required by applicable law. For purposes of the Offer,
the term "business day" means any day other than a Saturday, Sunday or U.S.
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, New York City time.
ACCEPTANCE FOR PAYMENT AND PAYMENT FOR NOTES
Upon the terms and subject to the conditions of the Offer (including if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, the Company will purchase, by accepting for
payment on the Acceptance Date, and will pay for all Notes validly tendered (and
not properly withdrawn) pursuant to the Offer promptly after the Expiration Date
(the date of such payment, the "Payment Date"). The Company will accept Notes
properly tendered in the U.S. Offer concurrently with its acceptance of Notes in
the Offer. In all cases, payment by the Tender Agent to tendering Holders will
be made only after timely receipt by the Tender Agent of all documentation
described under "Procedures for Tendering Notes--Tendering Notes" and receipt by
the Tender Agent of funds from the Company.
For purposes of the Offer, the Company shall be deemed to have accepted for
payment (and thereby to have purchased) tendered Notes as, if and when the
Company gives oral or written notice to the Tender Agent of the Company's
acceptance of such Notes for payment. Subject to the terms and conditions of the
Offer, payment for Notes so accepted will be made by deposit of the Offer
Consideration in immediately available funds by the Company with the Tender
Agent, which will act as the agent for tendering Holders for the purpose of
receiving payment from the Company and transmitting such payment to tendering
Holders. Under no circumstances will interest be paid by the Company by reason
of any delay in making payment by the Tender Agent. The Company expressly
reserves the right, in its sole discretion and subject to Rule 14e-1(c) under
the Exchange Act, to delay acceptance for payment of, or payment for, Notes in
order to comply, in whole or in part, with any applicable law.
The Company will not accept Notes tendered in the Offer unless and until the
conditions specified under "--Conditions of the Offer" above have been
satisfied. The Company does not expect that a definitive agreement relating to
the Credit Facility or a definitive agreement relating to the issuance of the
Senior Subordinated Notes will occur until after the Expiration Date, and this
may delay acceptance. In addition, the Company will not pay for accepted Notes
until the closing of the Equity Investment. The closing of the Equity Investment
cannot occur until after the record date for the Distributions occurs, and the
Company does not expect the record date for the Distributions to occur until at
least two trading days after the final proration ratio in the Equity Self-Tender
is announced. The Company does not expect to be able to announce the final
proration ratio until at least three trading days after the Expiration Date of
the Equity Self-Tender (which is two days prior to the Expiration Date of the
Offer), and this determination may take longer. Accordingly, the Company expects
that payment for accepted Notes will not occur until at least the fourth trading
day following the Expiration Date. If determination of the final proration ratio
or the closing of the Equity Investment is delayed, payment for accepted Notes
will also be delayed.
If any tendered Notes are not purchased pursuant to the Offer for any
reason, such Notes not purchased will be returned, without expense, to the
tendering Holder promptly (or, in the case of Notes tendered by book-entry
transfer, such Notes will be credited to the account maintained at Euroclear or
Cedel from which such Notes were delivered) after the expiration or termination
of the Offer.
Tendering Holders will not be obligated to pay brokerage fees or commissions
or, except as set forth in the Instructions to the Letter of Transmittal,
transfer taxes on the purchase of Notes pursuant to the Offer.
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ACCOUNTING TREATMENT OF THE OFFER
Upon the acceptance of Notes tendered pursuant to the 2003 Note Tender
Offers, the Company will recognize (as to tendered Notes only) an extraordinary
gain on the early extinguishment of debt. This extraordinary gain will be
calculated as the difference between the principal amount of the Notes tendered
as recorded in the Company's accounting records (the "Book Value of the Tendered
Notes") and 94.5% of the Book Value of the Tendered Notes.
PROCEDURES FOR TENDERING NOTES
TENDERING NOTES
The tender by a Holder of Notes (and subsequent acceptance of such tender by
the Company) pursuant to one of the procedures set forth below will constitute a
binding agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
In the case of Registered Regulation S Notes, only Holders of record are
authorized to tender their Notes. The procedures by which Registered Regulation
S Notes may be tendered by beneficial owners will depend upon the manner in
which the Notes are held.
EXCEPT AS PROVIDED IN "GUARANTEED DELIVERY," UNLESS THE NOTES BEING TENDERED
ARE EITHER (1) DEPOSITED BY THE HOLDER WITH THE TENDER AGENT AT ONE OF ITS
SPECIFIED OFFICES OUTSIDE OF THE UNITED STATES PRIOR TO THE EXPIRATION DATE
(ACCOMPANIED BY A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL) OR
(2) HELD IN A EUROCLEAR OR CEDEL ACCOUNT WHICH HAS BEEN PROPERLY BLOCKED AND IN
RESPECT OF WHICH INSTRUCTIONS TO TENDER HAVE BEEN PROPERLY GIVEN PRIOR TO THE
EXPIRATION DATE, THE COMPANY MAY, AT ITS OPTION, REJECT SUCH TENDER. PAYMENT FOR
NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF TENDERED NOTES AND DELIVERY OF ALL
OTHER REQUIRED DOCUMENTS.
TENDER OF NOTES HELD IN PHYSICAL FORM. To effectively tender Notes held in
physical form pursuant to the Offer, the Notes, a properly completed Letter of
Transmittal (or a facsimile thereof) duly executed by the Holder thereof and any
other documents required by the Letter of Transmittal, must be received by the
Tender Agent at one of its specified offices outside of the United States at the
address set forth on the back cover of this Offer to Purchase on or prior to the
Expiration Date, or the tendering Holder may instead comply with the guaranteed
delivery procedure set forth below. LETTERS OF TRANSMITTAL AND NOTES SHOULD BE
SENT ONLY TO THE TENDER AGENT AT ONE OF ITS SPECIFIED OFFICES OUTSIDE OF THE
UNITED STATES AND SHOULD NOT BE SENT TO THE COMPANY, THE TENDER AGENT'S OFFICES
IN THE UNITED STATES, THE DEALER MANAGER OR THE TRUSTEE.
TENDER OF NOTES HELD THROUGH A CUSTODIAN. To effectively tender Notes that
are held through a custodian bank, depositary, broker, dealer, trust company or
other nominee, the beneficial owner thereof must instruct such Holder to tender
the Notes on the beneficial owner's behalf. A Letter of Instruction is included
with this Offer to Purchase and may be used by a beneficial owner in this
process to give such instructions. Any beneficial owner of Notes held through a
participant's account in Euroclear or Cedel must direct such participant to
tender on such beneficial owner's behalf in the manner summarized below.
TENDER OF NOTES HELD THROUGH EUROCLEAR OR CEDEL. Notes held through
Euroclear or Cedel may only be tendered through direct participants in Euroclear
and Cedel, as the case may be, named on the official securities position listing
of Euroclear or Cedel. To effectively tender Notes that are held through
Euroclear or Cedel, such Euroclear or Cedel participants should instruct
Euroclear or Cedel, as the case may be, in accordance with such clearing
system's procedures, to tender such Notes and to block its account with respect
to the Notes tendered, and Euroclear and Cedel will then send a Book-Entry
11
<PAGE>
Confirmation (as defined below) to the Tender Agent for its acceptance. No
Letters of Transmittal will be required to tender Notes electronically through
Euroclear or Cedel. A tendering Euroclear or Cedel participant may instead
comply with the guaranteed delivery procedures set forth below.
THE METHOD OF TENDER OF NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING TENDER THROUGH EUROCLEAR OR CEDEL, IS AT THE ELECTION AND
RISK OF THE PERSON TENDERING NOTES AND DELIVERING LETTERS OF TRANSMITTAL AND,
EXCEPT AS OTHERWISE PROVIDED IN THE LETTER OF TRANSMITTAL, TENDER WILL BE DEEMED
MADE ONLY WHEN THE REQUIRED DOCUMENTS ARE ACTUALLY RECEIVED BY THE TENDER AGENT
AT ONE OF ITS SPECIFIED OFFICES OUTSIDE OF THE UNITED STATES. IF DELIVERY IS BY
MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE
OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE TENDER AGENT PRIOR TO SUCH
DATE.
BOOK-ENTRY DELIVERY PROCEDURES. Any participant in Euroclear or Cedel may
make book-entry tender of the Notes by instructing Euroclear or Cedel to tender
and block the position of such Notes in accordance with the established
procedures of Euroclear or Cedel, as the case may be. Following receipt of such
instruction, Euroclear or Cedel, as the case may be, will send a Book-Entry
Confirmation to the Tender Agent. Although tender of Notes may be effected
through blocking the position of the account in which tendered Notes are held, a
Book-Entry Confirmation and any other required documents, must, in any case, be
transmitted to and received by the Tender Agent at one of the addresses set
forth on the back cover of this Offer to Purchase on or prior to the Expiration
Date, or the Holder must comply with the guaranteed delivery procedures
described below. Delivery of documents to Euroclear or Cedel does not constitute
delivery to the Tender Agent. The confirmation of a tender and account blockage
or, in the case of guaranteed delivery, receipt of a Notice of Guaranteed
Delivery at Euroclear or Cedel as described above is referred to herein as a
"Book-Entry Confirmation." Book-Entry Confirmation means a message transmitted
by Euroclear or Cedel to, and received by, a Tender Agent, which states (i) that
Euroclear or Cedel has received an express acknowledgment from the participants
in Euroclear or Cedel described in such Book-Entry Confirmation, (ii) the
aggregate principal amount of Notes which have been tendered by such
participants pursuant to the Offer, (iii) that such participants have received
this Offer to Purchase and the Letter of Transmittal and agree to be bound by
the terms of this Offer to Purchase and the Letter of Transmittal, and (iv) that
the Company may enforce such agreement against such participants.
GUARANTEED DELIVERY. If a Holder desires to tender Notes pursuant to the
Offer and time will not permit the Letter of Transmittal, certificates
representing such Notes and all other required documents to reach the Tender
Agent, or the procedures for book-entry delivery cannot be completed, on or
prior to the Expiration Date, such Notes may nevertheless be tendered, with the
effect that such tender will be deemed to have been received prior to the
Expiration Date, if all the following conditions are satisfied:
(i) the tender is made by or through a participant in Euroclear or
Cedel;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company herewith, or a
Book-Entry Confirmation with respect to guaranteed delivery, is received by
the Tender Agent prior to the Expiration Date, as provided below; and
(iii) the certificates for the tendered Notes, in proper form for
transfer (or a Book-Entry Confirmation of the tendering and blocking of such
Notes by Euroclear or Cedel as described above), together with (in the case
of notes held in physical form) a Letter of Transmittal (or facsimile
thereof) properly completed and duly executed, with any documents required
by the Letter of Transmittal, are received by the Tender Agent within three
business days after the date of the notice of the Holder's intention to
tender by guaranteed delivery in accordance with the procedures of Euroclear
or Cedel, as the case may be.
The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission, mail or, if the Notes are held through Euroclear or Cedel, via the
procedures of Euroclear or Cedel, as the case may
12
<PAGE>
be, to the Tender Agent and must include a guarantee by a participant in
Euroclear or Cedel in the form set forth in the Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, payment of the Offer
Consideration for Notes tendered and accepted for payment pursuant to the Offer
will, in all cases, be made only after timely receipt by the Tender Agent of the
tendered Notes (or a properly transmitted Book-Entry Confirmation from Euroclear
or Cedel as described above), and a Letter of Transmittal (or facsimile thereof)
with respect to Notes held in physical form, properly completed and duly
executed and any other documents required by the Letter of Transmittal.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY THE COMPANY BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON USING THE GUARANTEED DELIVERY PROCEDURES.
THE OFFER CONSIDERATION FOR NOTES PROPERLY TENDERED PURSUANT TO THE GUARANTEED
DELIVERY PROCEDURES WILL BE THE SAME AS THAT FOR NOTES DELIVERED TO THE TENDER
AGENT ON OR PRIOR TO THE EXPIRATION DATE, EVEN IF THE NOTES TO BE DELIVERED
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES ARE NOT SO DELIVERED TO THE
TENDER AGENT, AND THEREFORE PAYMENT BY THE TENDER AGENT ON ACCOUNT OF SUCH NOTES
IS NOT MADE, UNTIL AFTER THE PAYMENT DATE.
BACKUP U.S. FEDERAL INCOME TAX WITHHOLDING. For a discussion of U.S.
federal income tax considerations relating to backup withholding, see "United
States Federal Income Tax Consequences to Non-U.S. Holders--Backup Withholding
and Information Reporting."
DETERMINATION OF VALIDITY. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered Notes
pursuant to any of the procedures described above will be determined by the
Company in its sole discretion (whose determination shall be final and binding).
The Company reserves the absolute right to reject any or all tenders of any
Notes determined by it not to be in proper form. The Company also reserves the
absolute right, in its sole discretion, to waive any defect or irregularity in
any tender with respect to Notes of any particular Holder, whether or not
similar defects or irregularities are waived in the case of other Holders. The
Company's interpretation of the terms and conditions of the Offer (including the
Letter of Transmittal and the Instructions thereto) will be final and binding.
No tender of Notes will be deemed to have been validly made until all defects or
irregularities have been cured or expressly waived. None of the Company, the
Tender Agent, the Dealer Manager, the Trustee or any other person will be under
any duty to give notification of any defects or irregularities in tenders or
will incur any liability for failure to give any such notification. If the
Company waives its right to reject a defective tender of Notes, the Holder will
be entitled to the tender pursuant to the terms of the Offer.
WITHDRAWAL OF TENDERS
Tenders of Notes (or any portion of such Notes in authorized denominations)
may be withdrawn at any time on or prior to the Expiration Date and, unless
accepted by the Company, may be withdrawn at any time after 3:00 p.m., London
time, on July 1, 1998, the 40th business day after the date of this Offer to
Purchase.
For a withdrawal of a tender of Notes to be effective, a written,
telegraphic, telex or facsimile transmission notice of withdrawal (or, if Notes
are held through Euroclear or Cedel, via the procedures of Euroclear or Cedel,
as the case may be) must be received by the Tender Agent on or prior to the
Expiration Date (or such later date as may be permitted by the preceding
paragraph) at one of its addresses set forth on the back cover of this Offer to
Purchase. Any such notice of withdrawal must specify the name of the person who
tendered the Notes to be withdrawn, that such person is withdrawing his or her
election to tender such Notes, the aggregate principal amount of the Notes to be
withdrawn, and the name of the registered Holder of the Notes as set forth on
the Notes, if different from that of the person who tendered such Notes. If
Notes have been delivered or otherwise identified to the Tender Agent, then
prior to the physical release of such Notes, the tendering Holder must submit
the serial numbers shown on the particular Notes to be withdrawn. If Notes have
been tendered pursuant to the procedures for book-
13
<PAGE>
entry transfer set forth in "--Book-Entry Delivery Procedures," the notice of
withdrawal must specify the name and number of the blocked account at Euroclear
or Cedel to be released and must otherwise comply with such book-entry transfer
facility's procedures, in which case a notice of withdrawal will be effective if
delivered to the Tender Agent by written, telegraphic, telex or facsimile
transmission. Withdrawals of tenders of Notes may not be rescinded. Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Offer, but may be retendered at any subsequent time on or prior to the
Expiration Date by following the procedures described above under "Procedures
for Tendering Notes."
ALL QUESTIONS AS TO THE VALIDITY (INCLUDING TIME OF RECEIPT) OF NOTICES OF
WITHDRAWAL WILL BE DETERMINED BY THE COMPANY, IN THE COMPANY'S SOLE DISCRETION
(WHOSE DETERMINATION SHALL BE FINAL AND BINDING). NO WITHDRAWAL OF NOTES WILL BE
DEEMED TO HAVE BEEN PROPERLY MADE UNTIL ALL DEFECTS OR IRREGULARITIES HAVE BEEN
CURED OR EXPRESSLY WAIVED. NONE OF THE COMPANY, THE TENDER AGENT, THE DEALER
MANAGER, THE TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE
NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL, OR
INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
14
<PAGE>
MARKET AND TRADING INFORMATION
THE NOTES
The Notes were issued in May 1996 and there currently is a limited trading
market for the Notes. In addition, the Notes are listed on the Luxembourg Stock
Exchange, but do not trade regularly on that exchange. Quotations for securities
that are not widely traded, such as the Notes, may differ from actual trading
prices and should be viewed as approximations. Holders are urged to contact
their brokers to obtain the best available information as to current market
prices.
To the extent that Notes are tendered and accepted in the 2003 Note Tender
Offers, the trading market for Notes that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Notes. The extent of the public market and the availability of price quotations
would depend upon a number of factors, including the number of Holders of Notes
remaining at such time. An issue of securities with a smaller outstanding market
value available for trading (the "float") may command a lower price than would a
comparable issue of securities with a greater float. Therefore, the market price
for Notes that are not tendered in the 2003 Note Tender Offers may be affected
adversely to the extent that the amount of Notes purchased in the 2003 Note
Tender Offers reduces the float. The reduced float also may tend to make the
trading prices of the Notes that are not exchanged more volatile.
THE COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"OFIS." On May 1, 1998, the closing price of the Common Stock was $17 15/16 per
share. The following table sets forth, for the fiscal periods indicated, the
range of high bid and low ask prices for the Common Stock on the Nasdaq National
Market. On November 6, 1997, the Company effected a three-for-two split of the
Common Stock. The prices given below are adjusted retroactively to reflect this
stock split.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1996
First fiscal Quarter........................................................................... $ 10.58 $ 7.00
Second fiscal Quarter.......................................................................... $ 12.08 $ 9.00
Third fiscal Quarter........................................................................... $ 17.58 $ 10.83
Fourth fiscal Quarter.......................................................................... $ 26.67 $ 14.67
FISCAL YEAR ENDED APRIL 26, 1997
First fiscal Quarter........................................................................... $ 30.33 $ 16.33
Second fiscal Quarter.......................................................................... $ 25.33 $ 16.50
Third fiscal Quarter........................................................................... $ 24.83 $ 17.50
Fourth fiscal Quarter.......................................................................... $ 23.17 $ 13.33
FISCAL YEAR ENDED APRIL 25, 1998
First fiscal Quarter........................................................................... $ 20.58 $ 14.67
Second fiscal Quarter.......................................................................... $ 25.92 $ 17.21
Third fiscal Quarter........................................................................... $ 24.83 $ 14.69
Fourth fiscal Quarter.......................................................................... $ 19.81 $ 16.88
FISCAL YEAR ENDING APRIL 24, 1999
First fiscal Quarter (through May 1, 1998)..................................................... $ 18.50 $ 16.19
</TABLE>
The market price of the Common Stock will be affected by the completion of
the Strategic Restructuring Plan, including the completion of the Equity
Self-Tender and the Distributions. See "Risk Factors--Impact of the Strategic
Restructuring Plan on Trading Prices of Common Stock" in Annex A. The market
price of the Common Stock also may be affected by any failure to complete all or
any elements of the Strategic Restructuring Plan.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE NOTES PRIOR TO
MAKING ANY DECISION WITH RESPECT TO THE OFFER.
15
<PAGE>
DESCRIPTION OF THE NOTES
At May 1, 1998, there was outstanding $230.0 million aggregate principal
amount of the Notes. The terms of the Notes are governed by the Indenture, dated
as of May 22, 1996 (the "Indenture"), between the Company and The Chase
Manhattan Bank, N.A., as trustee (the "Trustee"). The Notes bear interest at a
rate of 5 1/2% per annum payable semi-annually. They are convertible into Common
Stock at any time at the option of the Holder at a rate of one share for each
$31.60 in principal amount (the "Existing Conversion Price"). The Existing
Conversion Price is subject to adjustment in the event of certain corporate
transactions, including the Equity Self-Tender and the Distributions. See
"Effect of the Strategic Restructuring Plan on the Existing Conversion Price of
the Notes." The Indenture does not contain any restrictions on the payment of
dividends, the repurchase of securities of the Company or any financial
covenants or other provisions restricting the incurrence of indebtedness. The
Notes are subordinate to senior debt, which is generally defined as secured
indebtedness of the Company. At January 24, 1998, there was $340.8 million of
senior debt outstanding; on a pro forma basis, adjusted to give effect to the
Strategic Restructuring Plan and the Financing Transactions, senior debt was
$755.5 million at such date. The amount of senior debt would be reduced by the
amount of any Notes that are not repurchased in the 2003 Note Tender Offers. See
"Risk Factors--Substantial Indebtedness of the Company; Ability to Service Debt"
in Annex A. The Company has the right to redeem the Notes beginning May 22, 1998
for a premium over face amount until May 14, 2003, and thereafter at the face
amount, in each case with accrued interest, PROVIDED, that the Notes are not
redeemable prior to May 15, 1999, unless the Common Stock has traded above 150%
of the Existing Conversion Price for a specified period. This condition has not
been satisfied to date. The Company is required to offer to repurchase the Notes
for 100% of their principal amount plus accrued interest, upon occurrence of
certain change of control events or the termination of trading of the Common
Stock. The Strategic Restructuring Plan does not constitute a change of control
event within the meaning of the Indenture. The Notes, if not previously
converted, mature on May 15, 2003.
The foregoing description of the Notes is qualified in its entirety by
reference to the terms of the Indenture.
EFFECT OF THE STRATEGIC RESTRUCTURING PLAN ON THE
EXISTING CONVERSION PRICE FOR THE NOTES
The Indenture provides for three adjustments to the Existing Conversion
Price of the Notes, as a result of the Equity Self-Tender, the Distributions and
the one-for-four reverse stock split of the Common Stock, respectively. These
adjustments will apply to any Notes that remain outstanding after completion of
the 2003 Note Tender Offers. The adjustments are summarized below. This summary
is qualified in its entirety by reference to the terms of the Indenture.
EQUITY SELF-TENDER ADJUSTMENT
Under the Indenture, the Existing Conversion Price will be adjusted to
account for the purchase by the Company of its shares in the Equity Self-Tender
by multiplying the Existing Conversion Price by a fraction (the "Equity
Self-Tender Adjustment Factor"). The numerator of the fraction will be the
number of shares of Common Stock outstanding (including any tendered shares)
upon expiration of the Equity Self-Tender (the "Expiration Time") multiplied by
the Current Market Price (as defined in the last sentence of this paragraph) of
the Common Stock after the Expiration Time. The denominator will be the sum of
(x) the fair market value of the aggregate consideration payable to stockholders
based on the acceptance (up to the maximum specified in the terms of the Equity
Self-Tender) of all shares validly tendered and not withdrawn as of the
Expiration Time (the shares so accepted, up to any such maximum, being referred
to as the "Purchased Shares") plus (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) on the Expiration Time and
the Current Market Price of the Common Stock. For purposes of the Equity
Self-Tender Adjustment Factor, the "Current Market
16
<PAGE>
Price" is the average of the daily closing prices per share of Common Stock for
three trading days following the Expiration Time. Shares underlying stock
options that are accepted in the Equity Self-Tender will be outstanding for
purposes of calculating the Equity Self-Tender Adjustment Factor.
SPIN-OFF ADJUSTMENT
Under the Indenture, the Existing Conversion Price will also be adjusted to
account for the Distributions by multiplying the Existing Conversion Price (as
adjusted by the Equity Self-Tender Adjustment Factor) by a separate fraction
(the "Spin-Off Adjustment Factor"). The numerator of the fraction will be the
Current Market Price (as defined in the next sentence) on the record date for
the Distributions less the fair market value (as determined by the Board of
Directors) on the record date of the portion of the shares of the Spin-Off
Companies so distributed applicable to one share of Common Stock and the
denominator will be the Current Market Price. For purposes of the Spin-Off
Adjustment Factor, "Current Market Price" is defined as the average of the daily
closing prices per share of Common Stock for the ten consecutive trading days
immediately prior to the record date for the Distributions, except that the
closing price for each trading day prior to or including the Expiration Time for
the Equity Self-Tender will be adjusted by multiplying it by the Equity
Self-Tender Adjustment Factor. Further, for purposes of the Spin-Off Adjustment
Factor, the Board of Directors has determined that the "fair market value" of
each Spin-Off Company will be equal to the price at which the shares of common
stock of the Spin-Off Companies are offered to the public (without reduction for
underwriting discounts or commissions) in underwritten primary offerings on or
about the record date for the Distributions.
Because the Equity Self-Tender Adjustment Factor and the Spin-Off Adjustment
Factor are calculated by reference to closing prices of the Common Stock and the
offering price of the Spin-Off Companies' stock, the actual adjustments cannot
be calculated in advance.
ADJUSTMENT FOR REVERSE STOCK SPLIT
Concurrently with the Distributions, the Company will, subject to
stockholder approval, effect a one-for-four reverse stock split. Under the
Indenture, the Existing Conversion Price (as adjusted by the Equity Self-Tender
Adjustment Factor and the Spin-Off Adjustment Factor) will be proportionately
adjusted to account for the reverse stock split.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion summarizes the material United States federal
income tax consequences resulting from payments to purchase the Notes pursuant
to the Offer. This summary is general in nature and does not address all of the
United States federal income tax consequences that may be relevant to a Holder
in light of such Holder's particular tax situation. In addition, the discussion
does not consider the effect of any foreign, state, local or other tax laws, or
any United States tax considerations (e.g. estate or gift tax) other than United
States federal income tax considerations, that may be applicable to particular
Holders.
This discussion is directed only at Holders who are "Non-U.S. Holders" and
hold Notes in bearer form and does not discuss the U.S. federal income tax
consequences to Holders that own registered Notes. Non-U.S. Holders that hold
Notes in registered form may be subject to withholding or backup withholding for
United States federal income tax and should consult their tax advisors as to the
United States federal income tax consequences of holding Notes or participating
in the Offer. As used in this summary, the term "Non-U.S. Holder" means an owner
of a Note that is not (i) for United States federal income tax purposes a
citizen or resident of the United States (including certain former citizens and
former long-term residents), (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate the income of which is subject to
United States federal income taxation regardless of its source or (iv) a trust
with respect to the administration of
17
<PAGE>
which a court within the United States is able to exercise primary supervision
and one or more United States persons have the authority to control all
substantial decisions of the trust.
This summary is based upon the United States Internal Revenue Code of 1986,
as amended (the "Code"), the Treasury regulations promulgated thereunder,
Internal Revenue Service rulings, and judicial decisions, all as in effect on
the date hereof, and all of which are subject to change or differing
interpretations, possibly with retroactive effect. No assurance can be given
that the treatment described herein of the cash payments pursuant to the Offer
will be accepted by the Internal Revenue Service, or, if challenged, by a court.
INCOME AND WITHHOLDING TAX
Under current United States federal law, a Non-U.S. Holder of a Note will
not be subject to United States federal income tax on payments to purchase the
Note pursuant to the Offer unless (i) such Non-U.S. Holder is an individual who
is present in the United States for 183 days or more in the taxable year of
disposition, and either (a) such individual has a "tax home" (as defined in Code
Section 911(d)(3)) in the United States (unless such gain is attributable to a
fixed place of business in a foreign country maintained by such individual and
has been subject to foreign tax of at least 10%) or (b) the gain is attributable
to an office or other fixed place of business maintained by such individual in
the United States or (ii) such gain is effectively connected with the conduct by
such Non-U.S. Holder of a trade or business in the United States.
In addition, no withholding of United States federal income tax will be
required on payments for Notes and accrued interest paid to Non-U.S. Holders
pursuant to the Offer provided that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of voting stock of the Company, (ii) the Non-U.S. Holder is not a controlled
foreign corporation that is related directly or constructively to the Company
through stock ownership and is not a bank receiving interest described in
section 881(c)(3)(A) of the Code, and (iii) such payments are effected outside
the United States.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States, and if interest on the Note or gain realized on its sale pursuant
to the Offer is effectively connected with the conduct of such trade or
business, the Non-U.S. Holder will generally be subject to regular United States
federal income tax on such effectively connected income on a net income basis
and will be exempt from withholding even if such Non-U.S. Holder would otherwise
be subject to withholding under the rules described in the preceding paragraph.
Such Non-U.S. Holder will be required to provide to the Company a properly
executed United States Internal Revenue Service Form 4224 or successor form in
order to claim an exemption from withholding tax. In addition, if such Non-U.S.
Holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under certain circumstances, the United States Internal Revenue Service
requires information reporting and backup withholding of United States federal
income tax at a rate of 31% with respect to payments to certain noncorporate
Non-U.S. Holders (including individuals).
The payment of accrued interest and Purchase Price pursuant to the Offer
will not be subject to information reporting and backup withholding provided the
payment is effected outside the United States and (i) the payor does not have
actual knowledge that the person receiving payment is a United States person or
(ii) if payment is received on behalf of the Holder by a foreign branch of a
United States broker or a non-United States broker with certain relationships to
United States persons, the payee is either an otherwise exempt recipient or the
branch or broker has documentary evidence in its files that the payee is a
foreign person.
18
<PAGE>
Non-U.S. Holders of Notes should consult their tax advisors regarding the
application of withholding, information reporting and backup withholding in
their particular situations, the availability of an exemption therefrom, and the
procedure for obtaining such an exemption, if available.
Backup withholding is not an additional tax. Rather, any amounts withheld
from a payment to a Non-U.S. Holder under the backup withholding rules will be
allowed as a credit against such Non-U.S. Holder's United States federal income
tax liability and may entitle such Non-U.S. Holder to a refund, provided that
the required information is furnished to the United States Internal Revenue
Service.
THE UNITED STATES FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF SELLING THEIR NOTES
PURSUANT TO THE OFFER, INCLUDING THE TAX CONSEQUENCES UNDER FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE EFFECTS OF CHANGES IN SUCH LAWS.
19
<PAGE>
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by the Company to pay the consideration
in connection with the 2003 Note Tender Offers (excluding accrued and unpaid
interest) is estimated to be approximately $217.4 million (assuming 100% of the
outstanding principal amount of each of the Notes is tendered prior to the
Expiration Date and is accepted for payment). The Company intends to obtain such
funds as shown in the table below.
Set forth below is a summary of the estimated sources and uses of funds in
connection with the Strategic Restructuring Plan and the Financing Transactions
and the application of the net proceeds therefrom as if the foregoing
transactions were completed on January 24, 1998:
<TABLE>
<CAPTION>
(IN
MILLIONS)
------------
<S> <C>
Sources of Funds:
Senior Subordinated Notes(1).................................................. $ 400.0
Revolving Credit Facility(1).................................................. --
Tranche A Term Loan Facility(1)............................................... 72.4
Tranche B Term Loan Facility(1)............................................... 675.0
Equity Investment............................................................. 270.0
Debt Repayments by Spin-Off Companies(2)...................................... 115.0
Available Cash................................................................ 22.6
------------
Total....................................................................... $ 1,555.0
Uses of Funds:
2003 Note Tender Offers(3).................................................... $ 217.4
Repayment of Existing Credit Facility......................................... 332.6
Equity Self-Tender(4)......................................................... 930.0
Estimated Fees and Expenses(5)................................................ 75.0
------------
Total....................................................................... $ 1,555.0
</TABLE>
- ------------------------
(1) For a description of the Financing Transactions, see "The Strategic
Restructuring--Financing Transactions" in Annex A.
(2) Under the Strategic Restructuring Plan, the Company is allocating $130.0
million in debt to the Spin-Off Companies, of which $115.0 million will be
repaid by the Spin-Off Companies to the Company at the date of the
Distributions.
(3) Assumes that all outstanding Notes are repurchased in the 2003 Note Tender
Offers at 94.5% of the principal amount of the Notes (excluding accrued
interest).
(4) Assumes that five million Option Shares with an average exercise price of
$14 per Share are tendered and accepted for purchase by the Company in the
Equity Self-Tender. Total consideration paid in the Equity Self-Tender will
depend on the number of Option Shares tendered and the exercise price of the
options underlying such Option Shares.
(5) Estimated fees and expenses include banking and financial advisory fees,
legal and accounting expenses, a transaction fee payable to CD&R and
Investor's legal and other expenses.
The Company will incur substantial indebtedness in connection with the
Strategic Restructuring Plan and the Financing Transactions and will thereby
become highly leveraged. At January 24, 1998, the Company had outstanding
approximately $714.5 million in indebtedness consisting of bank loans,
convertible subordinated notes and capital leases. As a result of the Strategic
Restructuring Plan and the Financing Transactions, the Company's total
indebtedness will increase by approximately $441.0 million to approximately
$1,155.5 million, assuming that all Notes are accepted for purchase in the 2003
Note Tender Offers
20
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and all 2001 Notes are exchanged for Common Stock in the 2001 Note Offer. Any
Notes and 2001 Notes that remain outstanding will increase the amount of
outstanding debt.
For a description of the risks arising from the Company's leverage after the
Strategic Restructuring Plan, see "Risk Factors--Substantial Indebtedness of the
Company; Ability to Service Debt" and "--Risks Arising from Restrictions in
Agreements Relating to Indebtedness" in Annex A.
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THE DEALER MANAGER
The Company has retained BA Robertson Stephens International Limited
("Robertson Stephens International") to act as Dealer Manager in connection with
the Offer (the "Dealer Manager"). In its capacity as Dealer Manager, Robertson
Stephens International may contact Holders regarding the Offer and may request
brokers, dealers, commercial banks, trust companies and other nominees to
forward this Offer to Purchase and related materials to beneficial owners of
Notes. An affiliate of Robertson Stephens International, BancAmerica Robertson
Stephens, has been retained as Dealer Manager in connection with the U.S. Offer.
Robertson Stephens International and BancAmerica Robertson Stephens will receive
a fee for their services as Dealer Manager in connection with the 2003 Note
Tender Offers that will depend on the percentage of the aggregate principal
amount of the Notes tendered for purchase in the 2003 Note Tender Offers.
No fee will be paid on the first 60% of the aggregate principal amount of
the Notes tendered. Thereafter, a fee will be paid for each $1,000 principal
amount of Notes tendered. The fee is based on a sliding scale, with the higher
fee only paid on the incremental Notes tendered above specified thresholds. The
fees range from $3.75 per $1,000 principal amount up to a maximum of $30 per
$1,000 principal amount if more than 95% of the aggregate principal amount of
the Notes are tendered. Based on the foregoing fee structure, if all outstanding
Notes are tendered in the 2003 Note Tender Offers, Robertson Stephens
International and BancAmerica Robertson Stephens together will receive an
aggregate fee of $991,000.
Robertson Stephens International will also be reimbursed for its reasonable
out-of-pocket expenses incurred in connection with the Offer (including the
reasonable fees and disbursements of counsel). The Company has also agreed to
indemnify Robertson Stephens International and its affiliates against certain
liabilities caused by, relating to or arising out of the Offer.
BancAmerica Robertson Stephens has also been selected by the Company to act
as Dealer Manager with respect to the 2001 Note Offer. BancAmerica Robertson
Stephens has also been selected as the managing underwriter for the public
offering of common stock of two of the Spin-Off Companies. BancAmerica Robertson
Stephens has in the past provided certain investment banking services to the
Company, for which services BancAmerica Robertson Stephens has received
customary compensation, including acting as placement agent for the Company's
private placement of the Notes and lead manager for the Company's public
offering of the 2001 Notes.
The Dealer Manager does not assume any responsibility for the accuracy or
completeness of the information concerning the Company or its affiliates
contained herein or for any failure by the Company to disclose events which may
have occurred and may affect the significance or accuracy of such information.
Unless otherwise indicated, all information contained in this Offer to Purchase
has been supplied by the Company. The Company assumes full responsibility for
the accuracy or completeness of such information.
TENDER AGENT
The Chase Manhattan Bank London Office and Chase Manhattan Bank Luxembourg
S.A. have been retained to act as the Tender Agent in connection with the Offer.
All deliveries and correspondence sent to the Tender Agent should be directed to
one of the specified offices in London or Luxembourg at the relevant address set
forth on the back cover of this Offer to Purchase. Requests for assistance or
additional copies of this Offer to Purchase and the Letter of Transmittal should
be directed to the Tender Agent at one of the addresses set forth on the back
cover of this Offer to Purchase. Holders of the Notes may also contact their
broker, dealer, commercial bank or trust company for assistance concerning the
Offer.
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FEES AND EXPENSES
In addition to the fees and expenses payable to the Dealer Manager, the
Company will pay the Tender Agent reasonable and customary fees for its services
(and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith), and will pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Offer to Purchase and related documents to the beneficial owners
of the Notes and in handling or forwarding tenders for purchase. In addition,
the Company has agreed to indemnify the Tender Agent against certain liabilities
in connection with its services, including liabilities under the federal
securities laws.
The Company will pay all transfer taxes, if any, applicable to the purchase
of Notes pursuant to the Offer. If, however, tendered Notes are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the purchase of Notes
pursuant to the Offer, then the amount of any such transfer tax (whether imposed
on the registered Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such tax or exemption therefrom
is not submitted, then the amount of such transfer tax will be deducted from the
Offer Consideration otherwise payable to such tendering Holder.
MISCELLANEOUS
In connection with the Offer, directors, officers and employees of the
Company (who will not be specifically compensated for such services) may solicit
tenders by use of the mails, personally or by telephone, telegram or facsimile
transmissions.
None of the officers, directors or affiliates of the Company hold any of the
Notes.
The Company is not aware of any jurisdiction where the making of the Offer
is not in compliance with the laws of such jurisdiction. If the Company becomes
aware of any jurisdiction where the making of an Offer would not be in
compliance with such laws, the Company will make a good faith effort to comply
with any such laws or seek to have such laws declared inapplicable to the Offer.
If, after such good faith effort, the Company cannot comply with any such
applicable laws, the Offer will not be made to (nor will tenders be accepted
from or on behalf of) the holders of the Notes residing in such jurisdictions.
23
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ANNEX A
CERTAIN INFORMATION CONCERNING
THE STRATEGIC RESTRUCTURING PLAN AND THE COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
THE STRATEGIC RESTRUCTURING PLAN........................................................................... 1
Equity Self-Tender..................................................................................... 1
Spin-Off Distributions................................................................................. 2
Equity Investment...................................................................................... 4
Reverse Stock Split.................................................................................... 6
Financing Transactions................................................................................. 6
Agreements with Jonathan Ledecky....................................................................... 7
Adjustment to Employee Stock Options................................................................... 9
Information About the Board of Directors After the Equity Investment................................... 10
U.S. Federal Income Tax Consequences of the Distributions.............................................. 14
RISK FACTORS............................................................................................... 17
THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING............................................... 25
Company Overview....................................................................................... 25
Market Overview........................................................................................ 26
Business Strategies.................................................................................... 27
North American Office Products Group................................................................... 28
Operations Outside of North America.................................................................... 31
Mail Boxes Etc. ....................................................................................... 33
Competition............................................................................................ 34
Employees.............................................................................................. 35
Properties............................................................................................. 35
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
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NOTE REGARDING DEFINED TERMS
Capitalized terms used in this Annex without definition have the meanings
given them in the accompanying materials.
As used herein, the following capitalized terms shall have the meanings
indicated:
"Equity Self-Tender" means U.S. Office Products' offer to purchase
37,037,037 shares of Common Stock at a price of $27.00 per share, pursuant to a
Schedule 13E-4 and a Schedule 14D-1 filed with the Securities and Exchange
Commission on May 4, 1998.
"2001 Notes" means U.S. Office Products' outstanding 5 1/2% Convertible
Subordinated Notes due 2001.
"2001 Note Exchange Offer" means U.S. Office Products' offer to exchange
shares of its Common Stock for 2001 Notes pursuant to the terms set forth in a
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on May 1, 1998 and the accompanying Letter of Transmittal.
"2003 Notes" means U.S. Office Products' outstanding 5 1/2% Convertible
Subordinated Notes due 2003.
"2003 Note Tender" means U.S. Office Products' offer to purchase any and all
of the 2003 Notes for a purchase price equal to 94.5% of the principal amount of
the 2003 Notes and includes the U.S. Offer and the Offer.
<PAGE>
THE STRATEGIC RESTRUCTURING PLAN
EQUITY SELF-TENDER
U.S. Office Products will offer to purchase 37,037,037 shares of Common
Stock (including shares that may be issued on exercise of vested and unvested
stock options with an exercise price of less than $27.00) at a price of $27.00
per share (or, in the case of shares underlying stock options, at $27.00 minus
the exercise price of the options). The Equity Self-Tender commenced on May 4,
1998 and will expire on June 1, 1998, unless U.S. Office Products extends the
expiration date.
The Board approved the Equity Self-Tender--and borrowing by U.S. Office
Products to finance a substantial portion of the purchase price--to give
stockholders the opportunity to receive cash for a portion of their investment
in U.S. Office Products. The Equity Self-Tender price of $27.00 per share
represents a substantial premium over the trading price of U.S. Office Products
Common Stock immediately prior to the announcement of the Strategic
Restructuring Plan. The Board, after receiving oral confirmation from Morgan
Stanley that this change would not have affected their January 12, 1998 written
opinion as to the fairness of the Strategic Restructuring Plan (as described
under "Opinion of Financial Advisor," below), decided to allow employees to
tender shares underlying options to reduce potential dilution to stockholders of
the Company and the Spin-Off Companies as well as to permit employees to
participate in the Equity Self-Tender without incurring the cost (and potential
tax liability) of exercising their options before they knew whether their
options would be accepted in the Equity Self-Tender. Because shares underlying
options can be tendered, the Company will not make any adjustment to the
exercise price or number of options that will be outstanding after the Equity
Self-Tender, to take account of the effects of the Equity Self-Tender. In
addition, based on information received from management and recommendations of
outside advisers, the Board concluded that after U.S. Office Products is
restructured, it would be able to generate adequate cash flow to service the
additional debt.
U.S. Office Products will not be required to purchase shares of Common Stock
in the Equity Self-Tender unless the following conditions, and other standard
conditions, are satisfied:
- a minimum of 37,037,037 shares of Common Stock (including shares
underlying stock options) are validly tendered and not withdrawn;
- U.S. Office Products has obtained enough financing to pay for the shares
(including shares issuable upon exercise of outstanding employee stock
options) it will purchase in the Equity Self-Tender;
- all conditions to the completion of Investor's purchase of the equity
securities have been satisfied or waived, except completion of the Equity
Self-Tender and Distributions; and
- registration statements covering the shares of the Spin-Off Companies to
be distributed to U.S. Office Products' stockholders in the Distributions
have become effective and all other conditions to the completion of the
Distributions have been satisfied except completion of the Equity
Self-Tender.
U.S. Office Products expects to pay for the shares with a combination of the
money it receives from the Equity Investment described below and money it
obtains in the Financing Transactions.
In the Equity Self-Tender, employees of U.S. Office Products may tender
shares underlying vested (but unexercised) or unvested stock options with an
exercise price of less than $27.00. U.S. Office Products will allow employees to
conditionally exercise unvested options to the extent it purchases shares
underlying such unvested options in the Equity Self-Tender, as long as the
employee tenders all of his or her vested options. In the Equity Self-Tender,
tendered options will be prorated in the same proportion as tendered shares.
Unvested options that are not accepted for purchase in the Equity Self-Tender
will remain unvested after the Equity Self-Tender. U.S. Office Products will
accept for purchase in the Equity Self-Tender shares underlying an employee's
vested options before accepting any shares underlying an employee's unvested
options. Up to approximately 22 million shares are issuable upon exercise of
outstanding options. U.S. Office Products will record a non-cash compensation
expense to reflect the difference between the tender offer price of $27.00 per
share and the exercise price for options that are purchased. The amount of the
compensation expense will depend on the number of shares underlying options that
are accepted in the Equity Self-Tender and the exercise price of the associated
options. If all outstanding shares, plus all shares
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received in exchange for 2001 Notes (and assuming all 2001 Notes are exchanged
for shares in the 2001 Note Exchange Offer) and all shares underlying all
outstanding options are tendered, the Company currently estimates that the
non-cash expense will be approximately $65.0 million.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products stockholders filed an action in the Delaware Chancery
Court. The action claims that the directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity
Self-Tender to include employee stock options. The complaint seeks injunctive
relief, damages, and attorney's fees. U.S. Office Products believes that this
lawsuit is without merit and intends to vigorously contest it.
SPIN-OFF DISTRIBUTIONS
GENERAL. After acceptance of shares of Common Stock in the Equity
Self-Tender, U.S. Office Products will distribute the common stock of the
Spin-Off Companies. These companies will hold substantially all of the
businesses and assets of, and will be responsible for substantially all of the
liabilities associated with, U.S. Office Products' technology solutions (Aztec
Technology Partners, Inc.), print management (Workflow Management, Inc.),
educational supplies (School Specialty, Inc.) and corporate travel services
(Navigant International, Inc.) businesses. Each of the Spin-Off Companies
intends to issue additional common stock in an underwritten public offering that
is expected to occur at approximately the same time as the Distributions. The
Distributions are intended to qualify for tax-free treatment under Section 355
of the Code and will not be completed unless the Company receives an opinion
from Wilmer, Cutler & Pickering that the Distributions will receive tax-free
treatment. See "--U.S. Federal Income Tax Consequences of the Distributions."
The Board determined that the separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would benefit the stockholders because it would
have advantages for the Spin-Off Companies and U.S. Office Products. The
advantages that the Board considered included the following:
- The Distributions will allow each of U.S. Office Products and the Spin-Off
Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries, geographic territories and
stages of growth.
- Each will be able to pursue an independent acquisition program that allows
for a more focused use of resources and, where stock is used as
consideration, provide stock of a public company that is in the same
industry as the businesses being acquired.
- Each can be recognized by the financial community as a distinct business
that can be evaluated more readily and compared more easily to industry
peers.
- Each can implement more focused incentive compensation packages that
respond to specific industry and market conditions and enhance employee
retention objectives.
- After the Distributions, U.S. Office Products will be focused on a more
narrow, complementary group of businesses. Each of the Spin-Off Companies
will be focused primarily on their individual businesses.
In considering the Distributions, the Board also took into account that all
U.S. Office Products' stockholders remaining after the Equity Self-Tender will
receive stock of the Spin-Off Companies. Accordingly, these stockholders will
benefit from any appreciation in value of the stocks of the Spin-Off Companies
after the Distributions. The Board also considered the diversification
opportunities the Distributions would provide stockholders. Stockholders will be
able to retain an interest in those Spin-Off Companies they want to retain and
to dispose of their interests in the others.
U.S. Office Products will distribute shares of the Spin-Off Companies to its
stockholders remaining after completion of the 2001 Note Exchange Offer and the
Equity Self-Tender. U.S. Office Products has not yet determined the number of
shares of each of the Spin-Off Companies that will be distributed for each share
of Common Stock, but U.S. Office Products will distribute all shares of the
Spin-Off Companies it holds. The number of shares of the Spin-Off Companies that
a U.S. Office Products' stockholder
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<PAGE>
receives in the Distributions will be based on the number of shares of Common
Stock that the stockholder holds after the 2001 Note Exchange Offer and the
Equity Self-Tender but prior to the one-for-four reverse stock split.
Investor will not receive shares of the Spin-Off Companies in the
Distributions. At the same time, the Investment Agreement specifies certain
terms of the Distributions, and Investor has the right to reasonably approve
certain other terms of the Distributions. Investor may require terms of the
Distributions (such as responsibility for pre-distribution liabilities) that are
less favorable to the Spin-Off Companies than would be the case if Investor also
had an interest in the Spin-Off Companies. In addition, U.S. Office Products has
agreed to indemnify Investor and its affiliates against losses resulting from
any of the Spin-Off Companies failing to satisfy their obligations to U.S.
Office Products under certain agreements related to the Distributions.
In connection with the Distributions, the Company will enter into a series
of agreements with each Spin-Off Company to provide mechanisms for an orderly
transition and to define certain relationships among the Company and the
Spin-Off Companies after the Distributions. These agreements are: a distribution
agreement (the "Distribution Agreement") among the Company and the Spin-Off
Companies; a tax allocation agreement (the "Tax Allocation Agreement") among the
Company and the Spin-Off Companies; an employee benefits agreement (the
"Employee Benefits Agreement") among the Company and the Spin-Off Companies; and
a tax indemnification agreement (the "Tax Indemnification Agreement") among the
Spin-Off Companies. Each of these agreements is in the process of being
negotiated, and is subject to Investor's reasonable approval. There can be no
assurance that the terms of these agreements will contain the terms described
below.
DISTRIBUTION AGREEMENT. The Distribution Agreement will provide for the
transfer from the Company to the Spin-Off Companies of substantially all of the
equity interests in the Company's subsidiaries that are engaged in the business
of technology solutions, print management, educational supplies and corporate
travel services businesses as well as the transfer, in certain instances, of
other assets related to these businesses. The Distribution Agreement will also
allocate and provide for the assumption of financial responsibility for certain
liabilities (other than taxes and employee benefit matters which will be
governed by separate agreements) among the Company and the Spin-Off Companies.
It is expected that each Spin-Off Company may be responsible for (i) any
liabilities arising out of or in connection with its respective businesses as
they were formerly conducted by the Company and/or its subsidiaries, (ii) its
liabilities under the Distribution Agreement, the Tax Allocation Agreement and
the Employee Benefits Agreement and related agreements, (iii) its liabilities
for its portion of an aggregate of $130.0 million of debt allocated to the
Spin-Off Companies plus expenditures by such entities for acquisitions after the
date of the Investment Agreement, (iv) certain liabilities under the securities
laws and (v) any liabilities of the Spin-Off Company or its subsidiaries. In
addition, the Distribution Agreement is expected to provide that each of the
Company and the Spin-Off Companies will bear a portion of (i) any liabilities of
the Company under the securities laws arising from events prior to the
Distributions (other than claims relating solely to a specific Spin-Off Company
or relating specifically to the continuing businesses of the Company), (ii) the
Company's general corporate liabilities (other than debt, except for that
specifically allocated to the Spin-Off Companies) incurred prior to the
Distributions (i.e., liabilities not related to the management or conduct of a
particular distributed or retained subsidiary's business) and (iii) a portion of
transaction costs (including legal, accounting, investment banking and financial
advisory) and other fees incurred by the Company in connection with the
Strategic Restructuring Plan equal to $1.0 million in the case of each Spin-Off
Company.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT. The Tax
Allocation Agreement will provide that each Spin-Off Company is responsible for
its respective share of the Company's consolidated tax liability for the years
that each such corporation was included in the Company's consolidated U.S.
federal income tax return. The Tax Allocation Agreement will also provide for
sharing, where appropriate, of state, local and foreign taxes attributable to
periods prior to the Distributions. Under the Tax Allocation Agreement, the
Spin-Off Companies will jointly and severally indemnify the Company for any
losses
3
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associated with taxes ("Distribution Taxes") assessed against the Company that
are related to the Distributions if an action or omission (an "Adverse Tax Act")
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. Further, the Spin-Off
Companies, but not the Company, will enter into the Tax Indemnification
Agreement which will require the Spin-Off Company that is responsible for the
Adverse Tax Act to indemnify the other Spin-Off Companies for any liability to
the Company under the Tax Allocation Agreement. If there is a final
determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either the Company or
any of the Spin-Off Companies, each of the Company and the Spin-Off Companies
will be liable for its pro rata portion of such Distribution Taxes based on the
value of each company's common stock after the Distributions. However, the
Company and the Spin-Off Companies have not agreed to indemnify the Company's
stockholders for any taxes resulting from the Distributions failing to qualify
for tax-free treatment.
EMPLOYEE BENEFITS AGREEMENT. In connection with the Distributions, the
Company will enter into the Employee Benefits Agreement with the Spin-Off
Companies to provide for an orderly transition of benefits coverage between the
Company and the Spin-Off Companies. Pursuant to this agreement, the respective
Spin-Off Companies will retain or assume liability for employment-related claims
and severance for persons currently or previously employed by the respective
Spin-Off Companies and their subsidiaries, while the Company and the businesses
which remain part of the Company after the Distributions will retain or assume
responsibility for their current and previous employees.
EQUITY INVESTMENT
Pursuant to the Investment Agreement, the Company will, following the Equity
Self-Tender and Distributions, issue and sell Common Stock and warrants to
purchase Common Stock to Investor for a purchase price of $270.0 million. As a
result of the Equity Investment, Investor will acquire: (a) shares of Common
Stock representing 24.9% of the outstanding shares of Common Stock after giving
effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of Common Stock equal to
24.9% (after giving effect to issuance of such additional shares upon exercise
of the Special Warrants) of the additional shares that are issuable upon
conversion of any 2001 Notes that remain outstanding after the Strategic
Restructuring Plan is completed and certain shares of Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements including the ones referred to in the next sentence; and (c) warrants
representing the right to purchase one share of Common Stock for (i) each share
of Common Stock purchased by Investor at the date of closing under the
Investment Agreement (the "Equity Investment Closing Date") and (ii) each share
of Common Stock into which the Special Warrants become exercisable. The Special
Warrants will permit Investor to buy additional shares of Common Stock to
maintain its 24.9% ownership position in the event that the Company issues
additional shares of Common Stock to a former owner of Blue Star Group Limited
("Blue Star") under the terms of the agreement by which the Company acquired
Blue Star. The former owner is entitled to receive up to 3.0 million more shares
(prior to any adjustment that may be appropriate to take account of the effect
of the Strategic Restructuring Plan) depending on a number of future events,
including the future trading price of Common Stock and the consolidated pre-tax
earnings of Blue Star and its New Zealand subsidiaries for the fiscal year
ending April 1999. In view of the uncertainty of these future events the Company
cannot reasonably estimate what portion, if any, of these additional shares may
be issued. The Special Warrants are exercisable from and after the Equity
Investment Closing Date until the twelfth anniversary thereof, subject to
certain limitations, and the warrants described in clause (c) above are
exercisable from and after the second anniversary of the Equity Investment
Closing Date until such twelfth anniversary thereof. If Investor exercises all
of the warrants described in clause (c) above, it will be required to pay the
Company an aggregate of $405.0 million. If no currently outstanding stock
options are exercised, exercise of these warrants would give Investor ownership
of approximately 39.9% of the Common Stock after implementation of the Strategic
Restructuring Plan (assuming that all of the 2001 Notes are exchanged in the
2001 Note Exchange Offer and all of the 2003 Notes are tendered and accepted for
purchase in the 2003 Note Tender).
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In accordance with the Investment Agreement, the Company's Board of
Directors will consist of nine directors, including the Chief Executive Officer
of the Company, three designees of Investor and five persons initially selected
by the Company's current Board of Directors. Investor's obligation to consummate
the Equity Investment is conditioned on two of the designees to the Company's
Board of Directors initially selected by the Company's current Board of
Directors being satisfactory to Investor. After closing, for so long as Investor
maintains certain levels of ownership of Common Stock, Investor will have the
right to nominate three members of the Company's Board of Directors and to
designate the Chairman of the Board. Certain Company Board of Directors'
decisions will be subject to super-majority voting provisions that, under
certain circumstances, may require the concurrence of at least one director
nominated by Investor. Investor will be subject to certain restrictions and
limitations with respect to transactions in Common Stock. See "--Information
About the Board of Directors After the Equity Investment."
Investor's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of the Company's representations and warranties and compliance by the
Company with its obligations under the Investment Agreement; (ii) receipt of
necessary antitrust and other regulatory clearance; (iii) absence of material
litigation; (iv) Company shareholder approval of the issuance of shares in the
Equity Investment; (v) consummation of the Distributions in accordance with the
Distribution Agreement containing certain terms specified in the Investment
Agreement and otherwise as reasonably approved by Investor; (vi) execution and
delivery of the Tax Allocation Agreement containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by Investor; (vii)
execution of documents relating to financing for the Equity Self-Tender
satisfactory in form and substance to Investor; (viii) consummation of the
Equity Self-Tender; (ix) execution of a consulting agreement with CD&R providing
for payment of an annual consulting fee of $500,000; (x) execution of a
registration rights agreement with Investor; (xi) absence of any development
since October 25, 1997 that would have a material adverse effect on the Company
(after giving effect to the Distributions); (xii) no person or group (other than
Investor) acquiring beneficial ownership of 15% or more of the Common Stock and
no person or group (other than Investor or its affiliates) having entered into
an agreement with the Company with respect to a tender or exchange offer for any
shares of Common Stock, or a merger, consolidation or other business combination
with or involving the Company; and (xiii) the Company's debt existing
immediately following completion of the transactions contemplated by the
Strategic Restructuring Plan shall not exceed $1.4 billion (assuming exchange of
all of the 2001 Notes) and the outstanding debt of the Spin-Off Companies shall
be at least $130.0 million plus expenditures by such entities for acquisitions
after the date of the Investment Agreement. If the Company does not proceed with
the Distributions, or if the Equity Investment does not occur for certain other
reasons, Investor can terminate the Investment Agreement and CD&R would receive
a termination fee of $25.0 million plus Investor's reasonable fees and expenses.
Upon completion of the Equity Investment, CD&R will receive a transaction fee of
$15.0 million and Investor will receive reimbursement for expenses it incurs in
connection with the transaction.
Investor or the Company can terminate the Investment Agreement at any time
if they both agree in writing. Either one can terminate the agreement if
Investor has not purchased the equity securities by September 30, 1998 (if such
failure to close is not the result of a breach by the party seeking
termination), if the Company's shareholders do not approve the transaction, or
if any law or order prohibits the transaction.
In addition, Investor can terminate the Investment Agreement if (i) the
Company materially breaches or makes a material misrepresentation which is not
cured within 30 days after notice from Investor; (ii) the Company's Board of
Directors withdraws, modifies, or publicly announces the intention to withdraw
or modify, its approval of the Investment Agreement or related transactions or
recommends an alternative transaction proposal; (iii) the Board of Directors
publicly announces that it has decided not to complete the Distributions; (iv)
certain conditions--including the accuracy at closing of statements made by the
Company in the Investment Agreement--become impossible to fulfill and Investor
does not waive the conditions; (v) the Company makes substantive amendments to
the agreements setting out the terms of the
5
<PAGE>
Distributions or the Equity Self-Tender; or (vi) Investor decides in its good
faith reasonable judgment not to proceed with the transaction based on its
review of the agreements relating to the Distributions or the Equity
Self-Tender.
The Company can terminate the Investment Agreement if (i) Investor
materially breaches or makes a material misrepresentation which is not cured
with 30 days after notice from the Company; (ii) certain conditions--including
the accuracy at closing of statements made by Investor in the Investment
Agreement--become impossible to fulfill and the Company does not waive the
conditions or (iii) the Company receives an unsolicited proposal for an
investment in the Company or purchase of assets of the Company that meet certain
criteria including that the proposal provides consideration that the Board of
Directors of the Company determines in good faith contains terms that are
financially superior to the Equity Investment.
The foregoing summary of the Investment Agreement does not purport to be
complete and is qualified in its entirety by reference to the Investment
Agreement, which is hereby incorporated by reference herein.
REVERSE STOCK SPLIT
In connection with the Strategic Restructuring Plan and subject to
stockholder approval, the Company plans to effect a one-for-four reverse stock
split to be effective upon completion of all other elements of the Strategic
Restructuring Plan.
FINANCING TRANSACTIONS
In connection with the Strategic Restructuring Plan, the Company expects to
refinance its existing senior bank debt and to borrow additional funds to
finance the cost of purchasing shares of Common Stock in the Equity Self-Tender,
purchasing 2003 Notes in the 2003 Note Tender, and paying fees and expenses
incurred in connection with the Strategic Restructuring Plan.
NEW CREDIT FACILITY. The Company has agreed to and accepted a commitment
letter from The Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch
Capital Corporation, as agents, and Chase Securities Inc., BT Alex. Brown
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-arrangers, for a new bank loan facility (the "Credit Facility") that will
provide for an aggregate principal amount of $1.225 billion, consisting of (i)
seven-year term loan facilities totaling $300.0 million, (ii) an eight-year term
loan in the principal amount of $675.0 million, and (iii) a revolving credit
facility in the principal amount of $250.0 million. The Company and the banks
may agree to alter the allocated principal amount of two or more of the loan
facilities before signing definitive documents depending on market conditions.
The Credit Facility will be guaranteed by the Company's material domestic
subsidiaries and secured by substantially all assets of the Company and its
material domestic subsidiaries. Each loan will bear interest, at the Company's
option, at a short-term Eurodollar rate plus a margin of 2.25% or 2.50% (in the
case of the eight-year term loan) or a floating alternate base rate plus a
margin of 1.25% or 1.50% (in the case of the eight-year term loan). The
applicable margins will be subject to agreed upon reductions in the future based
on the Company's financial performance. The Company will be required to enter
into arrangements to insure that the effective interest rate paid by the Company
on at least 50% of its outstanding bank debt and subordinated debt will not
exceed a certain rate. The loan documents likely will include financial and
other covenants. These will include, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, transfer
provisions, amendment provisions and indemnification provisions. The Credit
Facility will be subject to mandatory prepayment in a variety of circumstances,
including upon certain asset sales and financing transactions. The Commitment
will terminate unless definitive loan documents are entered into, and the
Strategic Restructuring Plan and Financing Transactions completed, by June 30,
1998. No assurance can be given that the Credit Facility will be completed as
contemplated.
6
<PAGE>
SENIOR SUBORDINATED NOTES. The Company also expects to issue Senior
Subordinated Notes in a principal amount of at least $400.0 million. These
Senior Subordinated Notes will be subordinated in right of payment to the Credit
Facility. U.S. Office Products expects to offer these in a private placement.
The Senior Subordinated Notes will not be registered under the Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements. The availability of
subordinated debt financing will depend on a number of factors, including market
conditions and interest rates.
2001 NOTES AND 2003 NOTES. In addition to the 2003 Note Tender, U.S. Office
Products will also make the 2001 Note Exchange Offer to exchange the 2001 Notes
for Common Stock at an exchange rate of 61.843 shares per $1,000 principal
amount, which effectively reduces the conversion price on the 2001 Notes from
$19.00 to $16.17 while the offer is open. Holders of the 2001 Notes who accept
the offer will also receive accrued interest through the expiration of the 2001
Note Exchange Offer. The shares of Common Stock issuable on exchange of these
notes will be eligible to be tendered in the Equity Self-Tender and receive the
Distributions. U.S. Office Products will not complete this offer if the
commitment for the Credit Facility has been terminated or if Investor is no
longer obligated to complete the Equity Investment. The 2001 Note Exchange Offer
will also be subject to other conditions.
These transactions will reduce debt that will become due before the expected
due dates for the Credit Facility and the Senior Subordinated Notes. The 2001
Note Exchange Offer and the 2003 Note Tender are also intended to reduce the
number of shares of Common Stock that might be issued after completion of the
Strategic Restructuring Plan. Each of the 2001 Notes and the 2003 Notes are
convertible into Common Stock. If these notes are purchased or exchanged before
completion of the Strategic Restructuring Plan, the number of shares of Common
Stock that might be issued after the Strategic Restructuring Plan will be less.
The indebtedness of the Company after the Strategic Restructuring Plan will
include (i) any 2001 Notes that are not exchanged for Common Stock in the 2001
Note Exchange Offer and (ii) any 2003 Notes that are not purchased in the 2003
Note Tender.
AGREEMENTS WITH JONATHAN LEDECKY
Jonathan J. Ledecky, the founder, Chairman of the Board and former Chief
Executive Officer of U.S. Office Products, will resign as Chairman of U.S.
Office Products when the Distributions are completed. The U.S. Office Products
Board and Mr. Ledecky concluded that it will be important for the Spin-Off
Companies to have greater access to Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into an agreement with Mr. Ledecky.
This agreement will go into effect only if the Distributions are completed. It
will replace Mr. Ledecky's existing employment agreement with U.S. Office
Products. As a result of this agreement, Mr. Ledecky will remain employed with
U.S. Office Products, but his role with U.S. Office Products after the
Distributions will be substantially reduced. The principal terms of this
agreement, as it is expected to be amended prior to completion of the
Distributions, are summarized below.
The new agreement with Mr. Ledecky governs his continuing obligations to
U.S. Office Products. Under that agreement, Mr. Ledecky will report to the U.S.
Office Products Board of Directors and will provide high-level acquisition
negotiation services and business strategic advice. Under the agreement, Mr.
Ledecky will receive an annual salary of $48,000 through June 30, 2001. Mr.
Ledecky will also retain his existing U.S. Office Products options; the number
of shares subject to these options, and their exercise price, will be adjusted
to take account of the Distributions. See "--Adjustment to Employee Stock
Options." As a continuing employee, Mr. Ledecky is entitled to retain his
options despite his reduction in services to U.S. Office Products. U.S. Office
Products can terminate Mr. Ledecky's employment only for "cause." Cause consists
of (i) his conviction of or guilty or nolo contendere plea to a felony, (ii) his
engaging, despite notice, in conduct demonstrably and materially injurious to
U.S. Office Products, or (iii) his violation of the noncompetition agreement as
it relates to U.S. Office Products. If Mr. Ledecky resigns or is terminated, he
will cease to vest in his U.S. Office Products options and will have 90 days to
exercise any vested options (as under his existing options).
7
<PAGE>
It is expected that each Spin-Off Company will enter into an employment
agreement with Mr. Ledecky to implement its assigned portion of the agreement.
Under each employment agreement, Mr. Ledecky will report to the respective
boards of directors and senior management of the Spin-Off Companies. Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice to each of the Spin-Off Companies. Each Spin-Off Company can require his
performance of such services, consistent with his other contractual employment
obligations to Consolidation Capital Corporation (of which Mr. Ledecky is the
founder, chairman and chief executive officer), U.S. Office Products and the
other Spin-Off Companies. As an employee, Mr. Ledecky will also be subject to
the generally applicable personnel policies of each company and will be eligible
for each Spin-Off Company's benefit plans in accordance with their terms. Each
Spin-Off Company is expected to pay Mr. Ledecky an annual salary of up to
$48,000 for up to two years. Each Spin-Off Company may terminate Mr. Ledecky's
employment with or without "cause," where cause has the same definition as in
the agreement with U.S. Office Products, as modified to refer to the Spin-Off
Company. If without cause, the termination would entitle Mr. Ledecky to a
severance payment equal to his salary for the lesser of 12 months or the
remainder of the contract.
The agreement with U.S. Office Products provides for non-competition and
non-solicitation restrictions that continue for four years after the
Distributions have been completed. These provisions generally restrict Mr.
Ledecky from, among other things, investing in or working for or on behalf of
any business that sells products or services in direct competition with U.S.
Office Products or the Spin-Off Companies, within 100 miles of any location
where U.S. Office Products or the Spin-Off Companies conduct business. (For this
purpose, "products or services" are those that U.S. Office Products offered on
January 13, 1998.) The agreement prohibits Mr. Ledecky from trying to hire away
managerial employees of U.S. Office Products or the Spin-Off Companies, or
calling upon customers of U.S. Office Products or the Spin-Off Companies to
solicit or sell products or services in direct competition with U.S. Office
Products or the Spin-Off Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation (of which Mr. Ledecky is the founder, chairman
and chief executive officer) any person then or in the preceding year employed
by U.S. Office Products or the Spin-Off Companies. U.S. Office Products is
permitted to (and will) assign to the Spin-Off Companies the ability to enforce
the non-competition provisions described above as they apply to the Spin-Off
Companies' respective businesses, which will then constitute part of his
employment agreements with the Spin-Off Companies.
Mr. Ledecky will receive options from each Spin-Off Company for each of the
Spin-Off Companies' common stock on the date of the Distributions. The options
are intended to compensate Mr. Ledecky for his services to each of the Spin-Off
Companies as an employee. The options will cover up to 7.5% of each of the
Spin-Off Companies' outstanding common stock, determined as of the date of the
Distributions without regard to any concurrent public offerings. For each
Spin-Off Company, the options will have a per-share exercise price equal to the
initial public offering price for the Spin-Off Company. The estimated value of
these options depends on the initial public offering prices of the Spin-Off
Companies and the trading volatility of the Spin-Off Companies. U.S. Office
Products cannot make a reliable estimate of the value of these options until it
obtains an estimate of the initial public offering prices for the Spin-Off
Companies. U.S. Office Products believes that the value of these options will be
substantially greater than the annual cash compensation paid to officers of the
Spin-Off Companies, but moderate in relation to the total annual expenses of the
Spin-Off Companies. An estimate of the dollar value of the options will be
included in the information statements relating to each Distribution, which U.S.
Office Products will send to stockholders before the Distributions.
It is expected that, for each Spin-Off Company, Mr. Ledecky's options will
be fully vested when granted but will not be exercisable until 12 months after
the Distributions are completed. Mr. Ledecky's options from the Spin-Off
Companies will all become exercisable immediately if he dies before the option
expires or, in the case of a particular Spin-Off Company, if that company
accelerates the exercise schedule of options for substantially all management
option holders. (In this latter case, Mr. Ledecky's option will become
exercisable on the same accelerated schedule as the other management option
holders.) All
8
<PAGE>
unexercised portions of the option will expire ten years after the date of grant
of the option or, if applicable, as of the date Mr. Ledecky violates his
non-competition agreement with a Spin-Off Company.
ADJUSTMENT TO EMPLOYEE STOCK OPTIONS
The Company has previously granted stock options to management and
employees. The Company expects that the number and exercise price of these
options will be adjusted following completion of the Strategic Restructuring
Plan to take account of the effects of the Distributions on the underlying value
of the Common Stock. Options held after the Equity Self-Tender and Distributions
by employees who remain with U.S. Office Products will remain exercisable for
shares of Common Stock. Options held after the Equity Self-Tender and
Distributions by employees who will become employees of a Spin-Off Company will
be converted into options exercisable for shares of that particular Spin-Off
Company. The adjustments will be made by a formula that takes account of the
difference between the price of the Company's Common Stock before and after the
Distributions have been completed (and, in the case of options for Spin-Off
Company shares, the price of Spin-Off Company shares in the public offerings
expected to be completed by the Spin-Off Companies (the "Spin-Off Company
Offering Price")). The formula will not affect when the options vest or when
employees can exercise the options. The respective option exercise prices will
be adjusted by this formula:
<TABLE>
<S> <C> <C>
Trading Price
Post-Distributions
Exercise Price (New) = Exercise Price Trading Price
(Old) X Pre-Distributions
</TABLE>
The respective numbers of shares subject to option will be adjusted by this
formula:
<TABLE>
<S> <C> <C>
Trading Price
Pre-Distributions
Option Shares (New) = Option Shares Trading Price
(Old) X Post-Distributions
</TABLE>
For all optionees, the "Trading Price Pre-Distributions" will be the average
closing price of the Common Stock for the lesser of the ten business days
preceding the Distributions or the business days falling between expiration of
the Equity Self-Tender and the completion of the Distributions. For continuing
employees of the Company, the "Trading Price Post-Distributions" will be the
average closing price of the Common Stock for the ten business days after and
including the date on which the Distributions are completed. For employees of a
Spin-Off Company, the "Spin-Off Company Offering Price" will be substituted for
"Trading Price Post-Distributions" in this formula. The exercise price and
number of options will not be adjusted as result of the Equity Self-Tender, but
instead are adjusted solely for the Distributiuons and the reverse stock split.
The number of shares underlying options for continuing employees of the
Company will also be adjusted to take account of the reverse stock split; that
is, the new number of shares underlying such options will be divided by four and
the exercise price will be multiplied by four. The number of shares underlying
options for employees of a Spin-Off Company will also be adjusted for the
distribution ratio applied in the Spin-Off Company Distributions; that is, the
new number of shares underlying options in the Spin-Off Company will be divided
by the distribution ratio and the exercise price will be multiplied by the
distribution ratio. The intrinsic value of the adjusted options will be no
greater than the intrinsic value of the options immediately before the
Distributions and the reverse stock split, and the ratio of exercise price to
market price will be no less than the ratio immediately before the Distributions
and the reverse stock split.
As a result of the adjustments, employee stock options will likely represent
a greater percentage interest in the Company after these transactions than they
did before. At April 20, 1998, the Company's management and employees held
options to purchase a total of approximately 22.0 million shares, of which
approximately 3.7 million were held by employees that are expected to be
employees of a Spin-Off Company. The number of options that will be outstanding
after the Strategic Restructuring Plan will depend on the number of shares
subject to options that are accepted in the Equity Self-Tender and also on the
trading prices of the Common Stock around the time of the Distributions and the
offering prices of the Spin-Off Companies' shares. As a result, the ultimate
number of such options cannot be determined at this
9
<PAGE>
time. The fair value of the options may also change as a result of these
adjustments, but the fair value as measured by standard models will depend on
the adjusted exercise price, the adjusted number of shares, and the trading
prices and volatility of the Common Stock after completion of the Strategic
Restructuring Plan. Because the adjustments are designed to compensate for the
effects of the transactions in the Strategic Restructuring Plan, U.S. Office
Products does not currently expect that the adjustments will have a significant
effect on the fair value of the options, but cannot assure stockholders that the
change will not be significant.
INFORMATION ABOUT THE BOARD OF DIRECTORS AFTER THE EQUITY INVESTMENT
Investor has the right to designate three members of the Board of Directors
of the Company who will serve from the Equity Investment Closing Date until the
next annual meeting of stockholders. In addition, the Chief Executive Officer of
the Company, Thomas Morgan, will be a director. Two of the remaining directors
at closing must be satisfactory to Investor. Investor has informed the Company
that it intends to designate Charles P. Pieper, Kevin J. Conway and Brian D.
Finn as the three directors it is entitled to designate. Investor has the right
to designate the Chairman of the Board so long as it retains a specified
percentage of shares it acquires in the Equity Investment. Mr. Pieper will serve
as Chairman of the Board after closing. In addition, Michael Dooling, Timothy J.
Flynn, Jonathan J. Ledecky, Clifton B. Phillips and John A. Quelch have advised
the Board that they intend to resign as Directors of the Company effective as of
the Equity Investment Closing Date. The Board intends to appoint Frank P. Doyle
and L. Dennis Kozlowski as two new independent directors, and Investor has
advised the Company that it approves of them. Milton H. Kuyers, Allon H.
Lefever, Edward J. Mathias and Thomas Morgan will remain as directors of the
Company after the Equity Investment Closing Date.
Set forth below is information about the directors of the Company after
consummation of the Strategic Restructuring Plan:
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Kevin J. Conway........... Director 39 Mr. Conway will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Conway has been a principal and a director of
Clayton, Dubilier & Rice since 1994 and March 1998,
respectively. Prior to joining Clayton, Dubilier & Rice in
1994, Mr. Conway worked for 10 years at Goldman, Sachs &
Co., an investment banking firm. He also serves as a
director of Riverwood Inernational Corporation and North
American Van Lines, Inc., companies in which CD&R Fund V
has an investment. Mr. Conway is a graduate of Amherst
College, Columbia University School of Business and
Columbia Law School.
Frank P. Doyle............ Director 66 Mr. Doyle will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Doyle is a private consultant who retired from
his position as Executive Vice President of General
Electric Company on January 1, 1996. As Executive Vice
President, he was one of a three member Corporate Executive
Office to which all of GE's operating businesses and staff
reported. Mr. Doyle served as Executive Vice president of
GE from 1991, and prior to that time he was Senior Vice
President at GE with responsibility for Corporate Marketing
and Advertising from 1981. Mr. Doyle is a
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
director of Digital Equipment Corporation, Paine Webber
Group, Roadway Express and Educational Testing Service.
<S> <C> <C> <C>
Brian D. Finn............. Director 37 Mr. Finn will be named a director of U.S. Office Products
effective upon completion of the Strategic Restructuring
Plan. Mr. Finn has been a principal and a director of
Clayton, Dubilier & Rice since June 1997 and March 1998,
respectively. Prior to joining Clayton, Dubilier & Rice in
1997, Mr. Finn worked for 15 years at Credit Suisse First
Boston, an investment banking firm, most recently as
co-head of the Mergers and Acquisitions division. He holds
a B.S. in Economics from the University of Pennsylvania's
Wharton School.
L. Dennis Kozlowski....... Director 51 Mr. Kozlowski is Chairman and Chief Executive Officer of
Tyco International Ltd., a multinational company involved
in manufacturing, distribution and servicing of fire
protection and security systems, disposable medical
products, flow control and electronic products worldwide.
He has served as Chief Executive Officer of Tyco since July
1, 1992 and as Chairman since January 1, 1993. Prior to
July 1992, he was President and Chief Operating Officer of
Tyco since 1989 and a director of Tyco since 1987. Mr.
Kozlowski is a direcor of RJR Nabisco, Applied Power and
Raytheon Corp.
Milton H. Kuyers.......... Director 60 Mr. Kuyers has been a director of the Company since April
1995. He is a part owner and executive officer of a number
of privately held companies including: Zero Zone, Inc., a
manufacturer of commercial refrigeration units; Desert Air
Corp., a manufacturer of commercial dehumidification
equipment; Northwest Coatings, Inc., a manufacturer of
coating products; Grayline, Inc., a manufacturer of tubing
used in the appliance and electrical industries; Digicorp
Inc., a distributor of business telephone systems and
cellular telephones; and Faustel, Inc., a manufacturer of
custom coating equipment. Prior to 1993, Mr. Kuyers served
as the President of Star Sprinkler Corp., a manufacturer of
sprinkler heads for fire protection systems. Mr. Kuyers
previously served on the board of Medical Advances, Inc., a
manufacturer of parts for medical diagnostic applications,
until its sale in March 1997. Prior to its acquisition by
the Company, Mr. Kuyers also served as a director of The
H.H. West Company, a wholly owned subsidiary of the
Company. Mr. Kuyers holds an undergraduate degree in
business administration and an M.B.A. from the University
of Michigan.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Allon H. Lefever.......... Director 50 Mr. Lefever has served as a director of the Company since
February 1995. He has been Vice President of the Affiliated
Companies for High Industries, Inc., since April 1988. From
1988 until its acquisition by the Company, Mr. Lefever
served as the Chairman of the Board and Chief Executive
Officer of The Office Works, Inc., and he currently serves
on the boards of directors of several private companies. In
addition, he is a director of Red Rose SuperNet and
Goodville Insurance Co. and serves on the Business Advisory
Board of Millersville State University. Mr. Lefever
received his undergraduate degree from Millersville State
University and a Masters in Economics from Pennsylvania
State University.
Edward J. Mathias......... Director 55 Mr. Mathias has been a director of the Company since
February 1995. Currently, Mr. Mathias is a Managing
Director of The Carlyle Group, a merchant bank based in
Washington, D.C. From 1971 through 1993, Mr. Mathias was
employed by T. Rowe Price Associates, Inc., a major
investment management organization, most recently as a
Managing Director. Mr. Mathias presently serves on the
boards of directors of Sirrom Capital Corporation,
Pathogenesis and The Fortress Group, Inc. as well as on the
boards of directors of several private companies. Mr.
Mathias holds an undergraduate degree from The University
of Pennsylvania and an M.B.A. from Harvard Business School.
Thomas Morgan............. President, Chief 44 Mr. Morgan joined the Company in February 1997 as President
Executive Officer of the Company' North American Office Products Group. He
and Director was promoted to Chief Operating Officer in June 1997 and to
Chief Executive Officer in November 1997. Before joining
the Company, he spent more than 20 years with Genuine Parts
Company where he was most recently Executive Vice President
of S.P. Richards Company.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
<S> <C> <C> <C>
Charles P. Pieper Chairman of the 51 Mr. Pieper will be named Chairman of U.S. Office Products
Board of Directors effective upon completion of the Strategic Restructuring
Plan. Mr. Pieper has been a principal and a director of
Clayton, Dubilier & Rice since March 1997 and March 1998,
respectively. Previously, Mr. Pieper was President and
Chief Executive Office of GE Lighting Europe and GE Japan,
GE Korea, GE Taiwan, GE Medical Systems Asia, Yokogawa
Medical Systems and GE Trading Co. Mr. Pieper is Chairman
of North American Van Lines, Inc., a corporation in which
CD&R Fund V has an investment, and a director of Alliant
Foodservice, Inc. and its parent CDRF Holding, Inc., a
corporation in which a Clayton Dubilier & Rice-managed
investment fund has an investment.
</TABLE>
Pursuant to the Investment Agreement, three-fourths of the directors must
approve certain transactions. These are: (i) the sale by the Company of equity
securities, other than (A) a specified amount made available under employee
benefit plans, such as option plans, or (B) a specified amount issued to acquire
companies or issued in public offerings; (ii) any merger, tender offer or sale,
lease, or disposition of all or substantially all of the Company's assets, or
other business combination involving the Company, unless the consideration for
such sale is all cash or is freely tradable common stock of a public company
with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to shareholder rights plans; (v) any
dissolution or partial liquidation of the Company; or (vi) any modification to
the Company's charter or by-laws that is inconsistent with Investor's rights
under the Investment Agreement or the other agreements described in this Annex
A. The effect of this provision is that so long as Investor can nominate three
directors, at least one of them must vote in favor of any of these actions in
order for it to be approved.
This table shows Investor's rights with respect to the nomination of
directors and how they will change if Investor disposes of equity securities.
This table also shows when the three-fourths majority requirement will apply.
SUMMARY OF CORPORATE GOVERNANCE PROVISIONS
<TABLE>
<CAPTION>
NUMBER OF
DIRECTORS INVESTOR THREE-FOURTHS
IS BOARD
PORTION OF SHARES ACQUIRED ENTITLED TO RIGHT TO APPROVAL FOR
AT CLOSING RETAINED BY NOMINATE DESIGNATE CERTAIN
INVESTOR (1) (OUT OF NINE) CHAIRMAN TRANSACTIONS
- ------------------------------------------------------------------- ------------------ --------- ------------
<S> <C> <C> <C>
66 2/3% to 100%.................................................... Three Yes Yes
33 1/3% to 66 2/3%................................................. Two Yes Yes
Less than 33 1/3% but Investor
holds at least 5% of the then-
outstanding voting stock......................................... One No No
Less than 5% of the then-
outstanding voting stock......................................... None No No
</TABLE>
- ------------------------------
(1) This includes shares Investor can acquire by exercising special warrants.
Investor can approve one additional nominee to the Board if the Chief
Executive Officer of the Company is not a member of the Board or is not a Board
nominee. The Company can increase the size of the Board of Directors to as many
as 12 persons, but the number of persons Investor can nominate will increase at
least proportionally. For example, if there are 12 members, Investor could
nominate four directors (assuming it still held all of its shares). Investor
also will be entitled to at least proportionate
13
<PAGE>
representation on all Board committees, unless it is precluded from such
membership by law or stock exchange rules.
All of Investor's corporate governance rights will expire on the earlier of
the fifth anniversary of closing or if Investor ever acquires more than 50% of
the voting power represented by the Company's then-outstanding voting
securities.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
EFFECT ON THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY. Wilmer, Cutler &
Pickering expects to deliver an opinion (the "Spin-Off Opinion") at the time of
the Distributions stating that for U.S. federal income tax purposes the
Distributions will qualify as tax-free spin-offs under Section 355 of the Code
and will not be taxable under Section 355(e) of the Code. The Company will not
complete the Distributions unless it receives the Spin-Off Opinion. The Spin-Off
Opinion will be based on the accuracy as of the time of the Distributions of
factual representations made by the Company, the Spin-Off Companies and
Investor, and certain other information, data, documentation and other materials
that Wilmer, Cutler & Pickering has deemed necessary.
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the IRS or any court. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e) no gain or loss will be recognized by
the Company or the stockholders of the Company (except with respect to cash
received in lieu of fractional shares) as a result of the Distributions.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Spin-Off Opinion is not binding on the IRS or the courts.
Stockholders should be aware that the requirements of Section 355 pertaining to
business purpose, active trade or business, and absence of a device for
distribution of earnings and profits, as well as the requirements of Section
355(e) pertaining to a plan or series of related transactions to acquire 50% or
more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Distributions. Accordingly, the IRS and/or a court could
reach a conclusion that differs from the conclusions in the Spin-Off Opinion.
BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. The Company will represent that the
Distributions were motivated, in whole or substantial part, to allow the Company
and the Spin-Off Companies to adopt strategies and pursue objectives that are
more appropriate to their respective industries and stages of growth; to allow
the Spin-Off Companies to pursue independent acquisition programs with a more
focused use of resources and, where stock is used as consideration, to allow the
Spin-Off Companies to provide stock of a public company that is in the same
industry as the business being acquired; to allow the Company and the Spin-Off
Companies to offer their respective employees more focused compensation
packages; and to make possible the Equity Investment, which the Board of
Directors of the Company concluded would contribute to the Company's
development, based on the skills and experience of CD&R. Based on these
representations and certain other information, data, documentation and other
materials, Wilmer, Cutler & Pickering expects to deliver at the time of the
Distributions an opinion that each Distribution satisfies the business purpose
requirement of Section 355. However, although similar rationales have been
accepted by the IRS in other circumstances as sufficient to meet the business
purpose requirement of Section 355, there can be no assurance that the IRS will
not assert that the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355 both the Spin-Off Company and
the Company must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the Distribution, taking
into account only businesses that
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have been acquired in transactions in which no gain or loss was recognized. In
order for the distribution of the stock of Navigant to qualify as a tax-free
spin-off under Section 355, substantially all of the assets of Navigant must
consist of the stock of Professional Travel Corporation ("Professional Travel"),
and Professional Travel and the Company must meet the requirements described in
the preceding sentence. Whether current and historical business activity
constitutes an active trade or business, and whether any gain or loss should
have been recognized in an acquisition structured and reported as a nontaxable
transaction, turn in some instances on the application of subjective legal
standards and on factual determinations, such as intentions of the parties
involved. Based on the representations of the Company and the Spin-Off
Companies, Wilmer, Cutler & Pickering expects to deliver at the time of the
Distributions an opinion that each Distribution will satisfy the active trade or
business requirement. However, because of the inherently subjective nature of
important elements of the active trade or business requirement, and because the
IRS may challenge the representations upon which Wilmer, Cutler & Pickering
relies, there can be no assurance that the IRS will not assert that the active
trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of the Company or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of the Company and the Spin-Off Companies, Wilmer, Cutler &
Pickering expects to deliver at the time of the Distributions an opinion that
none of the Distributions is a transaction used principally as a device for the
distribution of earnings and profits of either the Company or any of the
Spin-Off Companies. However, because of the inherently subjective nature of the
device test (including the subjectivity involved in assigning weight to various
factors), and because the IRS may challenge the representations upon which
Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS will
not assert that any or all of the Distributions are transactions used
principally as a device for the distribution of earnings and profits.
If a Distribution fails to qualify under Section 355 as a tax-free spin-off,
each holder of Common Stock on the record date of the Distributions will be
treated as having received a taxable corporate distribution in an amount equal
to the fair market value (on the Distribution Date) of the Spin-Off Companies'
common stock distributed to such holder of Common Stock, including fractional
shares. In addition, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company (on
the Distribution Date). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or a series of related transactions
that includes the spin-off. Stock acquired by certain related persons is
aggregated in determining whether this 50% test is met. There is a presumption
that any acquisition of 50% or more, by vote or value, of the capital stock of
the company or the subsidiary occurring two years before or after the spin-off
is pursuant to a plan that includes the spin-off. However, the presumption may
be rebutted by establishing that the spin-off and the acquisition are not part
of a plan or a series of related transactions. Based on the representations of
the Company, the Spin-Off Companies and Investor, and the assumption that no
Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of the Company or of any Spin-Off Company, Wilmer, Cutler & Pickering expects to
deliver at the time of the Distributions an opinion that the Distributions will
not be
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taxable under Section 355(e). However, there can be no assurance that the IRS
will not assert that any or all of the Distributions are taxable under Section
355(e).
If the Distributions are taxable under Section 355(e), the Company will
recognize gain equal to the difference between the fair market value of the
common stock of the Spin-Off Company and the Company's adjusted tax basis in the
common stock of the Spin-Off Company (on the Distribution Date). However, no
gain or loss will be attributable to holders of Common Stock (except with
respect to cash received in lieu of fractional shares). If the Company were to
recognize gain on one or more Distributions, such gain would likely be
substantial.
The Company, but not the holders of the Common Stock, will be indemnified by
the Spin-Off Companies if the actions or omissions of the Spin-Off Companies
materially contribute to a determination that the Company is subject to a tax
liability in connection with the Distributions. See "--Distributions-- Tax
Allocation Agreement and Tax Indemnification Agreement." However, there can be
no assurance that the Company will be successful in recovering the full amount
of such tax liability under the indemnification arrangements with the Spin-Off
Companies.
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RISK FACTORS
HOLDERS OF THE 2003 NOTES WHO ARE CONSIDERING TENDERING THEIR 2003 NOTES IN
THE 2003 NOTE TENDER SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS
WELL AS THE OTHER INFORMATION INCLUDED IN THE ACCOMPANYING DOCUMENTS OR
INCORPORATED THEREIN BY REFERENCE, IN EVALUATING WHETHER TO DO SO.
SUBSTANTIAL INDEBTEDNESS OF THE COMPANY; ABILITY TO SERVICE DEBT
The Company will incur substantial indebtedness in connection with the
Strategic Restructuring Plan and the Financing Transactions and will thereby
become highly leveraged. At January 24, 1998, the Company had outstanding
approximately $714.5 million in indebtedness consisting of bank loans,
convertible subordinated notes, and capital leases. As a result of the Strategic
Restructuring Plan and the Financing Transactions, the Company's total
indebtedness will increase by approximately $441.0 million to approximately
$1,155.5 million, assuming that all 2001 Notes are exchanged in the 2001 Note
Exchange Offer and all 2003 Notes are tendered and accepted for purchase in the
2003 Note Tender. Any 2001 Notes that remain outstanding after the 2001 Note
Exchange Offer will increase the amount of outstanding debt.
The Company's high leverage could have material consequences to the Company,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing in the future for acquisitions, working capital,
capital expenditures, and general corporate or other purposes may be impaired or
any such financing may not be available on terms favorable to the Company; (ii)
a substantial portion of the Company's cash flow will be required for debt
service and, as a result, will not be available for its operations and other
purposes; (iii) a substantial decrease in net operating cash flows or an
increase in expenses could make it difficult for the Company to meet its debt
service requirements or force it to modify its operations or sell assets; (iv)
the Company's ability to withstand competitive pressures may be limited; and (v)
the Company's level of indebtedness could make it more vulnerable to economic
downturns, and reduce its flexibility in responding to changing business and
economic conditions. In addition, the Company's borrowings under the Credit
Facility are and will continue to be at variable rates of interest, which
exposes the Company to the risk of increased interest rates. If the Company is
unable to service its indebtedness, it may be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience to date operating a business with a substantial amount
of leverage.
Historically, the Company has funded its capital requirements by debt
financings and the sale of Common Stock. Future sales of Common Stock may be
subject to limitations on the number of shares the Company can issue without
jeopardizing the tax-free treatment for the Distributions. See "--Potential
Limitations on Stock Issuances" and "--Potential Liability for Taxes Related to
the Distributions." In addition, the Credit Facility and the indenture governing
the Senior Subordinated Notes are expected to contain restrictions on the
incurrence of additional indebtedness. See "--Risks Arising from Restrictions in
Agreements Relating to Indebtedness."
The ability of the Company to meet its debt service and other obligations
(including compliance with financial covenants) will be dependent upon the
future performance of the Company and its cash flow from operations, which will
be subject to prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. These factors could
include general economic conditions, operating difficulties, increased operating
costs, product pricing pressures, potential revenue instability arising from
cost savings initiatives or other factors, labor relations, the response of
competitors or customers to the Company's business strategy or projects and
delays in implementation of the Company's business strategy.
LIMITED TRADING MARKET
The 2003 Notes were issued in May 1996, and there currently is a limited
trading market for the 2003 Notes. Quotations for securities that are not widely
traded, such as the 2003 Notes, may differ from actual
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trading prices and should be viewed as approximations. Holders are urged to
contact their brokers to obtain the best available information as to current
market prices.
To the extent that 2003 Notes are tendered and accepted for exchange in the
2003 Note Tender Offer, the trading market for 2003 Notes that remain
outstanding may be significantly more limited, which might adversely affect the
liquidity of the 2003 Notes. The extent of the public market and the
availability of price quotations would depend upon a number of factors,
including the number of holders of 2003 Notes remaining at such time. An issue
of securities with a smaller outstanding market value available for trading (the
"float") may command a lower price than would a comparable issue of securities
with a greater float. Therefore, the market price for 2003 Notes that are not
tendered for exchange in the 2003 Note Tender Offer may be affected adversely to
the extent that the amount of 2003 Notes exchanged pursuant to the 2003 Note
Tender Offer reduces the float. The reduced float also may tend to make the
trading prices of the 2003 Notes that are not exchanged more volatile.
RISKS ARISING FROM RESTRICTIONS IN AGREEMENTS RELATING TO INDEBTEDNESS
The Credit Facility and the indenture governing the Senior Subordinated
Notes are expected to impose significant operating and financial restrictions on
the Company. Such restrictions will affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness and certain types of indebtedness, create liens, engage
in transactions with stockholders and affiliates, sell assets, issue capital
stock of subsidiaries or engage in mergers or acquisitions. In addition, the
Credit Facility is expected to require that the Company maintain certain
financial ratios. These restrictions could also limit the ability of the Company
to effect future financings, make needed capital expenditures, withstand a
future downturn in the Company's business or the economy in general, or
otherwise conduct necessary corporate activities.
RISKS RELATED TO CHANGE IN STRATEGIC FOCUS AND BUSINESS AND GROWTH STRATEGIES
The Company was founded in October 1994 and conducted no operations prior to
the acquisition of its founding companies in February 1995. Since that time, the
Company has grown primarily through an aggressive acquisition strategy. The
Company is now transitioning into a new stage of development, less reliant on
acquisitions and more focused on operational efficiencies, organic growth and
improved profit margins. The Company's ability to achieve these objectives will
depend on a number of factors, including its ability to generate increased
revenues and margins in existing businesses, its ability to continue to
integrate existing operations and new acquisitions without substantial delays or
other problems, and achievement of operating improvements and cost reductions.
In particular, the Company's ability to achieve operating improvements will
depend on successful implementation of its plans to establish District
Fulfillment Centers in the United States. There can be no assurance that these
efforts to achieve operating improvements will be successful or will result in
anticipated levels of cost savings and efficiencies or growth in revenues and
margins. See "Business of U.S. Office Products After the Restructuring--Business
Strategies."
CHALLENGES OF BUSINESS INTEGRATION; RISKS RELATED TO ACQUISITIONS
Historically, the Company has grown substantially through acquisitions. The
Company's aggressive acquisition program has produced a significant increase in
revenues, employees, facilities and distribution systems. While the Company's
decentralized management strategy, together with operating efficiencies
resulting from the elimination of duplicative functions and economies of scale,
may present opportunities to reduce costs, such strategies may initially require
additional expenditures to expand operational and financial systems and
corporate management administration. Because of the various costs and possible
cost-saving 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-saving and integration strategies and to manage operations and acquisitions
profitably.
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Additionally, attempts to achieve economies of scale through cost cutting and
lay-offs of existing personnel may, at least in the short term, have an adverse
impact upon the Company. Delays in implementing planned integration and
consolidation strategies, or the failure of such strategies to achieve
anticipated cost savings, also could have a material adverse effect on the
Company's results of operations and financial condition. In addition, there can
be no assurance that the Company's management and financial controls, personnel,
computer systems and other corporate support systems will be adequate to manage
the increasing size and scope of the Company's operations and its continuing
acquisition activity.
The Company intends to pursue selected acquisition opportunities; however,
no assurance can be given that the Company will identify, finance and complete
additional suitable acquisitions on acceptable terms, or that future
acquisitions, if completed, will be successful. Moreover, the amount of capital
stock the Company can issue as consideration for future acquisitions without
jeopardizing the tax-free treatment of the Distributions will be limited in the
near-term. See "--Potential Liability for Taxes Related to the Distributions".
The Company will likely incur additional debt to finance any additional
acquisitions. In addition, acquired companies may not achieve future revenues
and profitability levels that justify the prices that the Company paid to
acquire them. Acquisitions also may involve a number of risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill.
RISKS RELATING TO INABILITY TO USE POOLING-OF-INTEREST ACCOUNTING TREATMENT FOR
FUTURE ACQUISITIONS
As a result of the Equity Self-Tender and the Distributions, the Company
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 the Company completes during this period will have to
be accounted for under the purchase method. Under the purchase method of
accounting, the Company 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.
HIGHLY COMPETITIVE MARKETS
The Company operates in a highly competitive environment. It generally
competes with a large number of smaller, independent companies, many of which
are well-established in their markets. In addition, in the United States, the
North American Office Products Group of the Company competes with five large
office products companies, each of which may have greater financial resources
than the Company. Several of the Company's large competitors operate in many of
its geographic and product markets, and other competitors may choose to enter
its geographic and product markets in the future. In addition, as a result of
this competition, the Company may lose customers or have difficulty acquiring
new customers. As a result of competitive pressures in the pricing of products,
the Company's revenues or margins may decline. The highly leveraged nature of
the Company after the Strategic Restructuring Plan and the Financing
Transactions could limit the Company's ability to continue to make necessary or
desirable investments or capital expenditures, to compete effectively and to
respond to market conditions.
The Company faces significant competition to acquire additional businesses
as the office products industry undergoes continuing consolidation. Competition
is expected to increase in the domestic and international markets that the
Company serves or is planning to enter as consolidation occurs (or accelerates)
in those markets. A number of the Company's major competitors are actively
pursuing acquisitions on a global basis.
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FOREIGN OPERATIONS; EXCHANGE RATE FLUCTUATIONS
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 the Company's domestic operations
generally may also affect the Company's foreign operations. In addition, the
Company's foreign operations are subject to a number of other risks, including
fluctuations in currency exchange rates; new and different legal and regulatory
requirements in local jurisdictions; tariffs and trade barriers; potential
difficulties in staffing and managing local operations; credit risk of local
customers and distributors; potential difficulties in protecting intellectual
property; potential imposition of restrictions on investments; potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries; and local
economic, political and social conditions, including the possibility of
hyper-inflationary conditions, in certain countries. There can be no assurance
that one or a combination of these factors will not have a material adverse
impact on the Company's ability to maintain or increase its foreign sales or on
its business, financial condition or results of operations.
Over 34% of the Company's consolidated revenues for the nine months ended
January 24, 1998 were generated from the Company's international operations and
are denominated in currencies other than United States dollars. The Company's
results of operations have been and may continue to be impacted by the exchange
rate of the international operations' currencies into United States dollars.
Devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
The Company expects that it will incur additional costs with respect to
accessing cash flows from international operations, including such items as New
Zealand and Australian withholding taxes and other taxes and foreign currency
hedging costs. In addition, the Company's results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives currently being
evaluated by the Company.
Substantially all of the Company's indebtedness is denominated in U.S.
dollars. As a result, declines relative to the U.S. dollar in the value of the
currencies in which the Company's revenues are generated may materially
adversely affect the Company's business, financial condition and results of
operations and the ability of the Company to meet its obligations under
agreements relating to its indebtedness.
RISKS RELATING TO DEPENDENCE OF MAIL BOXES ETC. ON BUSINESS OF UPS AND FRANCHISE
RELATIONSHIPS
Various factors may affect the Company's Mail Boxes Etc. ("MBE") business.
The Company estimates that a significant percentage of the gross sales of a
typical MBE retail center in the United States are attributable to services
provided by United Parcel Service ("UPS"). In addition, the Company estimates
that the vast majority of general ground shipping from MBE retail centers in the
United States is done through UPS. As such, UPS is a key vendor for MBE. If UPS
were to raise its prices to MBE or otherwise materially adversely change the
terms on which it provides shipping services for MBE Retail Centers or if UPS
cannot provide service or provides limited services as it did during a 1997
strike by UPS employees, the revenues of MBE could be materially and adversely
affected. MBE conducts its business principally through franchisees or
licensees, with the result that MBE has limited control over franchisee
operations and is subject to significant government regulation of its legal
relationships with franchisees that limits the control that MBE has over its
franchisees. MBE also faces growing competition from the United States Postal
Service as it establishes postal service centers located in shopping centers and
other locations to compete against MBE and other similar retail service centers.
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RELIANCE ON KEY PERSONNEL
The Company's operations will depend on the continued efforts of its senior
executive officers, including Thomas Morgan, President and Chief Executive
Officer, and the senior management of certain of its subsidiaries. If any of
these individuals becomes unable to continue in his or her present role, or if
the Company is unable to attract and retain other skilled employees, its
business could be adversely affected. The Company intends to obtain key person
life insurance covering Thomas Morgan, but does not intend to obtain key person
life insurance covering any other members of senior management.
INTANGIBLE ASSETS
As of January 24, 1998, approximately $917.0 million, or 45.4% of the
Company's total assets on a pro forma basis to reflect the Equity Self-Tender,
the Distributions, the Equity Investment, the Financing Transactions and
purchase acquisitions completed subsequent to January 24, 1998 as if such
transactions had occurred on January 24, 1998, represented intangible assets,
the substantial majority of which was goodwill. As a result, a substantial
portion of the value of the Company's assets may not be available to repay
creditors in the event of a bankruptcy or dissolution of the Company.
INCREASE IN OUTSTANDING SHARES AND INABILITY TO DETERMINE CONVERSION PRICE
To the extent that 2001 Notes are exchanged for Common Stock, the number of
shares of Common Stock outstanding will increase. At March 26, 1998, there were
approximately 133.2 million shares of Common Stock outstanding. If all 2001
Notes are exchanged, the total shares outstanding will increase by approximately
8.9 million to 142.1 million. If those shares are tendered in the Equity
Self-Tender, that in turn will decrease the percentage of all outstanding shares
that will be accepted in the Equity Self-Tender. The increase in number of
shares outstanding resulting from the exchange will also increase the number of
shares of each Spin-Off Company that will be issued in the Distributions, which
could result in a reduction in the trading prices of the shares of the Spin-Off
Companies as compared to the trading prices that might have been realized if no
exchanges had occurred before the Distributions. On the other hand, to the
extent 2001 Notes are not exchanged prior to the Equity Self-Tender and the
Distributions, then the number of shares into which they can be converted will
be increased as a result of the anti-dilution provisions in the Indenture. The
number of shares of Common Stock issuable upon conversion of the 2003 Notes
outstanding after the 2003 Note Tender will similarly be adjusted. Accordingly,
the number of shares represented by convertible notes after completion of the
Strategic Restructuring Plan and Financing Transactions cannot be determined at
this time and will not be determined prior to the Expiration Date of the 2003
Note Tender.
Even if the Strategic Restructuring Plan is not completed, the exchange of
2001 Notes pursuant to the 2001 Note Exchange Offer will result in a dilution of
earnings per share and a potential adverse impact on the trading price of the
Common Stock. This dilution will be greater than would otherwise result if the
2001 Notes were converted at the Existing Conversion Price for the 2001 Notes.
As a result of the Strategic Restructuring Plan, the number and exercise
price of existing stock options held by the Company's employees will be adjusted
pursuant to a formula based on the market prices of the Common Stock around the
time of the Distributions and cannot be determined at this time. Nevertheless,
the Company expects that the adjustment will increase the percentage interests
represented by such options. See "The Strategic Restructuring Plan--Adjustment
to Employee Stock Options." However, the Company's employees are eligible to
tender shares underlying options (both vested and unvested) in the Equity
Self-Tender and, to the extent shares underlying tendered options are purchased,
the percentage interest represented by options outstanding after the Strategic
Restructuring Plan will be less than it otherwise would have been.
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IMPACT OF THE STRATEGIC RESTRUCTURING PLAN ON TRADING PRICES OF COMMON STOCK
There can be no assurance as to the prices at which the Common Stock will
trade after the Strategic Restructuring Plan is completed. The plan consists of
a number of elements that involve major changes to the assets and capital
structure of the Company. Upon completion of these transactions, the trading
price of the Common Stock is likely to be substantially lower to reflect the
cash distributions that will occur in the Equity Self-Tender and the
distribution of assets in the Distributions. The actual adjustment that will be
made by the market based on its valuation of the parts of the Strategic
Restructuring Plan cannot be predicted. The Company expects that an active
market for its Common Stock will continue on the Nasdaq National Market System,
but the trading prices may be affected in the short or long run by a number of
factors in addition to those that typically affect the trading prices of stocks.
These special factors may include: reduced public float, trades by investors
seeking to change their relative ownership positions in the stock of the Company
and each Spin-Off Company, uncertainty in the marketplace about the impact of
the Strategic Restructuring Plan on the Company's future operating results,
possible trading strategies by investors seeking to arbitrage disparities in
pricing between the Common Stock and the stock of each Spin-Off Company, and
increased market volatility resulting from market uncertainty or confusion about
the transactions or their impact on the Company.
EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
shares of Common Stock. Investor will hold shares of Common Stock representing
24.9% of shares outstanding after the issuance of such shares to Investor, and
warrants to purchase an equal number of shares (plus additional shares in
certain circumstances). The Investment Agreement restricts Investor's ability to
sell these shares or warrants, but when these restrictions expire (or if they
are waived) Investor may sell these shares or warrants. Additional shares may be
issued either in connection with acquisitions by the Company or upon exercise of
outstanding options, options that may be issued in the future, and warrants. The
sale of shares upon exercise of options or by Investor, or the perception that
such sales could occur, may have an adverse effect on the trading price of the
Common Stock if a significant number of shares become available over a limited
period of time.
ABILITY OF INVESTOR TO INFLUENCE MANAGEMENT
As part of the Strategic Restructuring Plan, Investor will acquire shares of
Common Stock amounting to 24.9% of the outstanding shares of the Common Stock
after giving effect to the Equity Self-Tender and to the issuance of such
shares. Investor will also purchase various warrants that give it the right to
acquire additional shares of Common Stock in the future. Such warrants will
include warrants that will give it the right to buy one share of Common Stock of
the Company for each share purchased by Investor in the Equity Investment. If no
currently outstanding stock options are exercised, exercise of these warrants
would give Investor ownership of approximately 39.9% of the Common Stock of the
Company after implementation of the Strategic Restructuring Plan (assuming that
all of the 2001 Notes are exchanged in the 2001 Note Exchange Offer and all of
the 2003 Notes are tendered and accepted for purchase in the 2003 Note Tender).
Investor will have, among other things, the right (subject to certain
conditions) to nominate three of the nine members of the Company's Board of
Directors, including the Chairman of the Board. Investor will retain the right
to nominate three members of the Board and to designate the Chairman of the
Board until Investor's level of ownership of Common Stock declines by more than
one-third. In addition, certain Board decisions will be subject to
super-majority voting provisions that, in certain circumstances, may require the
concurrence of at least one director nominated by Investor. The super-majority
voting provisions require the affirmative vote of three-fourths of the Board for
certain decisions such as sale of certain equity securities; any merger, tender
offer involving the Company's equity securities or sale, lease or disposition of
all or substantially all of the Company's assets or other business
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combination involving the Company; any dissolution or partial liquidation of the
Company; and certain changes to the Company's charter and by-laws. These
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
In addition, Investor's significant ownership of the Common Stock may permit
Investor to influence significantly matters requiring the approval of the
Company's stockholders. See "The Strategic Restructuring Plan---Equity
Investment."
POTENTIAL LIABILITY FOR CERTAIN LIABILITIES OF THE SPIN-OFF COMPANIES
As part of the Strategic Restructuring Plan, the Spin-Off Companies are
expected to indemnify the Company for certain liabilities that the Company could
incur relating to the Distributions, the operations of the Spin-Off Companies
and other matters. There can be no assurance that the Spin-Off Companies will be
able to satisfy any such indemnities, and the Company may therefore incur such
liabilities even if they arose out of the activities of the Spin-Off Companies.
The Company could be adversely affected if in the future the Spin-Off Companies
are unable to satisfy these obligations. See "The Strategic Restructuring
Plan--Spin-Off Distributions--Distribution Agreement." In addition, the Company
has agreed to indemnify Investor and its affiliates against losses resulting
from any of the Spin-Off Companies failing to satisfy their indemnity
obligations to the Company. In addition, the Company has agreed to indemnify
Investor and its affiliates against losses resulting from any of the Spin-Off
Companies failing to satisfy their indemnity obligations, to the Company.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Spin-Off
Opinion") at the time of the Distributions stating that for U.S. federal income
tax purposes, the Distributions will qualify as tax-free spin-offs under Section
355 of the Code, and will not be taxable under Section 355(e). The Company will
not complete the Distributions unless it receives the Spin-Off Opinion. The
Spin-Off Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other information, data, documentation and
other materials that Wilmer, Cutler & Pickering has deemed necessary. See "The
Strategic Restructuring Plan--U.S. Federal Income Tax Consequences of the
Distributions."
The Spin-Off Opinion will represent Wilmer, Cutler & Pickering's best
judgment of how a court would rule. However, the Spin-Off Opinion is not binding
upon either the IRS or any court. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Distributions. Accordingly, the IRS and/or a court could reach a conclusion that
differs from the conclusions in the Spin-Off Opinion.
If a Distribution fails to qualify as a tax-free spin-off under Section 355
of the Code, the Company will recognize gain equal to the difference between the
fair market value of the Spin-Off Company's common stock on the Distribution
Date and the Company's adjusted tax basis in the Spin-Off Company's common stock
on the Distribution Date. In addition, each stockholder of the Company will be
treated as having received a taxable corporate distribution in an amount equal
to the fair market value (on the Distribution Date) of the Spin-Off Company's
common stock distributed to such stockholder. If the Company were to recognize
gain on one or more Distributions, such gain would likely be substantial.
If a Distribution is taxable under Section 355(e), but otherwise satisfies
the requirements for a tax-free spin-off, the Company will recognize gain equal
to the difference between the fair market value of the Spin-Off Company's common
stock on the Distribution Date and the Company's adjusted tax basis in the
Spin-Off Company common stock on the Distribution Date. However, no gain or loss
will be recognized by holders of Common Stock (except with respect to cash
received in lieu of fractional shares). If the Company were to recognize gain on
one or more Distributions, such gain would likely be substantial.
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POTENTIAL LIMITATIONS ON STOCK ISSUANCES
Certain limitations under Section 355 of the Code may restrict U.S. Office
Products' ability to issue capital stock after the Distributions. As described
above under "The Strategic Restructuring Plan -- U.S. Federal Income Tax
Consequences of the Distributions," these limitations will generally prevent
U.S. Office Products from issuing capital stock to the extent the issuance is
part of a plan or series of related transactions that includes one or more of
the Distributions and pursuant to which one or more persons acquire capital
stock of U.S. Office Products that represents 50% or more of the voting power or
50% or more of the value of U.S. Office Products' capital stock. These
limitations may restrict U.S. Office Products' ability to undertake transactions
involving issuances of capital stock of U.S. Office Products that management
otherwise believes would be beneficial.
YEAR 2000 COMPLIANCE
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity System, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's operating
subsidiaries are, in some cases, using billing or other software that is not
year 2000 compliant. Based upon information that the Company has collected from
its operating subsidiaries, it expects to be able to achieve year 2000
compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
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THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING
After the Distributions, U.S. Office Products will continue to conduct its
office supply, office furniture, and office coffee, beverage and vending
services businesses (which will operate as the North American Office Products
Group), its MBE business, and its New Zealand and Australia operations. U.S.
Office Products also will continue to own its 49% interest in Dudley Stationery
Limited (a U.K. contract stationer). The Spin-Off Companies will operate U.S.
Office Products' educational supplies, corporate travel services, print
management, and technology solutions businesses.
The businesses that U.S. Office Products will operate after it completes the
Strategic Restructuring Plan are described below.
COMPANY OVERVIEW
U.S. Office Products is one of the world's leading suppliers of a broad
range of office products and business services to corporate customers. Through
its North American Office Products Group ("NAOPG"), U.S. Office Products
provides office supplies, office furniture and office coffee, beverage and
vending services primarily to middle market companies (25 to 500 employees).
Based on current sales, NAOPG is one of the largest contract stationers in the
United States. Outside North America, U.S. Office Products' Blue Star Group
Limited ("Blue Star") is a leading supplier of office products and services in
New Zealand and Australia, and U.S. Office Products owns a 49% interest in
Dudley Stationery Limited ("Dudley"), the second largest contract stationer in
the United Kingdom. With its November 1997 acquisition of MBE, U.S. Office
Products has expanded into the high growth small office and home office ("SOHO")
market. MBE is the world's largest franchisor of local postal, packaging,
business and communications service centers with approximately 3,600 outlets
worldwide.
Since its founding in October 1994, U.S. Office Products has grown primarily
through an aggressive acquisition program, which has included the purchase of
more than 230 businesses in the United States and internationally. U.S. Office
Products has focused on acquiring successful, established companies with
experienced management and sales presence in specific geographic, product or
service markets. It adheres to a rigorous due diligence and financial review
process in acquiring target companies.
U.S. Office Products is now transitioning into a new stage of development,
less reliant on acquisitions and more focused on operational efficiencies,
organic growth and improved profit margins. To execute this new strategy U.S.
Office Products is implementing new product, sales and marketing programs to
leverage its extensive sales force and existing distribution channels. U.S.
Office Products continues to pursue strategic alliances with well-known
companies to enable U.S. Office Products to increase sales by offering a broader
selection of services and products, such as its arrangement to distribute
Starbucks-Registered Trademark- coffee in the North American office market. In
addition, U.S. Office Products is centralizing a number of common business
functions, such as purchasing, distribution, inventory management and
information systems. Furthermore, U.S. Office Products is systematically
consolidating the operations of businesses located within the same geographic
areas into large, centrally-located regional warehouses known as district
fulfillment centers ("DFCs"). Through DFCs, U.S. Office Products believes it can
achieve greater regional efficiencies and economies of scale in purchasing,
distribution and asset utilization. At the same time, U.S. Office Products
continues to encourage entrepreneurial innovation and management of customer
relationships at the local level. U.S. Office Products believes that its
organizational structure combines the best elements of both centralized and
decentralized management for its business.
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MARKET OVERVIEW
UNITED STATES
The office products and business services market in the United States
includes office supplies, office furniture, and office coffee, beverage and
vending services. Business customers can be generally divided into three
segments: (i) large corporate (more than 500 employees), (ii) middle market (25
to 500 employees) and (iii) SOHO (fewer than 25 employees). Set forth below is
an overview of the major business products supplied by U.S. Office Products and
the customer segments for which it competes.
OFFICE SUPPLIES. According to independent research reports, the office
supplies market in the United States generates over $60.0 billion in annual
sales. Office supplies include a broad array of products including desktop
accessories, writing instruments, paper products, computer consumables and
business machines. Historically, office supplies have been sold through three
distribution channels: (i) traditional retailers (which now include discount
superstores); (ii) mail order (or direct mail) marketers; and (iii)
direct-to-business suppliers ("contract stationers" such as U.S. Office
Products' NAOPG). Independent estimates indicate that retailers generate
approximately $30.0 billion in annual revenues, and contract stationers generate
approximately $30.0 billion in annual revenues.
In recent years, as industry participants have sought to take advantage of
economies of scale, the retail and contract stationer distribution channels have
undergone significant consolidation with several large companies emerging in
each channel. Additionally, while most office supply businesses traditionally
operated in just one of the three distribution channels, more recently U.S.
Office Products and many of its large competitors have sought to enter more than
one of these channels as a way of expanding their revenues and customer bases.
Despite recent consolidation and "cross channel" activity, the office supplies
market remains highly fragmented, with more than 4,300 independent suppliers
representing approximately 50% of the U.S. market. With pro forma revenues of
$1.1 billion in office supplies for the twelve-month period ended January 24,
1998, U.S. Office Products has approximately 3.7% of the approximately $30.0
billion U.S. contract stationer market.
OFFICE FURNITURE. The U.S. office furniture market generates approximately
$12.0 billion in annual revenues and can be divided into three segments:
catalog, middle market and contract furniture. Catalog furniture items include
such office commodities as low-priced chairs, file cabinets and computer stands.
Such furniture is sold by direct marketers, retailers and contract stationers
through catalog mailings. Middle-market furniture is of higher quality and
functionality than commodity furniture items and is available through retailers
and contract stationers. Contract furniture is high quality, includes customized
office configurations, often involves a service component and is usually
purchased on a project basis when offices are opened or remodeled. Contract
furniture is typically sold through dealers affiliated with furniture
manufacturers. U.S. Office Products believes that thousands of companies sell
office furniture to the corporate market. With pro forma revenues of
approximately $570.0 million in office furniture for the twelve month period
ended January 24, 1998, U.S. Office Products has approximately a 4.0% share of
the U.S. market.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. U.S. Office Products believes
that the office coffee services industry in the United States generates
approximately $3.0 billion in annual sales and is highly fragmented. U.S. Office
Products had pro forma revenues in this segment for the twelve-month period
ended January 24, 1998 of approximately $110.0 million (including approximately
$30.0 million in vending services revenues), giving it approximately a 3.7%
share of this market.
BUSINESS RELATED SERVICES. Superstores and a variety of specialty companies
provide business-related services such as copying, graphic arts, printing,
packaging, delivery, fax and computer services. The business services market,
targeted mainly at middle market and SOHO customers, is highly fragmented and
includes many medium- to small-sized independent outlets.
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BUSINESS CUSTOMERS. Customers for office supplies, office furniture and
office coffee can be divided into three segments: middle market corporate, large
corporate and SOHO.
The middle market corporate segment has been the primary focus of NAOPG's
sales efforts because U.S. Office Products believes that it offers greater
growth potential and higher margins than the large corporate segment. U.S.
Office Products believes that, as compared to large corporate customers, middle
market companies place a relatively higher value on the quality of service,
including order fill rates and dependable delivery.
Historically, contract stationers have been the primary providers of office
supplies to middle market customers, with mail order marketers and traditional
retail dealers playing secondary roles. Superstore chains and mail order
marketers have attempted to gain market share in this segment by providing
delivery services and allowing credit card purchases. However, U.S. Office
Products believes that superstores and mail order marketers have achieved only
limited penetration because they do not provide the level of service often
requested by customers in this segment.
Businesses in the large corporate segment often negotiate contract pricing
on many of the office products they routinely purchase, and U.S. Office Products
believes that this segment places a relatively higher value on low product
pricing. As a result, the large corporate segment tends to generate lower gross
profit margins for suppliers. The large corporate segment has historically been
served by contract stationers, and U.S. Office Products believes that this
segment is currently the primary focus of several of its largest competitors.
The SOHO segment consists of home offices, telecommuters and small
businesses. The SOHO market has grown from 25 million people in 1993 to
approximately 47 million people in 1997. According to the U.S. Bureau of Labor
Statistics, the SOHO market for office supplies and related business services is
currently a $54.0 billion market, and is expected to continue to grow. In
addition to office supplies, SOHO customers purchase a variety of business
services such as printing, packaging, fax and computer services. This market is
highly fragmented with products and services offered by superstores, mail order
marketers, medium to small independent outlets, and specialty service providers
such as copy centers and quick print centers. MBE specifically targets this high
growth customer segment.
INTERNATIONAL
U.S. Office Products has operations in New Zealand and Australia and a 49%
ownership interest in Dudley in the United Kingdom. The business products market
is more consolidated in New Zealand and Australia than in the United States.
Additionally, given the relatively small size of these economies, suppliers of
business products often offer a broader range of complementary products and
services than in the United States. Blue Star is the largest office products
supplier in New Zealand and the second largest in Australia. With pro forma
revenues of approximately $1.0 billion for the twelve-month period ended January
24, 1998, Blue Star has a significant share of the office products market in New
Zealand and Australia. In the United Kingdom, contract stationers offer a
similar product offering to that of their counterparts in the United States.
Office products superstores in the United Kingdom have a relatively smaller
share of the office products market than do office products superstores in the
United States. As a result of several recent acquisitions, Dudley currently has
annualized revenues of over $200.0 million, and U.S. Office Products believes
that Dudley is the second largest contract stationer in the United Kingdom.
BUSINESS STRATEGIES
U.S. Office Products' goal is to be the leading provider of office products
and business services in the United States and select international markets with
an emphasis on serving middle market businesses and expanding its role in
serving the high-growth SOHO market. Key elements of U.S. Office Products'
strategies in pursuit of this goal include the following:
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IMPROVE PROFIT MARGINS AND ASSET UTILIZATION. To achieve greater operating
efficiencies, profit margins and asset utilization, U.S. Office Products intends
to:
- Consolidate and eliminate redundant facilities, operating systems and
business functions by developing DFCs to service defined geographic
territories; rationalize overlapping operations; and combine general and
administrative corporate functions.
- Develop and implement strategic pricing plans and improve inventory
selection and turnover, control and distribution systems to reduce
handling, storage and overhead costs.
- Integrate operating, distribution and information systems among business
entities through continued implementation of U.S. Office Products'
proprietary Trinity 2.0 software and other information technology
improvements.
- Continue to seek additional volume discounts and rebates from third-party
vendors through increased sales.
- Dispose of or sublease surplus real estate and fixed assets.
FOCUS ON ORGANIC GROWTH. U.S. Office Products intends to pursue
aggressively the following initiatives to increase sales through organic growth:
- Expand U.S. Office Products' product lines and services in certain markets
through broadened catalog offerings and development of "greenfield"
(start-up) operations.
- Develop customized catalogs, target product offerings and expand catalog
distribution to promote overall revenue growth and the sale of higher
margin products.
- Pursue cross-selling opportunities both within and across business groups
through customer referrals and marketing programs.
- Promote wide-spread use of U.S. Office Products' trade name, both
exclusively and in conjunction with its subsidiaries' local and regional
trade names, to realize the full benefits of a national identity and
reputation.
- Pursue additional strategic alliances with third-party vendors as a way of
enhancing U.S. Office Products' product offerings and fostering additional
cross-selling opportunities.
PURSUE TARGETED ACQUISITIONS AND EXPAND MBE NETWORK. U.S. Office Products
will continue to:
- Grow NAOPG by selectively acquiring additional businesses, focusing
primarily on smaller companies that provide competitive benefits.
- Evaluate and pursue select international acquisition opportunities to
increase its international presence.
- Grant additional MBE master licenses in foreign countries and expand the
MBE network in the United States.
NORTH AMERICAN OFFICE PRODUCTS GROUP
NAOPG is a leading supplier of office supplies, office furniture, and office
coffee, beverage and vending services to corporate customers in the United
States. NAOPG's pro forma revenues for the twelve-month period ended January 24,
1998 were approximately $1.7 billion, accounting for the largest portion of U.S.
Office Products' revenues among its business groups. NAOPG has focused primarily
on middle market businesses which it believes tend to place relatively greater
value on the quality of service than large corporate businesses.
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In late 1997, NAOPG was reorganized into 29 districts divided among four
geographic regions. A district president oversees each district and reports to a
regional vice president who manages each region. NAOPG has continued to
centralize common business functions and has accelerated its efforts to
implement a hybrid organizational structure that uses centralized and
decentralized management. Management believes that this structure allows U.S.
Office Products to achieve certain economies of scale associated with a large
organization while maintaining the kind of flexible and responsive level of
service to its customers that is characteristic of a smaller organization.
Through U.S. Office Products' centralized management (located at corporate
headquarters, larger operating subsidiaries or within the DFCs), U.S. Office
Products can leverage its size and scale in the areas of purchasing, inventory
management and distribution, accounting, human resources and management
information systems. Customer-oriented functions, including sales, marketing,
customer service, credit and collections, are decentralized and managed locally.
PRODUCTS AND SERVICES
NAOPG offers the following categories of products:
OFFICE SUPPLIES. In the contract stationery market, NAOPG offers over 33,000
different items such as desktop accessories, writing instruments, paper
products, computer consumables and business machines. U.S. Office Products
believes that it offers a broader assortment of office supplies than any of its
contract stationer competitors. NAOPG also operates approximately 30 retail
outlets, primarily in Northern California under the McWhorter's name, that sell
office supplies, gifts and related products, primarily to consumers and to the
SOHO market.
U.S. Office Products generally provides next-day delivery of ordered items
and, on request, same-day delivery. This "just in time" service enables
customers to reduce overhead cost by reducing inventory and associated personnel
and space requirements. U.S. Office Products obtains office products from many
sources, including manufacturers and wholesalers, and maintains and warehouses
certain frequently ordered items.
OFFICE FURNITURE. NAOPG sells catalog, middle-market, contract and
remanufactured furniture and provides other related furniture services. Both
contract stationer businesses and specialized dealers principally serve the
office furniture market. NAOPG focuses on products and services that
traditionally have higher profit margins, such as middle-market furniture,
refurbished and remanufactured furniture, moving and storage services, furniture
installation services, furniture rentals and asset management. In 1997, NAOPG
initiated an office furniture rental program which offers customers a limited
catalog selection of lower to medium-priced furniture for rental. This program
is currently being implemented in test markets and is expected to be expanded
nationwide within approximately 12 months.
OFFICE COFFEE, BEVERAGE AND VENDING SERVICES. NAOPG provides and installs
coffee brewing equipment in a customer's office at no charge but requires
customers to purchase, on an ongoing basis, a minimum volume of coffee and
related items. NAOPG generally also offers a wide assortment of both coffee and
related products, including creamers, sugar, stirrers, teas, sodas, juices and
bottled waters, as well as snack items and all other items that are likely to be
found in an employee "breakroom" or lunch room, including plastic flatware,
napkins, paper cups, straws and similar items. NAOPG also installs, stocks and
maintains a variety of food and beverage vending machines for business
customers.
In September 1996, U.S. Office Products signed an agreement with Starbucks
to act as a major distributor of Starbucks-Registered Trademark- coffee in the
North American office coffee and beverage services market for five years subject
to, among other things, satisfaction of certain minimum purchase requirements.
U.S. Office Products has developed promotional materials (including materials
for its office products catalogs), and its employees have received training from
Starbucks in connection with this strategic alliance. U.S. Office Products
believes that this strategic alliance strengthens its position in the office
coffee and beverage services market and will enhance its ability to cross-sell
products and services to its clients.
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SALES AND MARKETING
NAOPG sells primarily through direct contact with customers through its
approximately 2,200 sales representatives. U.S. Office Products generally
establishes and maintains its relationships with customers by assigning a sales
representative to each customer. Many of U.S. Office Products' representatives
conduct targeted, business segment-specific marketing in their respective sales
areas. U.S. Office Products intends to leverage the skills and relationships of
its sales representatives by encouraging them to cross-sell multiple product
lines to customers.
U.S. Office Products' catalog is a primary marketing tool used by U.S.
Office Products' sales representatives. U.S. Office Products distributed over
1.4 million catalogs in fiscal 1997. Sales materials, including certain
catalogs, are tailored to address customer and market requirements and to take
advantage of pricing and marketing programs intended to maximize gross margins
by product type. U.S. Office Products does not conduct significant mass-market
advertising.
Customer orders are received by U.S. Office Products' sales personnel
primarily by telephone or facsimile. In addition, U.S. Office Products uses an
electronic data interchange ("EDI") system between U.S. Office Products and
certain of its customers. U.S. Office Products has recently developed OFIS NET,
which includes data order capabilities through its web site on the Internet.
Using such systems, customers are able to place orders directly into U.S. Office
Products' computer systems, manage their own inventory and generate customized
usage reports and invoices. Orders to be filled are routed electronically to
either U.S. Office Products' local warehouse or, if the ordered item is not
stocked by U.S. Office Products at its local warehouse, to a wholesaler.
OPERATING AND GROWTH STRATEGIES
NAOPG's operating and growth strategies include: (i) integrating and
consolidating business operations through establishment of DFCs; (ii) installing
operating and technology systems designed to improve its operations; (iii)
implementing cross-selling programs to leverage its 2,200 person national sales
force, (iv) continuing to pursue targeted acquisitions; and (v) developing
"greenfield" (or start-up) operations.
DFCS. DFCs are large centralized warehouses conducting operations that
service entire geographic territories previously served by multiple smaller
business operations. U.S. Office Products believes that the establishment of
DFCs will improve profit margins and asset utilization. U.S. Office Products'
first DFC, opened in Orlando, Florida in late 1997, supports ten NAOPG operating
companies. Within the next 12 months, U.S. Office Products plans to open and/or
reconfigure at least six new DFCs to support multiple operating units.
Ultimately, U.S. Office Products expects to establish approximately 24 DFCs.
DFCs will enhance U.S. Office Products' ongoing efforts to rationalize redundant
facilities and functions, thereby improving profit margins. Additionally,
through proprietary information systems which are being introduced throughout
its operations, U.S. Office Products will be able to identify high-turnover
items and optimize inventory management on a regional basis at DFCs. By using
DFCs and relying on wholesalers to stock and supply slower moving items, U.S.
Office Products believes it can continue to offer the broadest merchandise
assortment in the industry while also reducing inventories of low turnover
products and increasing profit margins on high turnover products.
TECHNOLOGY. The Systems House, Inc. subsidiary of U.S. Office Products has
developed proprietary operating and technology systems including computerized
inventory management and order processing systems, computerized quotation and
job costing systems and computerized logistics and distribution systems. U.S.
Office Products is currently installing Trinity 2.0, an operating system
developed by The Systems House, Inc., and management expects that by the end of
fiscal 1999, more than half of the 29 NAOPG districts will be connected to this
common operating system. NAOPG is also incorporating industry-standard
technology platforms, including frame relay networks, bar coding and radio
frequency technologies, at its existing and planned DFCs. Trinity 2.0 and other
technologies will allow U.S. Office Products to process orders and track
inventory and order fulfillment on a real-time basis, forecast demand
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by specific inventory item or stock keeping unit and generate customized usage
and billing reports for its customers. Management believes that implementation
of these systems throughout U.S. Office Products' operations will significantly
increase the speed and accuracy of order processing and fulfillment, thereby
improving customer satisfaction, while also increasing inventory turns.
CROSS-SELLING. U.S. Office Products expects that its "cross-selling"
program will generate internal growth by increasing sales to existing NAOPG
customers. "Cross-selling" is the practice of having different businesses sell
their products and services to each other's customers. For example, office
supply companies within NAOPG encourage their customers to buy office furniture
and office coffee, beverage, and vending services from other NAOPG companies and
vice-versa. Within NAOPG, management is implementing programs to encourage
customers to buy a full range of products and services from NAOPG companies.
NAOPG programs include customer referrals, joint marketing efforts, and other
efforts designed to demonstrate to customers the advantages of purchasing
multiple lines of products and services from NAOPG companies. At the end of
1997, U.S. Office Products introduced an expanded catalog that promotes
cross-selling and is part of an overall marketing strategy to offer customers a
broader selection of products. NAOPG's cross-selling efforts also include
providing sales representatives with training and selling tools to help them
introduce customers to the broad line of products that is available through U.S.
Office Products.
ACQUISITIONS. U.S. Office Products has historically grown through
acquisitions. Management believes that the vast majority of companies now
available to be acquired are relatively small, with annual revenues of $20.0
million or less. While U.S. Office Products intends to continue to expand NAOPG
by acquiring additional businesses, in the United States it expects to target
primarily smaller companies that are profitable and desirable because of their
geographic location, their customer base, or their management or sales
personnel. Substantially all of NAOPG's operations are in the United States with
the exception of three vending operations in Canada. Although U.S. Office
Products does not expect to acquire significant additional businesses in Canada
in the near future, it will evaluate other opportunities for expansion in other
parts of North America, such as Mexico.
GREENFIELD OPERATIONS. U.S. Office Products also expects to continue to
develop "greenfield" operations where management believes an attractive
acquisition target does not exist to enter a strategic geographic market or
where management believes it can expand sales in an existing market by adding a
new line of business (such as opening a coffee and beverage operation in a
market where U.S. Office Products already has a successful office supply
company). Management believes that this second approach is consistent with, and
will be supported by, U.S. Office Products' cross-selling efforts. U.S. Office
Products expects to continue to focus its greenfield efforts in the office
coffee and beverage operations and the new furniture rental program. As of
January 24, 1998, U.S. Office Products had opened approximately 20 office coffee
and beverage greenfield operations serving approximately 25 markets in the
United States and Canada.
OPERATIONS OUTSIDE OF NORTH AMERICA
U.S. Office Products' operations outside of North America accounted for
approximately 35% of its pro forma revenues in the 12 months ended January 24,
1998. U.S. Office Products sells office products and business services and
certain other products and services in New Zealand and Australia through Blue
Star and its subsidiaries. U.S. Office Products acquired 51% of Blue Star in
February 1996 and the remaining 49% in June 1996. Since its acquisition by U.S.
Office Products, Blue Star has completed 37 acquisitions to become the largest
office products company in New Zealand and the second largest in Australia. In
addition to Blue Star, U.S. Office Products acquired its interest in Dudley in
November 1996.
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PRODUCTS AND SERVICES--BLUE STAR
OFFICE SUPPLIES AND FURNITURE. Blue Star sells office supplies, office
furniture, stationery, packaging supplies and similar products to corporate,
commercial and SOHO customers in New Zealand and Australia. In addition to its
corporate contract stationery business, Blue Star operates more than 250 retail
book and stationery stores throughout New Zealand and Australia (approximately
90 of which are franchises). These stores operate primarily under the Whitcoulls
and Angus & Robertson brand names.
BUSINESS MACHINES AND PERSONAL COMPUTERS. Blue Star's Business Solutions
Group offers a range of office automation products, such as personal computers
and servers, telephone systems, fax machines and photocopiers, as well as
office-related services such as systems integration, project management and
consulting. U.S. Office Products believes that Blue Star is one of New Zealand's
leading direct sellers of personal computers, with Blue Star's consumer market
accounting for the largest portion of sales. Blue Star expects to rationalize
its product offerings in this part of its business and to focus on services and
solutions-based products that respond to customers' particular needs.
COMMERCIAL PRINTING. Blue Star's Print Group has a large commercial print
company in New Zealand. It offers a range of printed products and related
services, including commercial sheet-fed and offset printing, label
manufacturing, and digital and reprographic printing. The group also provides
specialized products and services for certain large customers, such as printing
all of New Zealand's telephone directories and handling the pre-press printing
and distribution of bills, acts and other legislative materials for the New
Zealand Parliament.
PRODUCTS AND SERVICES--DUDLEY
OFFICE SUPPLIES. Dudley sells office products and related business services
throughout the United Kingdom. With annualized revenues of over $200.0 million,
Dudley is the second largest contract stationer in the United Kingdom. Dudley
serves as stationer to Her Majesty the Queen and the Prince of Wales.
SALES AND MARKETING
Blue Star currently employs approximately 2,100 sales representatives in New
Zealand and Australia. Blue Star promotes sales primarily through direct
marketing by its sales representatives. Blue Star is actively pursuing
cross-selling initiatives to increase product sales across business groups.
OPERATING AND GROWTH STRATEGIES
Blue Star intends to leverage its sales force to cross-sell products to its
corporate and consumer customer base. To service its large corporate customers,
Blue Star is establishing a unit to fulfill the single-point procurement
requirements of such customers. Blue Star also will evaluate business
opportunities with governments and additional large corporate accounts. Blue
Star also expects to expand its retail store business through a variety of
strategies, including opening new stores in selected locations, re-branding
certain businesses, refurbishing certain outlets, expanding product offerings,
and introducing coffee shops in selected store locations. Blue Star management
expects that in the near term it will focus primarily on integrating the
operations of several recent acquisitions, expanding product offerings, and
developing joint marketing plans across business units.
U.S. Office Products expects to continue to make strategic acquisitions in
New Zealand and Australia and to evaluate opportunities to enter other foreign
markets. Dudley is continuing to expand through acquisitions in the United
Kingdom, using the funds invested by U.S. Office Products.
32
<PAGE>
MAIL BOXES ETC.
MBE is the world's largest franchisor of local postal, packaging, business
and communication retail service centers ("MBE Centers"). With approximately
3,600 MBE Centers in 55 countries, MBE's network is approximately ten times
larger than the network of its next largest competitor. MBE's primary sources of
revenues are (i) royalty and marketing fees paid by existing franchisees, (ii)
fees paid by buyers of new franchises, and (iii) sales of supplies and equipment
to MBE Centers.
There are approximately 3,000 MBE Centers operating throughout the United
States and approximately 600 MBE Centers serving customers outside the United
States. MBE has granted master licenses in more than 55 countries abroad which
allow the licensee to control the development of MBE franchises in designated
territories in those countries. MBE's global network of MBE Centers sold a total
of approximately $1.3 billion of products and services during fiscal 1997, a
substantial amount of which was generated by SOHO customers. While MBE's
revenues include only a small percentage of this amount (in the form of royalty
and marketing fees paid to MBE on the sale of products and services), U.S.
Office Products believes that the volume of business which MBE transacts and its
extensive distribution network make it a an important supplier to the SOHO
market.
FRANCHISE ARRANGEMENTS
MBE offers both individual franchises and area franchises in the United
States and master licenses in foreign countries. U.S. area franchisees are
granted the exclusive right to sell individual MBE franchises in their
respective areas and also provide start-up assistance and continuing support for
such individual franchisees. Master licenses in foreign countries provide the
licensee with the exclusive right to develop and operate MBE Centers in
designated territories in those countries and the right to sell individual MBE
franchises to others. MBE provides its franchisees and licensees valuable
services including, among other things, instruction at MBE University,
operational guidance, assistance in site selection, marketing, and advertising
programs.
PRODUCTS AND SERVICES
A typical MBE Center offers mail and parcel receiving, packaging, and
shipping services through a number of carriers and provides small businesses
with a wide range of products and services. These products and services
generally include telephone message service, word processing, copying and
printing, office supplies and communication services. Communications services
typically include fax, voice mail, pagers, and wire transfers of funds. In
addition, MBE Centers usually offer convenience items such as stamps, packaging
supplies, stationery supplies, notary, passport photos, and money orders. Large
corporations that need a national distribution system use MBE as communication
centers for their field-based employees.
SALES AND MARKETING
MBE conducts national advertising campaigns that are designed to market the
MBE brand, including televised ad campaigns during three consecutive Super Bowls
(1996-1998). MBE's marketing strategies are based upon extensive market research
and include campaigns directed at both the consumer and business-to-business
markets. MBE is also developing programs to encourage existing MBE franchisees
to acquire additional MBE franchises. U.S. Office Products is also developing a
program to offer MBE Center customers the convenience of on-site ordering of
office supplies from NAOPG catalogs.
OPERATING AND GROWTH STRATEGIES
MBE's operating and growth strategies include: (i) broadening its product
and services offerings; (ii) growing organically through additional
strategically-located express service centers and improved
33
<PAGE>
technology systems to better serve customers; and (iii) increasing its franchise
base both domestically and internationally.
PRODUCTS AND SERVICES MBE is pursuing several new programs to increase
same-store sales in MBE Centers. First, MBE is developing with NAOPG a special
office products catalog for use in MBE Centers and by MBE customers. Customers
will be able to use the catalog to order office products for delivery to their
local MBE Center, to their offices, or to their homes. Second, MBE is developing
a series of new products related to computer and Internet technology. MBE
expects that these products will have applications both within MBE Centers and
in customers' homes and offices and that they can be developed without material
expense. Third, MBE is pursuing a program that will allow franchise owners to
purchase office supplies, copy paper and other consumables more efficiently.
Management believes this program will allow MBE franchisees to offer their
customers a broader range of competitively priced office products. Fourth, MBE
has entered into strategic alliances with UPS, Spiegel, Microsoft and Bank/One
to offer MBE Center customers a broader range of products and services. MBE
receives fees directly from strategic partners or from franchisees (in the form
of a royalty on sales of products and services offered as a result of the
strategic alliances).
EXPRESS SERVICE CENTERS MBE has recently introduced MBE Business
Express-TM- sites, which are 24-hour self-serve, credit card-activated business
centers designed to serve customers in hotels and hospitality centers, airports,
convention centers, military retail outlets, and academic settings. The MBE
Business Express sites include computer (including Internet access), copying,
printing, and facsimile services. The sites also will allow users to connect
with MBE Centers via direct-dial telephone to order or arrange for additional
services such as package receipt or delivery or document reproduction.
FRANCHISE BASE The global network of MBE Centers has grown dramatically,
with the number of MBE Centers in the United States increasing by 250 to 300
each year since 1991. MBE has implemented several new programs to market its
franchises. These programs include the Conversion Store Program, which targets
potential independent operators in the industry to convert to a MBE franchise;
the Host Store concept, which locates MBE Centers within another retail
environment; the Corporate Tour Program, in which potential franchise owners are
invited to attend a tour of MBE's headquarters in San Diego and receive formal
presentations by key departments; and a multiple center ownership program which
is designed to encourage existing successful MBE franchisees to purchase
additional centers.
INTERNATIONAL EXPANSION MBE plans to continue to expand the number of
master licensees outside of the United States, and to continue to explore
opportunities for new relationships in other countries. MBE expects that
international growth will account for an increasingly significant proportion of
the total growth of MBE Centers. Approximately 600 MBE Centers are currently
open outside the United States, with another 40 MBE Centers under contract as
new foreign outlets.
COMPETITION
NAOPG
NAOPG operates in a highly competitive market. U.S. Office Products
estimates that its NAOPG contract stationery operations have attained
approximately a 3.7% share of the $30.0 billion of annual sales of all contract
stationers in the United States. U.S. Office Products believes that it has five
major competitors and that the combined market share of all five of these
competitors is less than 35%. U.S. Office Products' five major competitors
include: Boise Cascade Office Products Corporation; Corporate Express, Inc.;
Office Depot; BT Office Products International, Inc.; and Staples, Inc. Two of
these five competitors are divisions of discount superstore chains and two
others are primarily owned by large manufacturers of office products. As the
office products industry has undergone rapid consolidation, many smaller office
supply companies have been acquired by larger companies or have closed.
Nevertheless, the
34
<PAGE>
market remains highly fragmented, with more than 4,300 independent suppliers
representing approximately 50% of the U.S. market.
In the contract stationery market, as well as the other markets that it
serves or may in the future seek to serve, U.S. Office Products believes that
customers not only are concerned with the overall reduction of their office
products costs, but also place an emphasis on dependability, superior levels of
service and flexible delivery capabilities. U.S. Office Products believes that
it competes favorably with its five largest competitors in the contract
stationery market on the basis of service and price. However, some of these
companies have greater financial resources than U.S. Office Products.
INTERNATIONAL
The markets in which Blue Star operates are extremely competitive. In New
Zealand, U.S. Office Products believes that its three main competitors are
Corporate Express, Warehouse and Office Products Depots, which together with
Blue Star serve the vast majority of the market. Independent operators and
retail bookstore chains are the primary outlets serving the remaining market.
In Australia, Corporate Express, Boise Cascade and Viking Office Products,
Inc. are Blue Star's major competitors. However, the market remains highly
fragmented with a large number of independent operators.
MAIL BOXES ETC.
The market for ancillary services and products served by MBE, including
office supplies, telecopy and copying services, is highly fragmented with
products and services being provided by national chains, medium to small
independent outlets, and specialty service providers such as copy centers, quick
print centers and office supply companies. In the United States, the U.S. Postal
Service is the primary competitor in the SOHO market for mailing and packaging,
particularly its postal service centers located in shopping centers and other
locations. A growing segment of other domestic business is also being captured
by discount outlets such as Staples and Office Depot. In addition, approximately
10,000 other independent or franchised postal and business service centers are
operating in the United States and compete with MBE.
EMPLOYEES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will have more than 15,000 full-time employees, a small number of which are
members of labor unions. In general, U.S. Office Products considers its
relations with its employees to be satisfactory.
PROPERTIES
Upon completion of the Strategic Restructuring Plan, U.S. Office Products
will operate 801 facilities in various states and in New Zealand, Australia and
Canada, including one facility located in Washington, D.C. for its corporate
headquarters. Of these facilities, 753 are leased and 48 are owned. The
facilities are used for retail, warehouse and office purposes, or a combination
of these functions. The aggregate square footage for all facilities is
approximately 9.4 million square feet, consisting of approximately 2.1 million
square feet for retail use, approximately 5.5 million square feet for warehouse
use and approximately 1.8 million square feet for office use.
The terms on U.S. Office Products' leases are from one month to 20 years,
with the majority of the terms ranging from five to ten years. U.S. Office
Products generally pays market rates for its leases. U.S. Office Products leases
approximately 7.7 million square feet and owns approximately 1.7 million square
feet. Approximately 280 leases, representing approximately 29% of U.S. Office
Products' total leased space, will expire in the next 12 months. Many of these
leases contain renewal options. Where necessary,
35
<PAGE>
U.S. Office Products intends to seek to renew or extend such expiring leases,
and U.S. Office Products believes that it will be able to do so on terms that
are acceptable to it. When no renewal option exists or the property is no longer
a desirable location for operational purposes, U.S. Office Products will
evaluate the local real estate market and seek to identify alternative space in
sufficient time to negotiate an acceptable lease agreement prior to the
expiration of the existing lease. U.S. Office Products has generally been able
to renew or extend its expiring leases, and enter into new leases where
necessary, on acceptable terms.
U.S. Office Products believes that its facilities are and will be suitable
for their respective purposes and have adequate productive capacity for U.S.
Office Products' present and anticipated needs.
The principal executive offices of U.S. Office Products are 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007.
36
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Introduction to Selected Financial Data................................................................... F-2
Selected Financial Data................................................................................... F-3
Management's Discussion and Analysis of Financial Position and Results of Operations...................... F-5
Pro Forma Combined Financial Information of U.S. Office Products Company
Introduction to Pro Forma Combined Financial Statements................................................. F-21
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited)..................................... F-23
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited)........... F-25
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited)........... F-26
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)........................................................................................... F-27
Notes to Pro Forma Combined Financial Statements........................................................ F-28
Consolidated Financial Statements of U.S. Office Products Company
Report of Price Waterhouse LLP, Independent Accountants................................................. F-32
Report of Ernst & Young LLP, Independent Accountants.................................................... F-33
Report of BDO Seidman, LLP, Independent Accountants..................................................... F-34
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-35
Report of KPMG Peat Marwick LLP, Independent Accountants................................................ F-36
Report of Rubin, Koehmstedt and Nadler, Independent Accountants......................................... F-37
Report of Deloitte & Touche LLP, Independent Accountants................................................ F-38
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-39
Report of Hertz, Herson & Company, LLP, Independent Accountants......................................... F-40
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)........ F-41
Consolidated Statement of Income for the fiscal years ended April 30, 1995 and 1996, April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)................... F-42
Consolidated Statement of Stockholders' Equity for the fiscal years ended April 30, 1995 and 1996, April
26, 1997 and the nine months ended January 24, 1998 (unaudited)....................................... F-43
Consolidated Statement of Cash Flows for the fiscal years ended April 30, 1995 and 1996, April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998 (unaudited)............... F-45
Notes to Consolidated Financial Statements.............................................................. F-47
Consolidated Financial Statements of Mail Boxes Etc.
Report of Ernst & Young LLP, Independent Auditors....................................................... F-74
Consolidated Balance Sheets as of April 30, 1997 and 1996............................................... F-75
Consolidated Statements of Income for the fiscal years ended April 30, 1997, 1996 and 1995.............. F-76
Consolidated Statement of Shareholders' Equity for the fiscal years ended April 30, 1997, 1996 and
1995.................................................................................................. F-77
Consolidated Statements of Cash Flows for fiscal years ended April 30, 1997, 1996 and 1995.............. F-78
Notes to Consolidated Financial Statements.............................................................. F-80
Condensed Consolidated Balance Sheet as of October 31, 1997 (unaudited)................................. F-91
Condensed Consolidated Statements of Operations for three months and six months ended October 31, 1997
(unaudited) and October 31, 1996 (unaudited).......................................................... F-92
Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 1997 (unaudited)
and October 31, 1996 (unaudited)...................................................................... F-93
Notes to Condensed Consolidated Financial Statements (unaudited)........................................ F-94
</TABLE>
F-1
<PAGE>
INTRODUCTION TO SELECTED FINANCIAL DATA
Set forth below is certain selected financial data for U.S. Office Products
Company (the "Company"). The historical Statement of Income Data for the fiscal
years ended April 30, 1995 and 1996 and April 26, 1997 and the Balance Sheet
Data at April 30, 1996 and April 26, 1997 have been derived from the Company's
consolidated audited financial statements and are included elsewhere in this
Annex A. The historical Statement of Income Data for the years ended April 30,
1993 and 1994 and the Balance Sheet Data at April 30, 1993, 1994, and 1995 have
been derived from unaudited consolidated financial statements which are not
included elsewhere in this Annex A. The Selected Financial Data for the nine
months ended January 25, 1997 and January 24, 1998 (except pro forma amounts)
have been derived from unaudited consolidated financial statements that appear
elsewhere in this Annex A. These unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations for the periods presented. The
financial data have been restated from prior presentations as a result of the
Company's adoption of the Strategic Restructuring Plan.
The pro forma financial data gives effect, as applicable, to the Strategic
Restructuring Plan, the offer to exchange the 2001 Notes for common stock at a
reduced conversion price (the "2001 Note Offer"), the tender offer for the 2003
Notes (the "2003 Note Tender"), the offering of senior subordinated notes ("Note
Offering") and borrowings under the new senior secured credit facilities (the
"Credit Facility"; borrowings under the Note Offering and the Credit Facility
are referred to as the "New Borrowings") and the acquisitions completed by the
Company after May 1, 1996 as if all such transactions had been consummated on
May 1, 1996 for balance sheet purposes as if such transactions had occurred on
January 24, 1998 and for income statement purposes as if such transactions had
occurred at the beginning of the relevant period. In addition, the pro forma
information is based on available information and certain assumptions and
adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the
unaudited pro forma financial information, including the notes thereto, and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Annex A.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6)............................. 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6)............................. 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,120
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company since May 1, 1996 as if such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements included elsewhere in this Annex A.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company subsequent to January 24, 1998 as if such transactions had
been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of the Company's future financial position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS ANNEX A CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS ANNEX A, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES. THE
COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED UNDER "RISK FACTORS" ABOVE AND "FACTORS AFFECTING THE COMPANY'S
BUSINESS" BELOW.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Annex A. The discussion of the Company's pro forma results of operations
is based on the assumptions and conditions described in the Pro Forma Combined
Financial Statements and the Notes thereto. The Company's audited consolidated
financial statements have been restated to reflect (i) the results of the
businesses to be spun off to shareholders in the Company's recently announced
Strategic Restructuring Plan as discontinued operations; and (ii) the change in
accounting treatment of the 22 business combinations completed during the nine
months ended January 24, 1998, from the pooling-of-interests method to the
purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment by Investor following
acceptance of shares in the Tender Offer and the record date for the
Distributions. In conjunction with the Strategic Restructuring Plan, the Company
plans to undertake the 2001 Note Offer, the 2003 Note Tender and the New
Borrowings. (Capitalized terms not defined herein shall have the meaning given
such term in the text of the Proxy Statement.)
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
F-5
<PAGE>
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing operations and 21 related
to discontinued operations) from its inception through the end of fiscal 1997,
54 of which were accounted for under the pooling-of-interests method (39 related
to continuing operations and 15 related to discontinued operations). During the
nine months ended January 24, 1998, the Company completed an additional 60
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the Strategic
Restructuring Plan, all 60 business combinations completed during the nine
months ended January 24, 1998 are accounted for under the purchase method. Prior
to the adoption of the Strategic Restructuring Plan, 22 of these 60 business
combinations were accounted for under the pooling-of-interests method (12
related to continuing operations and 10 related to discontinued operations).
Following adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method (including the Company's acquisition of
Mail Boxes Etc.) The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
F-6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Strategic Restructuring
Plan, the 2001 Note Offer, the 2003 Note Tender, the New Borrowings and the
results of the companies acquired between May 1, 1996 and March 20, 1998 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.3 0.5 0.3
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.3 4.1 4.6 4.4
Interest expense, net........ 0.4 0.4 1.4 3.7 1.5 1.3 3.8
Other income (loss).......... (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 0.9 2.9 3.6 0.9
Provision for income taxes... 0.4 0.6 1.3 0.7 1.2 1.7 0.7
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.2% 1.7 1.9 0.2%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.8
Other income (loss).......... (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.5
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.5%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisition of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
F-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues for
the nine months ended January 24, 1998 include revenues from 111 companies
acquired in business combinations accounted for under the purchase method after
the beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for the nine months ended January 25, 1997 include revenues from 54 of
the Fiscal 1997 and 1998 Purchased Companies for a portion of such period. This
increase was partially offset by the effect on international revenues of the
devaluation of the New Zealand and Australian dollars versus the USD. Because
revenues generated in New Zealand and Australia contributed approximately
one-third of the Company's consolidated revenues during the nine months ended
January 24, 1998, management estimates that currency devaluation had the effect
of reducing the Company's reported consolidated revenues (in U.S. dollar terms)
by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
F-8
<PAGE>
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company through the negotiation of national or other
large-scale contracts with the providers of certain services affecting these
general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
expects to undertake cost reduction measures including the elimination of
duplicative facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 1997. The
increase in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix resulting in a higher proportion of revenues in
traditionally higher margin products and services, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 110.8%, from $231.6
million, or 21.8% of revenues, in fiscal 1996, to $488.2 million, or 23.1% of
revenues, in fiscal 1997. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues from products and services with
traditionally higher selling, general and administrative expenses, such as
products sold in New Zealand and Australia.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $12.6 million or 39.6%. The
Company believes that the adjustments to the employee stock options as a result
of the Strategic Restructuring Plan will result in a significant increase in the
number of stock options outstanding which may limit the number of stock options
available for grant to employees in the future. The Company believes that it
offers its employees market competitive compensation packages and does not
expect that a reduction in the number of stock options available to employees in
the future will have a material impact on the Company's ability to retain and
attract qualified employees.
Amortization expense increased from $2.7 million in fiscal 1996 to $12.4
million in fiscal 1997. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1997 versus
fiscal 1996.
The Company incurred non-recurring acquisition costs of $8.1 million and
$8.0 million during fiscal 1996 and 1997, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs reflect the completion of 14 and 25 business
combinations accounted for under the pooling-of-interests method during fiscal
1996 and fiscal 1997, respectively. The non-recurring acquisition costs in
fiscal 1996 included a charge of approximately $4.7
F-10
<PAGE>
million related to one business combination which included the payment of
significant transaction-related compensation obligations.
The Company also incurred restructuring costs of approximately $682,000 and
$4.2 million during fiscal 1996 and 1997, respectively. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that the income from its equity investment will increase as
the fiscal 1997 amount represented earnings from November 14, 1996, the date of
the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
F-11
<PAGE>
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were not subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by the Company.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma as adjusted basis, at January 24, 1998, the Company had
working capital of $396.6 million, long-term debt of $1,155.5 million and
capitalization of $1.7 billion. Such pro forma amounts give effect to the
Strategic Restructuring Plan, the 2001 Note Offer, the 2003 Note Tender and the
New Borrowings to be undertaken in conjunction with the Strategic Restructing
Plan and purchase acquisitions completed subsequent to January 24, 1998, and
through March 20, 1998, as if such transactions had occurred on January 24,
1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its existing bank credit facility will be
sufficient to meet its liquidity requirements for its operations and capital
expenditures and for its additional debt service obligations for the remainder
of the calendar year. The Company does not currently anticipate that any
possible restructuring costs related to the Company's planned cost reduction
measures, coupled with the effects of such cost reduction measures, would have a
significant adverse effect on the Company's financial position, liquidity or
cash flows. The Company anticipates capital expenditures of approximately $40.0
million in both fiscal 1999 and fiscal 2000.
The existing credit facility provides the Company with a $500 million line
of credit, bearing interest, at the Company's option, at the bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. At March 20, 1998, the Company had
approximately $362.0 million outstanding under the Credit Facility, at an annual
interest rate of approximately 6.5%, and $138.0 million available under the
Credit Facility for acquisition and working capital purposes. Because certain
elements of the Strategic Restructuring Plan would violate covenants in the
Credit Facility, that facility will either have to be modified with the lenders'
consent or refinanced. The Company currently expects to finance the aggregate
cost of purchasing shares in the Tender Offer with the proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from the
issuance of subordinated debt securities. In connection with the completion of
the Strategic Restructuring Plan, the Company expects to incur approximately
$500 million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses.
U.S. Office Products has agreed to and accepted a commitment letter from The
Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch Capital
Corporation, as agents, and Chase Securities Inc., BT Alex. Brown Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers, for a
new bank loan facility that will provide for an aggregate principal amount of
$1,225.0 million, consisting of (i) seven-year term loan facilities totaling up
to $300.0 million, (ii) an eight-year term loan in the principal amount of
$675.0 million, and (iii) a revolving credit facility in the principal amount of
$250.0 million. U.S. Office Products and the banks may agree to alter the
allocated principal amount of two or more of the loan facilities before signing
definitive documents depending on market conditions. The loan facilities will be
guaranteed by U.S. Office Products' material domestic subsidiaries and secured
by substantially all of the assets of U.S. Office Products and its material
domestic subsidiaries. U.S. Office Products will be required to enter into
arrangements to insure that the effective interest rate paid by U.S. Office
Products on at least 50% of its outstanding bank and subordinated debt will not
go above a certain rate. The loan documents will likely include financial and
other covenants. These will include, among others, restrictions on U.S. Office
Products' ability to incur additional indebtedness, sell assets, pay dividends
or engage in certain other transactions, and requirements that U.S. Office
Products maintain certain financial ratios, and other provisions customary for
loans to highly leveraged companies, including representations by U.S. Office
Products, conditions to funding, cost and yield protections, restricted payment
provisions, transfer provisions, amendment provisions and indemnification
provisions. The loan facilities will be subject to mandatory prepayment in a
variety of circumstances, including upon certain asset sales and financing
transactions. The commitment will terminate unless definitive loan documents are
entered into, and the Strategic Restructuring Plan and Financing Transactions
are completed, by June 30, 1998. As a result of the Company's increased
indebtedness, a portion of the cash flows from the Company's international
operations, will be required to service debt and interest payments. The Company
expects that it will incur additional costs with respect to accessing cash flows
from international operations including
F-13
<PAGE>
such items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. In addition, the results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives being evaluated by the
Company. The Company also expects to issue $400.0 million principal amount
senior subordinated notes in a private placement but has not received any
commitment with respect to such issuance.
The Company expects that the indenture governing the senior subordinated
notes will also place restrictions on the Company's ability to incur
indebtedness, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets to, or merge or
consolidate with, another entity.
On a historical basis, the Company's working capital was $286.0 million at
April 26, 1997 and $134.0 million at January 24, 1998. Long-term debt was $380.2
million and $381.8 million at April 26, 1997 and January 24, 1998, respectively.
The decline in working capital was due primarily to an increase in the Company's
borrowings under its Credit Facility from $140.1 million at April 26, 1997 to
$330.0 million at January 24, 1998. The increase in the borrowings under the
Credit Facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. Long-term debt increased during
the fiscal year ended April 26, 1997 as a result of the sales, in an offshore
offering and in a concurrent private placement in the United States, of the 2003
Notes in the principal amount of $230.0 million. The net proceeds were used for
working capital and acquisition purposes. In addition, the Company completed the
public sale, at a gross price of $22.00 per share, of approximately 13.0 million
shares of common stock. The net proceeds to the Company were approximately
$275.7 million and were used to repay a portion of the balance outstanding under
the Company's Credit Facility.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $0.78 USD at April 27, 1997 to $0.66 USD
at January 24, 1998. This resulted in a reduction in stockholders' equity,
through a cumulative translation adjustment, of approximately $105.5 million,
reflecting the impact of the declining exchange rate on the Company's
investments in its New Zealand and Australian subsidiaries. In addition, the
devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
Subsequent to April 26, 1997 and through March 20, 1998, the Company
completed 67 business combinations (45 related to continuing operations and 22
related to discontinued operations) for an aggregate purchase price of $774.7
million, consisting of approximately $190.8 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $34.9 million. Net cash used in investing activities
was $97.6 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company's 49% equity investment in Dudley. Net borrowings
increased $244.7 million during the nine months ended January 25, 1997,
primarily to fund the purchase prices of acquisitions, to repay higher-cost debt
assumed in acquisitions and to fund the initial equity investment in Dudley. The
Company also received $41.9 million in cash as a result of the sale of common
stock during the period. Discontinued operations used $3.2 million of cash
during the nine months ended January 25, 1997.
F-14
<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's operations in New Zealand and Australia have generally been higher
in the Company's third quarter. As the Company's mix of businesses evolves
through future acquisitions, these seasonal fluctuations may continue to change.
Therefore, results for any quarter are not necessarily indicative of the results
that the Company may achieve for any subsequent fiscal quarter or for a full
fiscal year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands, except for per share
amounts). The information has been derived from unaudited consolidated financial
F-15
<PAGE>
statements that in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
Historically, U.S. Office Products has grown substantially through
acquisitions. U.S. Office Products' aggressive acquisition program has produced
a significant increase in sales, employees, facilities and
F-17
<PAGE>
distribution systems. While the Company's decentralized management strategy,
together with operating efficiencies resulting from the elimination of
duplicative functions and economies of scale, may present opportunities to
reduce costs, such strategies may initially require additional costs and
expenditures to expand operational and financial systems and corporate
management administration. Because of the various costs and possible
cost-savings strategies, historical operating results may not be indicative of
future performance. There also can be no assurance that the pace of the
Company's acquisitions will not adversely affect efforts to implement
cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon U.S. Office Products. Delays in
implementing planned integration and consolidation strategies, or the failure of
such strategies to achieve anticipated cost savings, also could adversely affect
the Company's results. In addition, there can be no assurance that U.S. Office
Products' management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the continuing
increase in the size and scope of the Company's operations and acquisition
activity.
U.S. Office Products intends to pursue future acquisition opportunities;
however, no assurance can be given that U.S. Office Products will identify,
finance and complete additional suitable acquisitions on acceptable terms, or
that future acquisitions, if completed, will be successful. U.S. Office Products
will likely incur additional debt to finance any additional acquisitions. In
addition, acquired companies may not achieve future sales and profitability
levels that justify the prices that U.S. Office Products paid to acquire them.
Acquisitions also may involve a number of special risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill. Tax considerations may also
restrict the amount of stock that U.S. Office Products can use for acquisitions.
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.7% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's 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
F-18
<PAGE>
able to achieve year 2000 compliance in 1999 and does not expect that the cost
of making necessary adaptations will be material to the Company. If the Company
cannot make the necessary adaptations on a timely basis, or if the costs are
greater than expected, the Company's business could be adversely affected.
Management intends to continue to focus significant attention and resources
on international operations and expects foreign sales to continue to represent a
significant portion of U.S. Office Products' total sales. The factors described
in this section that apply to U.S. Office Products' domestic operations also may
affect U.S. Office Products' foreign operations. In addition, U.S. Office
Products' foreign operations are subject to a number of other risks, including
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property,
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on U.S.
Office Products' ability to maintain or increase its foreign sales or on its
business, financial condition or results of operations. See "Managements'
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statements and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that give
it the right to acquire additional shares of common stock in the future. Under
the Investment Agreement that Investor and the Company signed on January 12,
1998 (the "Investment Agreement"),
F-19
<PAGE>
Investor will have, among other things, the right (subject to certain
conditions) to nominate three of the nine members of the U.S. Office Products
Board of Directors, including the Chairman of the Board, and certain Board
decisions will be subject to super-majority voting provisions that, in certain
circumstances, may require the concurrence of at least one director nominated by
Investor. Matters subject to super-majority Board approval include (i) the
issuance of new shares in excess of certain amounts specified in the Investment
Agreement, (ii) certain business combinations, (iii) a disposition by the
Company of all or substantially all of its assets, (iv) a major
recapitalization, dissolution, or liquidation of the Company, or (v) an
amendment of the Company's charter or by-laws that is inconsistent with the
terms of the Investment Agreement. Investor's significant ownership of U.S.
Office Products common stock may permit Investor to influence significantly
matters requiring the approval of the Company's stockholders. The super-majority
Board voting requirements may give Investor the ability to block the approval of
certain actions requiring the super-majority vote of the Board. Together, this
ownership position and the Board voting requirements may have the effect of
discouraging (or possibly preventing) a future change in control of U.S. Office
Products. In addition, the super-majority Board voting requirement may have the
effect of limiting the Company's future use of equity to acquire businesses,
raise capital, or provide employees with long-term incentives.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Code and will not be taxable under Section 355(e) of the Code. The
Company will not complete the Distributions unless it receives the Tax Opinion.
The Tax Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other data, documentation and other
materials that Wilmer, Cutler & Pickering has deemed necessary. See "U.S.
Federal Tax Consequences of the Distributions."
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the Company's stockholders (except with respect to cash received
in lieu of fractional shares) as a result of the Distributions.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
the Company will recognize gain equal to the difference between the fair market
value of the common stock of the Spin-Off Company and the Company's adjusted tax
basis in the common stock of the Spin-Off Company. In addition, holders of U.S.
Office Products common stock will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value of the common
stock of the Spin-Off Company that you receive in the Distribution. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company.
However, no gain or loss will be attributable to holders of U.S. Office
Products' common stock as the result of a Distribution being taxable under
Section 355(e). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
Certain limitations under Section 355 may restrict the Company's ability to
issue capital stock after the Distributions. These limitations will generally
prevent the Company from issuing capital stock to the extent the issuance is
part of a plan, which includes a Distribution, pursuant to which one or more
people or organizations acquire capital stock of the Company that represents 50%
or more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Equity
Self-Tender, (ii) the Distributions, and (iii) the Equity Investment
contemplated by the Strategic Restructuring Plan, (iv) the 2001 Note Offer, (v)
the 2003 Note Tender, (vi) the New Borrowings to be undertaken in conjunction
with the Strategic Restructuring Plan and (vii) all acquisitions completed
through March 20, 1998. The unaudited pro forma combined financial statements do
not give effect to the allocation of corporate overhead to the Spin-Off
Companies.
The pro forma combined balance sheet gives effect to (i) the Equity
Self-Tender, (ii) the Distributions, (iii) the Equity Investment, (iv) the 2001
Note Offer, (v) the 2003 Note Tender, (vi) the New Borrowings and (vii) the
businesses acquired by the Company after January 24, 1998 in business
combinations accounted for under the purchase method (the "Post January 24, 1998
Purchase Acquisitions"), as if all such transactions had occurred as of the
Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; and (vii) the business combinations accounted for under
the purchase method during fiscal 1998 (the "Fiscal 1998 Purchase
Acquisitions"), as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 is comprised of (i) the unaudited financial information of the Company for
the nine months ended January 24, 1998; and (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through their respective acquisition dates, except for the financial
information of the Post January 24, 1998 Purchase Acquisitions which is included
through January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisitions");
and (viii) the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on May 1, 1996. The pro forma combined statement of income for the
nine months ended January 25, 1997 is comprised of (i) the unaudited financial
information of the Company for the nine months ended January 25, 1997; (ii) the
unaudited financial information of the Fiscal 1997 Purchase Acquisitions for the
period from May 1, 1996 through the earlier of January 25, 1997 or their
respective dates of acquisition; and (iii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions,
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the Fiscal 1997 Purchase Acquisition; and (viii)
the Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred
on May 1, 1996. The pro forma combined statement of income for the year ended
April 26, 1997 is comprised of (i) the audited financial information of the
Company for the fiscal year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
April 26, 1997 which were acquired in business combinations accounted for under
the pooling-of-interests method of accounting. The results of the companies
included in the Spin-Off Companies have been reflected as discontinued
operations in the Company's historical statement of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
U.S. JANUARY 24, PRO FORMA ADJUSTMENTS
OFFICE 1998 ---------------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
---------- ------------- ----------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 45,258 $ 108 $(22,754)(a) $ 907,388(b) $
70,000(b)
(1,000,000)(b)
Accounts receivable,
net.................. 324,976 5,077
Inventory, net......... 239,043 2,035
Prepaid and other
current assets....... 103,624 94 (1,447)(b)
---------- ------------- ----------- ------------- -------------
Total current
assets........... 712,901 7,314 (22,754) (24,059)
Property and equipment,
net.................... 217,228 6,144
Intangible assets, net... 903,722 13,255(a)
Other assets............. 174,549 317 (3,739)(b)
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........ 114,959 (114,959)(c)
All other net assets... 346,083 (346,083)(d)
---------- ------------- ----------- ------------- -------------
Total assets....... $2,469,442 $13,775 $ (9,499) $ (27,798) $(461,042)
---------- ------------- ----------- ------------- -------------
---------- ------------- ----------- ------------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
----------- ----------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 270,000(e) $ $ 217,350(h) $
(270,000)(e) (217,350)(h)
Accounts receivable,
net.................. 330,053
Inventory, net......... 241,078
Prepaid and other
current assets....... 102,271
----------- ----------- ----------- ----------
Total current
assets........... 673,402
Property and equipment,
net.................... 223,372
Intangible assets, net... 916,977
Other assets............. 30,000(f) (3,275) (g) (5,518)(h) 192,334
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........
All other net assets...
----------- ----------- ----------- ----------
Total assets....... $ 30,000 $ (3,275) $ (5,518) $2,006,085
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA ADJUSTMENTS
U.S. OFFICE JANUARY 24, 1998 -----------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
----------- ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $ 332,636 $ 640 $ (640)(a) $ $(114,959)(c)
Accounts payable............ 164,229 2,438
Accrued compensation........ 41,262
Other accrued liabilities... 67,654 1,742 (2,074 )(b)
(26,000 )(b)
----------- -------- ---------- ----------- -------------
Total current
liabilities........... 605,781 4,820 (640) (28,074 ) (114,959)
Long-term debt................ 381,844 3,817 (3,817)(a) 907,388 (b)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,050 96
----------- -------- ---------- ----------- -------------
Total liabilities....... 996,520 8,733 (4,457) 879,314 (114,959)
Stockholders' equity:
Common stock................ 133 (37 )(b)
5 (b)
Paid-in capital............. 1,463,523 69,995 (b) (314,514)(d)
(999,963 )(b)
65,000 (b)
Cumulative translation
adjustment................ (113,022)
Retained earnings
(deficit)................. 122,288 (3,112 )(b) (31,569)(d)
(39,000 )(b)
Equity of purchased
companies................. 5,042 (5,042)(a)
----------- -------- ---------- ----------- -------------
Total stockholders'
equity................ 1,472,922 5,042 (5,042) (907,112 ) (346,083)
----------- -------- ---------- ----------- -------------
Total liabilities and
stockholders'
equity................ $2,469,442 $ 13,775 $ (9,499) $ (27,798 ) $(461,042)
----------- -------- ---------- ----------- -------------
----------- -------- ---------- ----------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $(217,677)(e) $ $ $
Accounts payable............ 166,667
Accrued compensation........ 41,262
Other accrued liabilities... (1,311)(g) 2,853(h) 42,864
---------- ---------- ---------- ----------
Total current
liabilities........... (217,677) (1,311) 2,853 250,793
Long-term debt................ (52,323)(e) (143,750)(g) (230,000)(h) 1,155,509
75,000(f) 217,350(h)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,146
---------- ---------- ---------- ----------
Total liabilities....... (195,000) (145,061) (9,797) 1,415,293
Stockholders' equity:
Common stock................ 33(e) 12(g) 146
Paid-in capital............. 269,967(e) 168,897(g) 707,905
(15,000)(f)
Cumulative translation
adjustment................ (113,022 )
Retained earnings
(deficit)................. (30,000)(f) (25,159)(g) 7,590(h) (4,237 )
(1,964)(g) (3,311)(h)
Equity of purchased
companies.................
---------- ---------- ---------- ----------
Total stockholders'
equity................ 225,000 141,786 4,279 590,792
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
equity................ $ 30,000 $ (3,275) $ (5,518) $2,006,085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues........................................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit........................................... 420,912 103,271 75,967 600,150
Selling, general and administrative expenses............... 344,474 93,201 53,931 (7,698)(i) 483,908
Amortization expense....................................... 8,072 10,343(j) 18,415
Non-recurring acquisition costs............................ 7,316 7,316
------------ ----------- ----------- ----------- ------------
Operating income....................................... 61,050 10,070 22,036 (2,645) 90,511
Other (income) expense:
Interest expense......................................... 27,540 3,109 1,855 45,493(k) 77,997
Interest income.......................................... (6,048) (186) (1,017) 7,251(k)
Other.................................................... (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations before provision for
income taxes and extraordinary items..................... 43,631 9,303 21,699 (55,389) 19,244
Provision for income taxes................................. 18,238 3,007 7,341 (14,153)(l) 14,433
------------ ----------- ----------- ----------- ------------
Income from continuing operations before extraordinary
items.................................................... $ 25,393 $ 6,296 $ 14,358 $ (41,236) $ 4,811
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic.................................................... 85,978 146,331(m)
Diluted.................................................. 87,824 148,177(m)
Income per share from continuing operations before
extraordinary items:
Basic.................................................... $ 0.30 $ 0.03
Diluted.................................................. $ 0.29 $ 0.03
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues....................................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit....................................... 597,667 106,268 101,759 805,694
Selling, general and administrative expenses........... 488,215 95,913 70,996 (8,257)(i) 646,867
Amortization expense................................... 12,416 12,722(j) 25,138
Non-recurring acquisition costs........................ 8,001 8,001
Restructuring costs.................................... 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income................................... 84,834 10,355 30,763 (4,465) 121,487
Other (income) expense:
Interest expense..................................... 36,047 3,170 2,552 62,227(k) 103,996
Interest income...................................... (6,857) (212) (1,448) 8,517(k)
Other................................................ (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary items................. 59,877 9,561 30,412 (75,209) 24,641
Provision for income taxes............................. 27,939 3,056 9,933 (22,447)(l) 18,481
------------ ------------ ------------ ------------ ------------
Income from continuing operations before extraordinary
items................................................ $ 31,938 $ 6,505 $ 20,479 $ (52,762) $ 6,160
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic................................................ 90,026 146,331(m)
Diluted.............................................. 91,761 148,066(m)
Income per share from continuing operations before
extraordinary items:
Basic................................................ $ 0.35 $ 0.04
Diluted.............................................. $ 0.35 $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Equity Self-Tender, including the repurchase
of 37,037 shares of common stock (including shares underlying employee
stock options) by the Company for $1,000,000 and reduced by the proceeds
from the exercise of employee stock options related to shares
participating in the Equity Self-Tender of $70,000. The funds to finance
the net $930,000 cost of the Equity Self-Tender are expected to be
obtained from New Borrowings of $907,388 and cash on hand of $22,612. As
a result of the New Borrowings, the adjustment also reflects the
write-off of $5,186 in short-term and long-term capitalized debt issue
costs related to the Company's current credit facility. The Company
estimates that the proceeds from the exercise of employee stock options
will be approximately $70,000 based upon 5,000 employee stock options
exercised at an average exercise price of $14.00 per share. As a result
of the Company allowing for the conditional exercise of employee stock
options tendered pursuant to the Equity Self-Tender, such tendered stock
options take on the characteristics of a combination plan during the
Equity Self-Tender period (the "Deemed Combination Plan"). Combination
plans are those that provide stock appreciation rights ("SARs") in
combination with typical stock options. To the extent that the
optionholder exercises the SAR provisions, the companion stock options
are canceled. Compensation expense is recorded for cash payments made
upon exercise of the deemed SARs. Upon completion of the Equity
Self-Tender, stock options not accepted pursuant to the Equity
Self-Tender revert to fixed option awards with terms identical to those
prior to commencement of the Equity Self-Tender. The terms of the Equity
Self-Tender, including the number of shares to be repurchased in relation
to the total number of shares and options outstanding and the stated
tender price in relation to the current market price of the Company's
common stock, provide persuasive evidence that only a portion of the
Deemed Combination Plan awards will be extinguished via payment under the
deemed SAR provisions. The Company estimates that the compensation
expense related to the option shares purchased in the Equity Self-Tender
will range from $65,000 to $72,000, assuming management's estimate of the
likely range of acceptance rates for the Equity Self-Tender of 22.5% to
25.0% of the total number of shares (including shares underlying options)
tendered. For purposes of the pro forma combined balance sheet, the
Company has reflected the after-tax compensation expense of $39,000
($65,000 before benefit from income taxes) as a reduction to retained
earnings. Additionally, other accrued liabilities has been decreased by
$26,000 to reflect the expected income tax benefit and additional paid-in
capital has been increased by $65,000. The Company has not included this
compensation expense in the unaudited pro forma combined statements of
income because it is of a non-recurring nature and is directly related to
the restructuring transaction.
(c) Adjustment to reflect the collection of $114,959 of receivables from the
Spin-Off Companies at the date of the Distributions.
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(d) Adjustment to remove the remaining net assets of the Spin-Off Companies.
(e) Adjustment to reflect the issuance of 33,489 shares of common stock in
conjunction with the Equity Investment of $270,000. The Company has made
certain preliminary calculations in relation to the allocation of the
proceeds to be received from Investor to the related common stock, the
Warrants and the Special Warrants. These calculations cannot be finalized
until the trading value of the Company's common stock immediately
following the Distributions is available. The Company intends to reflect
any amounts allocated to the Warrants and the Special Warrants in
additional paid-in capital. The preliminary assessment of the fair value
of the Warrants at the future grant date was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
WARRANTS
-----------
<S> <C>
Expected life...................................................................... 9 years
Risk free interest rate............................................................ 5.6%
Expected volatility of Company common stock........................................ 40%
Dividend rate...................................................................... 0%
</TABLE>
With respect to the Special Warrants, the Company's calculations assumed
that all holders of the 2001 Notes accept the 2001 Note Offer. The
Company does not anticipate assigning a value to the Special Warrants at
the time of the Equity Investment by Investor because (i) the 2001 Note
Offer is expected to have been completed prior to such Equity Investment;
and (ii) the other potential events which could give rise to the exercise
of the Special Warrants are considered by the Company to be contingent in
nature.
Based on the above assumptions, the Company's preliminary calculations
indicate that approximately $203,700 of the proceeds from the Equity
Investment will be allocated to the shares of Company common stock issued
to Investor, $66,300 will be allocated to the Warrants and no value will
be allocated to the Special Warrants. In arriving at these values, no
discount was applied to the value of the Warrants to reflect the
illiquidity of the Warrants pursuant to SFAS No. 123 issued by FASB.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Equity Self-Tender, the
Distributions, the Equity Investment and the New Borrowings of $75,000.
Of this amount, $30,000 of debt issue costs will be capitalized. These
fees and expenses have not been reflected in the unaudited pro forma
combined statements of income because they are either capitalizable or
are of a non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(g) Adjustment to reflect the issuance of 11,837 shares of common stock in
conjunction with the 2001 Note Offer, consisting of 8,890 shares of
common stock issued in exchange for 2001 Notes and 2,947 shares of common
stock to Investor in accordance with the provisions of the Special
Warrants. As a result of the 2001 Note Offer, the Company will issue
1,324 shares of common stock over the contractual amount with a market
value of $25,159 to induce conversion of the 2001 Notes. The $25,159 has
been reflected as a reduction in retained earnings as the market value of
the inducement is required to be recorded as an expense. In addition, the
adjustment
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
reflects the write-off of $3,275 in capitalized debt issue costs related
to the 2001 Notes. These expenses have not been reflected in the
unaudited pro forma combined statements of income because they are of a
non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(h) Adjustment to reflect the early extinguishment of the 2003 Notes,
$230,000 principal amount, in exchange for $217,350 in cash in the 2003
Note Tender. The Company believes that it will be able to retire the 2003
Notes at a price of 94.5% of par value, or $217,350, resulting in an
extraordinary gain of $7,590, net of income taxes of $5,060, which has
been reflected as an increase to retained earnings. In addition, the
adjustment reflects the write-off of $5,518 in capitalized debt issue
costs related to the 2003 Notes. The gain and write-off have not been
reflected in the unaudited pro forma combined statements of income
because they are extraordinary items and are directly related to the
Strategic Restructuring Plan.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(i) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
The Company believes that these reductions are expected to remain in
place for the forseeable future and are not reasonably likely to affect
operating performance.
(j) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(k) Adjustment to reflect the increase in interest expense, at a weighted
average rate of 9.0%, resulting from the increase in debt outstanding to
$1,155,509 as a result of the Equity Self-Tender, partially offset by the
proceeds from the Equity Investment, and the effects of the 2001 Note
Offer and the 2003 Note Tender assuming full exchange and tender,
respectively. The weighted average interest rate of 9.0% was determined
based upon $755,509 outstanding under the terms of the new bank loan
facility at annual interest rates of LIBOR plus margins ranging from
2.25% to 2.5% (approximately 7.9% to 8.15%) and the issuance of $400,000
of senior subordinated notes at an annual interest rate of approximately
9.0%, plus commitment fees on unused balances and amortization of the
related debt issue costs. Pro forma interest expense will fluctuate
$5,778 on an annual basis for each 0.5% change in interest rates.
Depending on market conditions at the time the senior subordinated notes
are offered and when funds are borrowed under the new bank loan facility,
the interest rates may vary from those indicated herein.
(l) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 75%, 65%
and 75% for the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 and January 25, 1997, respectively. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and non-deductible goodwill amortization
expense. This adjustment assumes
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
that all companies were taxed at the effective tax rates regardless of
how they were taxed prior to being acquired by the Company, including
those companies that previously paid no taxes under Subchapter S.
(m) Basic pro forma earnings per share is calculated based upon 146,331
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Equity
Self-Tender, the issuance of 36,436 shares as a result of the Equity
Investment, the issuance of 5,000 shares related to employee stock
options participating in the Equity Self-Tender and the issuance of 8,890
shares as a result of the 2001 Note Offer, assuming full conversion. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 26, 1997 and April 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain wholly-owned subsidiaries, which statements reflect net income of $7.4
million and $10.4 million included in the Company's income from discontinued
operations, net of income taxes, for fiscal years ended April 30, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for those wholly-owned subsidiaries, is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 628,355 712,901
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Net assets of discontinued operations:
Amounts to become receivable upon the Distributions..................... 87,700 114,959
All other net assets.................................................... 33,674 83,422 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 319,906 867,039 1,463,523
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 73,991 59,588 122,288
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Undistributed earnings of Subchapter S
corporations acquired in pooling-of-
interests business combinations..... 6,628 (6,628)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 319,906 770 73,991 394,746
</TABLE>
(Continued)
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
------------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,497 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,631 6,859
Capital contributions................ 12,342 1,857
Exercise of warrants and stock
options............................ 478,616 1 1,979
Retirement of common stock........... 102,305 (443) (34)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations......................... 57,640 (57,640)
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------- ----- ------------ ----------- ---------- -----------
Balance at April 26, 1997................ 104,479,004 104 867,039 (5,583) 59,588
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 27,792,099 28 585,509
Repayment of debt.................... 28,179 570
Exercise of stock options, including
tax benefits....................... 609,494 1 7,600
Employee stock purchase plan......... 169,723 2,805
Share adjustments at Pooled
Companies............................ (36,520)
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------- ----- ------------ ----------- ---------- -----------
Balance at January 24, 1998
(unaudited)............................ 133,041,979 $ 133 $ 1,463,523 $ (113,022) $ 122,288
------------- ----- ------------ ----------- ---------- -----------
------------- ----- ------------ ----------- ---------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30, 1996................ $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 1,857
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations.........................
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------
Balance at April 26, 1997................ 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 585,537
Repayment of debt.................... 570
Exercise of stock options, including
tax benefits....................... 7,601
Employee stock purchase plan......... 2,805
Share adjustments at Pooled
Companies............................
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------
Balance at January 24, 1998
(unaudited)............................ $1,472,922
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Payments of restructuring costs........................... (1,900)
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 34,937
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition costs............................... (7,283) (5,343) (4,094) (3,871)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (97,567)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. The fair values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. In order to qualify for
hedge accounting, a foreign currency transaction must be designated as, and
effective as, a hedge of a firm foreign currency commitment or an existing
foreign currency denominated asset or liability. Gains and losses on Exchange
Contracts designated to firm foreign currency commitments are deferred and
accounted for as an adjustment to the purchase price of the asset, while gains
and losses on Exchange Contracts designated
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to an underlying asset or liability are reported as other income or loss in the
Company's financial statements. The offsetting transaction loss or gain
resulting from the foreign currency denominated asset or liability is also
reflected in other income or loss in the Company's financial statements. At
April 26, 1997, the Exchange Contracts, in the notional amount of $3,319, hedge
certain foreign currency denominated firm purchase commitments. The Exchange
Contracts generally have maturity dates of 60 days or less. Discounts or
premiums on the Exchange Contracts are amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. In order to qualify for hedge accounting, an interest rate swap
must be designated to a specific debt and there must be a high correlation
between the interest rate component of the value of the swap and changes in the
variable interest rates on the underlying debt. The Swap Agreements were
specifically designated and were fully correlated with changes in the variable
interest rates on the underlying debt. The notional amount of the Swap
Agreements was $43,000 at April 30, 1996. Amounts to be paid or received under
the Swap Agreements are accrued as interest rates change and are recognized over
the life of the Swap Agreements as an adjustment to interest expense. During
fiscal 1997, the Swap Agreements were terminated at the time of the
extinguishment of the underlying debt, resulting in a loss of $117 and was
included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to short-term leases is recognized
on a monthly basis over the life of the lease. Certain long-term leases qualify
as sales-type leases and, accordingly, the present value of the future lease
payments is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary Mail Boxes Etc. ("MBE"),
enters into area and individual franchise agreements in the United States and
master license agreements in other countries. Area franchise agreements grant
the area franchisee the exclusive right to market individual franchise centers
for the Company in the area franchisee's territory. The area franchisee
generally receives a commission on the individual franchises sold as well as a
share of the royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance costs related to the Company's
employees in accordance with EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the Consolidated Statement of Income as a
component of selling, general and administrative expenses. During fiscal 1995,
1996 and 1997, the Company incurred advertising expenses of $3,309, $7,233 and
$14,355, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Equity Self-Tender") to purchase 37,037 shares of
Company common stock (including shares that may be issued on exercise of stock
options) at $27.00 per share and the incurrence of significant additional debt
to pay a portion of the purchase price of the shares in the Equity Self Tender;
(ii) after acceptance of shares in the Equity Self Tender, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
(the "Spin-Off Companies") that will conduct the Company's current print
management, corporate travel services, educational supplies and technology
solutions businesses (the "Distributions"); and (iii) following acceptance of
shares in the Equity Self Tender and the record date for the Distributions, the
sale to an affiliate of an investment fund managed by Clayton, Dubilier & Rice,
Inc. ("Investor") of equity interests in U.S. Office Products. In these
transactions, Investor will not acquire any equity interest in the Spin-Off
Companies. The Distributions are expected to be tax-free to both the Company and
its stockholders (except for any cash in lieu of fractional shares received by
stockholders). As part of the financing for the Strategic Restructuring Plan,
the Company is expanding its bank credit facility, issuing new subordinated
indebtedness and offering to repurchase or reduce the conversion price on
convertible notes previously issued. The Company expects the Strategic
Restructuring Plan to be completed in the second calendar quarter of 1998. The
transactions are subject to a number of conditions, including financing,
approval of the Company's stockholders and receipt of regulatory approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
of the Company's Print Management, Corporate Travel Services, Educational
Supplies and Technology Solutions divisions for the periods presented and is
summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based upon
the average intercompany debt outstanding during the periods presented.
Intercompany debt allocated to the Spin-Off Companies generally is comprised of
funding provided to the Spin-Off Companies by U.S. Office Products for
acquisitions and acquisition related expenses, repayments of long-term and
short-term debt of acquired companies, payments of direct operating expenses of
the Spin-Off Companies and the net results of daily advances and sweeps of cash
by the Company to keep each Spin-Off Company's cash balance at or near zero on a
daily basis. To the extent that the sum of the intercompany funding and
third-party debt outstanding exceeded the amount of debt to be allocated to the
Spin-Off Companies pursuant to the investment agreement with Investor, such
excess amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from
U.S. Office Products during the periods presented.
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assests of the
Company's Print Management, Corporate Travel Services, Educational Supplies and
Technology Solutions divisions for the periods presented and are summarized as
follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 26, 1997:
Current assets............................... $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net........... 34,175 7,953 14,478 2,164 58,770
Intangible assets, net....................... 705 7,112 20,824 28,641
Other assets................................. 7,807 581 359 2,005 10,752
Current liabilities.......................... (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities........................ (7,208) (5,218) (35,052) (3,218) (50,696)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 50,376 $ 5,477 $ 16,606 $ 10,963 $ 83,422
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 1,995 85,525 94,651 63,891 246,062
Other assets................................. 8,473 1,002 2,595 508 12,578
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
unaudited January 24, 1998 Consolidated Balance Sheet are expected to be
recovered from the Spin-Off Companies in connection with the Distributions.
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for fiscal
1995, 1996 and 1997 by $10,602 (or $0.23 per share), $14,998 (or $0.22 per
share) and $17,811 (or $0.20 per share), respectively. Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
$422.8 million of goodwill, associated with both continuing and discontinued
operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley which is included in other assets on the
Consolidated Balance Sheet. The Company has included its share of Dudley's net
income as a component of other income on the Consolidated Statement of Income.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates
ranging from 7.8% to 10.2% at April 30, 1996.................................... 67,660
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996......... 12,731
Other............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 1999 unless the closing price of the common stock is at least
150% of the conversion price for a period of time prior to the notice of
redemption. Costs incurred in connection with the issuance of the 2003 Notes
are included in other assets and are being amortized over the seven year period
of maturity. The fair value of the 2003 Notes at April 26, 1997, based upon
quoted market prices, totaled $184,000.
The 2001 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after February 3, 1998, but may not be
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the
2001 Notes are included in other assets and are being amortized over the five
year period of maturity. The fair value of the 2001 Notes at April 26, 1997,
based upon quoted market prices, totaled $147,344.
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 782,615 753,254 1,535,869
</TABLE>
The amounts listed above as identifiable assets of continuing operations at
year-end differ from the total asset amounts presented on the Consolidated
Balance Sheet since net assets of discontinued operations of $33,514, $33,674
and $171,122 at April 30, 1995 and 1996 and April 26, 1997, respectively, were
excluded from the above analysis but are included in total assets on the
Company's Consolidated Balance Sheet.
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
F-70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method and as a result of the
reporting of the results of Spin-Off Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,332 11,186
Basic income per share from continuing operations
before extraordinary items........................... 0.08 0.08
Diluted income per share from continuing operations
before extraordinary items........................... 0.08 0.08
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products' stockholders filed an action in the Delaware Chancery
Court. The action claims that the Directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity-Self
Tender to include employee stock options. The complaint seeks injunctive relief,
damages and attorneys fees. The Company believes that this lawsuit is without
merit and intends to vigorously contest it.
F-73
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mail Boxes Etc.
at April 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997,
in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
--------------------------------------------
Ernst & Young LLP
San Diego, California
June 6, 1997
</TABLE>
F-74
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................................. $ 3,992 $ 1,416
Restricted cash--franchisee deposits...................................................................... 1,613 2,073
Short-term investments.................................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April 30, 1997 and
1996, respectively...................................................................................... 6,547 6,799
Receivable from National Media Fund....................................................................... 250 770
Inventories............................................................................................... 447 544
Current portion of notes receivable....................................................................... 6,048 6,756
Current portion of net investment in sales-type leases.................................................... 2,322 2,414
Deferred income taxes..................................................................................... 1,272 1,846
Re-acquired area and center rights held for resale........................................................ 629 638
Other..................................................................................................... 1,394 1,063
--------- ---------
Total current assets.................................................................................. 51,856 46,144
Notes receivable, net..................................................................................... 12,977 10,831
Net investment in sales-type leases....................................................................... 6,067 7,518
Property and equipment:
Land.................................................................................................... 1,200 1,200
Building and improvements............................................................................... 5,076 4,201
Office furniture and equipment.......................................................................... 4,307 4,018
Vehicles................................................................................................ 209 209
--------- ---------
Total property and equipment.......................................................................... 10,792 9,628
Less accumulated depreciation and amortization.......................................................... 4,831 4,247
--------- ---------
Net property and equipment.............................................................................. 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at April 30, 1997
and 1996, respectively.................................................................................. 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997 and 1996,
respectively............................................................................................ 6,443 3,240
Deferred income taxes..................................................................................... 1,249 1,307
Other assets.............................................................................................. 739 904
--------- ---------
Total Assets.......................................................................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................................... $ 1,363 $ 2,096
Franchisee deposits....................................................................................... 2,097 2,619
Royalties, referrals and commissions payable.............................................................. 1,760 2,515
Accrued employee expenses and related taxes............................................................... 2,390 1,963
Other accrued expenses.................................................................................... 1,550 2,012
Income taxes payable...................................................................................... 769 838
Current maturities of long term debt...................................................................... 692 958
--------- ---------
Total current liabilities............................................................................. 10,621 13,001
Long-term debt, net of current maturities................................................................... 3,916 1,402
Commitments and contingencies...............................................................................
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.............
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698 shares issued and
outstanding at April 30, 1997 and 1996, respectively.................................................... 16,728 14,944
Retained earnings......................................................................................... 54,410 46,419
--------- ---------
Total shareholders' equity............................................................................ 71,138 61,363
--------- ---------
Total liabilities and shareholders' equity............................................................ $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
Total Revenues............................................................... 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000
--------- --------- ---------
Total cost and expenses...................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
Net income................................................................... $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
Net income per common share...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-76
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-77
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................ $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements..................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts.......................... (530) 880 1,236
Loss (gain) on disposal of property and equipment............................... (7) 4 122
Deferred income taxes........................................................... 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................. 460 (459) (252)
Accounts and notes receivable................................................... (760) (1,049) (7,386)
Receivable from National Media Fund............................................. 520 830 (1,600)
Assets leased to franchisees and inventories.................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale.............................. 109 378 261
Other current assets............................................................ (331) (58) 421
Other assets.................................................................... (38) 152 173
Accounts payable................................................................ (733) 945 419
Franchisee deposits............................................................. (522) 466 747
Royalties, referrals and commissions payable.................................... (755) 66 610
Accrued employee expenses and related taxes..................................... 427 500 697
Other accrued expenses.......................................................... (369) 838 821
Income taxes payable............................................................ 535 397 730
--------- --------- ---------
Net cash flows provided from operating activities............................. 5,908 10,802 1,090
Investing Activities:
Net change in short-term investments............................................ (5,517) (11,773) 389
Additions to property and equipment............................................. (1,292) (472) (477)
Principal payments received on sales-type leases................................ 3,407 3,628 3,223
Re-acquired area rights......................................................... (439) (185) (887)
--------- --------- ---------
Net cash flows provided from (used in) investing activities..................... (3,841) (8,802) 2,248
Financing Activities:
Borrowing under line of credit.................................................. 1,630 3,720 3,800
Repayments under line of credit................................................. (2,150) (4,550) (2,200)
Repayments on notes payable..................................................... (354) (146) (54)
Repurchase of common stock...................................................... (410) (1,922) (5,681)
Proceeds from the issuance of common stock...................................... 1,793 1,923 937
--------- --------- ---------
Net cash flows provided from (used in) financing activities..................... 509 (975) (3,198)
--------- --------- ---------
Increase in cash and cash equivalents............................................... 2,576 1,025 140
Cash and cash equivalents at beginning of year...................................... 1,416 391 251
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for Income taxes...................................... $ 3,762 $ 6,348 $ 5,479
</TABLE>
F-78
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense.................................................................... $ 261 $ 155 $ 98
Supplemental Schedule of Non-Cash Activities:
Equipment sold under sales-type leases.......................................... $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................. $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................. $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights.......... $ 104 $ 468
Exchange of area rights......................................................... $ 260
</TABLE>
See accompanying notes.
F-79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs.
These advances, including interest, are repaid to the Company based on the
collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund....................................................................... 3,641 77
Short-term investments:
U.S. Government securities.............................................................. 5,842 4,000
Mutual fund preferred equity securities................................................. 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments. Receivables from franchisees include trade
receivables, lease receivables and notes receivable. Credit is extended based on
an evaluation of the franchisee's financial condition. Sales-type leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The Company may also repurchase the
area rights with the primary intention of retaining the royalties normally
shared with the former area franchisees and maintaining such rights as long-term
investments. The area
F-82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repurchases have been accounted for as purchases. The Company records these area
repurchases at cost less accumulated amortization. Periodically the Company
assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 30, 1997 no adjustment is necessary. The Company had an
investment of $6.4 million and $3.2 million in such area rights at April 30,
1997 and 1996, respectively. Area franchise rights held as long-term investments
are amortized over a period of 20 years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building................................................... 31.5 years
12.5--31.5
Building improvements...................................... years
Office furniture and equipment............................. 3-5 years
Vehicles................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:..................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000 -$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
F-84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
4. DEBT (CONTINUED)
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998 ---$442; 1999--$452; 2000--$447; 2001--$457; 2002--$463;
and thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock. Significant components of the Company's deferred tax
assets for federal and state income taxes as of April 30 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................................ 5.0% 5.5% 5.6%
Other................................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
----------------------------
<S> <C> <C>
NUMBER OF WGTD. AVG.
SHARES EXERCISED PRICE
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year...................................................... 1,113 $ 9.85
Granted............................................................................... 489 $ 17.54
Exercised............................................................................. (180) $ 9.97
Forfeited............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year.................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year.................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
----- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
----- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
----- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
----------- -------------
<S> <C> <C>
Adjusted pro forma net income.......................................................... $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.................................................. $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1977 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS
- ------------------------------------------------------------------------------ EXERCISABLE
OPTION WGTD. AVE ---------------------------------------
RANGE OF SHARES REMAINING WGTD. AVE. NUMBER WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- -------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 ...................................... 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$ 8.25..................................... 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50..................................... 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50.................................... 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13.................................... 432 9.1 $ 17.70 18 $ 18.27
----- ----------- ----------- ----- -----------
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
F-89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses................................................ 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes.............................. 1,331 (341) 2,310 1,534
Net income (loss)...................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share.............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses................................................ 10,279 11,804 11,870 11,479
Provision for (benefit from) income taxes.............................. 1,036 1,345 1,751 1,488
Net income (loss)...................................................... 1,622 2,091 2,708 2,308
Earnings (loss) per share.............................................. .14 .18 .24 .20
</TABLE>
F-90
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
1997
------------
<S> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................................... $ 1,059
Restricted cash--franchisee deposits.............................................................. 1,923
Short-term investments............................................................................ 31,354
Accounts receivable, net.......................................................................... 7,806
Inventories....................................................................................... 533
Current portion of notes receivable............................................................... 8,998
Current portion of net investment in sales-type leases............................................ 3,388
Deferred income taxes............................................................................. 1,272
Re-acquired area and center rights held for resale................................................ 612
Other............................................................................................. 1,637
------------
Total current assets............................................................................ 58,582
Notes receivable, net............................................................................. 18,131
Net investment in sales-type leases............................................................... 5,133
Property and equipment, net....................................................................... 6,686
Excess of cost over assets acquired, net.......................................................... 268
Re-acquired area rights........................................................................... 1,157
Deferred income taxes............................................................................. 1,249
Other assets...................................................................................... 958
------------
Total assets.................................................................................... $ 92,164
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 1,952
Franchisee deposits............................................................................... 2,395
Royalties, referrals and commissions payable...................................................... 2,760
Accrued employee expenses and related taxes....................................................... 2,089
Other accrued expenses............................................................................ 2,038
Income taxes payable.............................................................................. 1,523
Current maturities of debt and notes payable...................................................... 274
------------
Total current liabilities....................................................................... 13,031
Long-term debt, net of current maturities........................................................... 2,448
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.....
Common stock, no par value, 40,000,000 shares authorized, with 11,422,091 shares issued
outstanding at October 31, 1997................................................................. 18,340
Retained earnings................................................................................. 58,345
------------
Total shareholders' equity...................................................................... 76,685
------------
Total liabilities and shareholders' equity.................................................... $ 92,164
------------
------------
</TABLE>
See accompanying notes.
F-91
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees........................................ $ 8,466 $ 7,985 $ 17,161 $ 15,586
Franchise fees.................................................... 3,802 2,736 6,144 4,531
Sales of supplies and equipment................................... 3,537 3,899 6,049 6,929
Interest income on leases and other............................... 2,537 2,163 4,413 4,151
Company centers................................................... 204 264 458 630
--------- --------- --------- ---------
Total revenues................................................ 18,546 17,047 34,225 31,827
Cost and Expenses:
Franchise operations.............................................. 4,515 4,328 8,598 8,488
Franchise development............................................. 1,840 1,742 3,316 2,954
Cost of supplies and equipment sold............................... 2,552 2,912 4,396 5,189
Marketing......................................................... 1,773 1,713 3,048 3,061
General and administrative........................................ 3,251 2,099 5,591 4,341
Company centers................................................... 197 284 459 680
Litigation settlement expenses.................................... 5,000 5,000
Non recurring charges............................................. 2,510
--------- --------- --------- ---------
Total cost and expenses....................................... 14,128 18,078 27,918 29,713
--------- --------- --------- ---------
Operating Income (loss)............................................... 4,418 (1,031) 6,307 2,114
Interest on investments and other..................................... 309 220 631 476
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes............. 4,727 (811) 6,938 2,590
Provision for income taxes............................................ 1,881 (341) 3,003 990
--------- --------- --------- ---------
Net income (loss)............................................. $ 2,846 $ (470) $ 3,935 $ 1,600
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:................................... $ .24 $ (.04) $ .33 $ .14
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding...... 12,101 11,198 12,088 11,774
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-92
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities:
Net income................................................................................. $ 3,935 $ 1,600
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization............................................................ 556 523
Gain on sale of re-acquired area rights.................................................. (2,644) (339)
Gain on sale of equipment under sales-type lease agreements.............................. (166) (241)
Changes in assets and liabilities:
Restricted cash.......................................................................... (310) 80
Accounts and notes receivable............................................................ (1,792) 461
Receivable from National Media Fund...................................................... 250 770
Assets leased to franchisees and inventories............................................. (675) (1,032)
Re-acquired area and center rights (held for resale)..................................... (143) (86)
Other current assets..................................................................... (243) (1,447)
Other assets............................................................................. (127) (191)
Accounts payable......................................................................... 589 288
Franchisee deposits...................................................................... 298 89
Royalties, referrals and commissions payable............................................. 1,000 (26)
Accrued employee expenses and related taxes.............................................. (301) (929)
Other accrued expenses................................................................... 488 4,806
Income taxes payable..................................................................... 754 (838)
--------- ---------
Net cash flows provided from operating activities...................................... 1,469 3,488
Investing Activities:
Net change in short-term investments..................................................... (4,012) (2.840)
Additions to property and equipment...................................................... (1,106) (215)
Principal payments received on sales-type leases......................................... 624 1,777
--------- ---------
Net cash flows (used in) investment activities......................................... (4,494) (1,278)
Financing Activities:
Borrowings under revolving loan.......................................................... 930
Repayments under revolving loan.......................................................... (250) (1,700)
Repayments on notes payable.............................................................. (1,270) (136)
Repurchase of common stock............................................................... (112) (283)
Proceeds from the issuance of common stock............................................... 1,724 945
--------- ---------
Net cash flows provided from (used in) financing activities............................ 92 (244)
Increase in cash and cash equivalents........................................................ (2,933) 1,966
Cash and cash equivalents at beginning of period............................................. 3,992 1,416
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,059 $ 3,382
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes............................................. $ 2,240 $ 3,270
Interest................................................................................. 164 85
Supplemental Schedule with Non-Cash Investment and Financing Activities:
Equipment sold under sales-type agreements............................................... $ 755 $ 1,048
Additions to debt for acquisition of Area rights......................................... 597 1,780
</TABLE>
See accompanying notes.
F-93
<PAGE>
MAIL BOXES ETC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. BASIS OF PRESENTATION:
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of October 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
six-month periods ended October 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In addition, certain Risk Factors may also
impact future financial reports. It is suggested that the condensed consolidated
financial statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1997 Annual Report on
Form 10-K, as well as the Risk Factors discussed in the Form 10-K Report. The
results of operations for the quarter ended October 31, 1997 are not necessarily
indicative of the operating results for the full year.
NOTE 2. SUBSEQUENT EVENT
During November 1997, Mail Boxes Etc. was acquired by U.S. Office Products.
U.S. Office Products issued approximately 15.4 million shares of its common
stock in exchange for all the outstanding shares of Mail Boxes Etc.,
representing an exchange ratio of 1.349 shares of U.S. Office Products common
stock for each share of Mail Boxes Etc. common stock.
F-94
<PAGE>
THE TENDER AGENT FOR THE OFFER IS:
<TABLE>
<S> <C> <C>
THE CHASE MANHATTAN BANK LONDON OFFICE or CHASE MANHATTAN BANK
Trinity Tower LUXEMBOURG S.A.
9 Thomas More Street 5, rue Plaetis
London E1 9YT L-2338 Luxembourg
Attention: Kevin Rainbird Attention: Veronique Cridel
Telephone: +(44) 171 777 2000 Telephone: (352) 4626 85-284
Facsimile: +(44) 171 777 5410 Facsimile: (352) 4626 85-380
or
+(44) 171 777 5420
</TABLE>
THE DEALER MANAGER FOR THE OFFER IS:
BA ROBERTSON STEPHENS INTERNATIONAL LIMITED
105 Piccadilly
London W1V 9FN
Attention: Lars-Christian Brask
+(44) 171 518 7100
The date of this Offer to Purchase is May 5, 1998.
<PAGE>
ISIN: XS0066478800
COMMON CODE: 6647880
(BEARER NOTES)
ISIN: XS0069763281
COMMON CODE: 6976328
(REGISTERED REGULATION S NOTES)
LETTER OF TRANSMITTAL
TO TENDER
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER WILL EXPIRE AT 3:00 P.M., LONDON TIME, ON WEDNESDAY, JUNE 3, 1998,
UNLESS EXTENDED (SUCH DATE AND TIME, AS THE SAME MAY BE EXTENDED, THE
"EXPIRATION DATE").
<TABLE>
<S> <C> <C>
THE TENDER AGENT FOR THE OFFER IS:
The Chase Manhattan Bank London or Chase Manhattan
Office Bank Luxembourg S.A.
Trinity Tower 5, rue Plaetis
9 Thomas More Street L-2338 Luxembourg
London E1 9YT Attention: Veronique Cridel
Attention: Kevin Rainbird Telephone: (352) 4626 85-284
Telephone: +(44) 171 777 2000 Facsimile: (352) 4626 85-380
Facsimile: +(44) 171 777 5410
or
+(44) 171 777 5420
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD
BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE OFFER CONSIDERATION PURSUANT
TO THE OFFER MUST VALIDLY TENDER (OR RE-TENDER IF SUCH HOLDERS HAVE PREVIOUSLY
WITHDRAWN) THEIR NOTES TO THE TENDER AGENT PRIOR TO THE EXPIRATION DATE. TENDERS
MAY NOT BE WITHDRAWN AT ANY TIME FOLLOWING THE EXPIRATION DATE, SUBJECT TO
LIMITED EXCEPTIONS.
This Letter of Transmittal should be used only to tender the Notes held in
bearer form or held in the form of Registered Regulation S Notes as described in
the Offer to Purchase of U.S. Office Products Company, dated May 5, 1998 (as the
same may be amended or supplemented from time to time, the "Offer to Purchase"
and together with this Letter of Transmittal, the "Offer").
This Letter of Transmittal is to be used (i) if Notes held in definitive
form are to be physically delivered to the Tender Agent or (ii) if Notes held in
definitive form are to be tendered in accordance with the guaranteed delivery
procedures set forth in the Offer to Purchase under the caption "Procedures for
Tendering Notes--Guaranteed Delivery."
The Offer is not being made, directly or indirectly, in or into, or by use
of the mails of, or by any means or instrumentality (including, without
limitation, facsimile transmissions, telex and telephone) of interstate or
foreign commerce of, or of any facility of a national securities exchange of,
the United States and tenders cannot be made by any such use, means or
instrumentality or from within the United States.
<PAGE>
Accordingly, copies of the Offer to Purchase, this Letter of Transmittal and
any related documents are not being and must not be mailed or otherwise
distributed or sent in or into the United States, including to Holders with
addresses in the United States. Persons receiving such documents (including,
without limitation, custodians, nominees and trustees) should not distribute or
send them in, into or from the United States or use such mails or any such means
or instrumentality in connection with the Offer, and so doing will render
invalid any related purported acceptance of the Offer. Persons wishing to tender
their Notes should not use such mails or any means, instrumentality or facility
for any purpose directly or indirectly relating to acceptance of the Offer.
Envelopes containing Letters of Transmittal should not be postmarked in the
United States or otherwise dispatched from the United States and all tendering
Holders must provide addresses outside the United States for the receipt of
payment in respect of the Offer or the return of Notes.
Holders whose Notes are not available or who cannot deliver their Notes and
all other documents required hereby to the Tender Agent prior to, or on, the
Expiration Date may nevertheless tender their Notes in accordance with the
guaranteed delivery procedures set forth in the Offer to Purchase under the
caption "Procedures for Tendering Notes--Tendering Notes--Guaranteed Delivery."
See Instruction 1 herein.
DELIVERY OF DOCUMENTS TO EUROCLEAR OR CEDEL, THE COMPANY OR THE DEALER
MANAGER DOES NOT CONSTITUTE DELIVERY TO THE TENDER AGENT.
THE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF NOTES BE ACCEPTED FROM
OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE
OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
Holders who wish to tender their Notes must complete the box below entitled
"Method of Delivery," complete the box entitled "Description of Notes Tendered"
and sign in the appropriate box below. Holders who complete this Letter of
Transmittal will be deemed to have tendered all Notes listed in the box.
In the case of Registered Regulation S Notes, only registered Holders of
such Notes are entitled to receive the Offer Consideration with respect to the
Notes pursuant to the Offer.
2
<PAGE>
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Offer to Purchase.
METHOD OF DELIVERY
/ / CHECK HERE IF CERTIFICATES FOR TENDERED NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE TENDER AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Owner(s)**: ____________________________________________________
Window Ticket Number (if any): ____________________________________________
Date of Execution of Notice of Guaranteed Delivery: _______________________
Name of Eligible Institution which Guaranteed Delivery: ___________________
DESCRIPTION OF NOTES TENDERED*
Name of Holder(s)**:
________________________________________________________________________________
Aggregate Principal Amount of Notes Tendered**: $_______________________________
________________________________________________________________________________
If definitive certificates are being tendered, please confirm that all relevant
unmatured coupons are attached to the Notes ... Yes/No
* Completion of this Letter of Transmittal will constitute the tender of all
Notes delivered.
** In the case of Registered Regulation S Notes, the tendering holder must be
the registered holder of such Notes.
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Offer to Purchase dated May 5, 1998 (as the same may be supplemented or amended
from time to time, the "Offer to Purchase") of U.S. Office Products Company (the
"Company") and this Letter of Transmittal and instructions hereto (as the same
may be supplemented or amended from time to time, the "Letter of Transmittal,"
which, together with the Offer to Purchase, constitutes the "Offer") relating to
the Company's offer to purchase all of its outstanding 5 1/2% Convertible
Subordinated Notes due 2003 (the "Notes") held in bearer form or held in the
form of Registered Regulation S Notes (as defined in Offer to Purchase) upon the
terms and subject to the conditions set forth in the Offer.
Upon the terms and subject to the conditions of the Offer as set forth in
the Offer, the undersigned hereby tenders to the Company the principal amount of
Notes indicated above.
Subject to, and effective upon, the acceptance for payment of the principal
amount of Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to, and any and all claims in respect of or arising or having arisen as a
result of the undersigned's status as a Holder of, all Notes tendered hereby.
The undersigned hereby irrevocably constitutes and appoints the Tender Agent as
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that the Tender Agent also acts as the agent of the Company) with
respect to such Notes, with full power of substitution (such power of attorney
being deemed to be an irrevocable power coupled with an interest) to (a) deliver
such Notes, to or upon the order of the Company, (b) present such Notes for
transfer and (c) receive all benefits and otherwise all rights of beneficial
ownership of such Notes, all in accordance with the terms of the Offer as
described in the Offer to Purchase.
The undersigned understands that tenders of Notes may be withdrawn by
written notice of withdrawal received by the Tender Agent at any time on or
prior to the Expiration Date. In the event of a termination of the Offer, the
Notes tendered pursuant to the Offer will be returned to the tendering Holders
promptly. Tenders of Notes (or any portion of such Notes in authorized
denominations) may be withdrawn at any time on or prior to the Expiration Date
and, unless accepted by the Company, may be withdrawn at any time after 40
business days after the date of this Offer to Purchase. If, prior to the
Expiration Date, the Company reduces (i) the principal amount of Notes subject
to the Offer or (ii) the Purchase Price, then previously tendered Notes may be
validly withdrawn until the expiration of ten business days after the date that
notice of either such reduction is first published, given or sent to Holders by
the Company. If the Company makes a material change in the terms of the Offer,
the Company will disseminate additional Offer materials regarding such change
and will extend the Offer, in each case to the extent required by applicable
law.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Notes tendered
hereby, and that when such Notes are accepted for payment by the Company, the
Company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that none of
such Notes will be subject to any adverse claim or right. The undersigned, upon
request, will execute and deliver all additional documents deemed by the Tender
Agent or the Company to be necessary or desirable to complete the sale,
assignment and transfer of the Notes tendered hereby.
The undersigned understands that tenders of Notes pursuant to any of the
procedures described in the Offer to Purchase under the caption "Procedures for
Tendering Notes" and in the instructions hereto will constitute the
undersigned's acceptance of the terms and conditions of the Offer. The Company's
acceptance of such Notes for payment will constitute a binding agreement between
the undersigned and
4
<PAGE>
the Company upon the terms and subject to the conditions of the Offer. For
purposes of the Offer, the undersigned understands that validly tendered Notes
(or defectively tendered Notes with respect to which the Company has waived such
defect) will be deemed to have been accepted by the Company if, as and when the
Company gives oral or written notice thereof to the Tender Agent.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives.
The undersigned understands that the delivery and surrender of any Notes is
not effective, and the risk of loss of the Notes does not pass to the Tender
Agent, until receipt by the Tender Agent of this Letter of Transmittal (or a
manually signed facsimile hereof), properly completed and duly executed,
together with all accompanying evidences of authority and any other required
documents in form satisfactory to the Company. All questions as to the form of
all documents and the validity (including the time of receipt) and acceptance of
tenders and withdrawals of Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding.
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions," please issue the check for the Offer Consideration with respect
to Notes accepted for payment and return any certificates or Notes not tendered
or accepted for payment, in the name(s) of the Holder(s) appearing above under
"Description of Notes Tendered" with the Offer Consideration in respect of Notes
accepted for payment, and return any certificates for Notes not tendered or not
accepted for payment, in the name(s) of the holder(s) appearing above under
"Description of Notes Tendered." Similarly, unless otherwise indicated herein in
the box entitled "Special Delivery Instructions," please mail the check for the
Offer Consideration with respect to Notes accepted for payment, together with
any certificates for Notes not tendered or not accepted for payment (and any
accompanying documents, as appropriate) to the address(es) of the Holder(s)
appearing above under "Description of Notes Tendered." If both the "Special
Payment Instructions" box and the "Special Delivery Instructions" box are
completed, please issue the check for the Offer Consideration with respect to
any Notes accepted for payment, and return any certificates for Notes not
tendered or not accepted for payment, in the name(s) of, and mail the check and
any such certificates to, the person(s) at the address(es) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Payment Instructions" box or "Special Delivery Instructions" box
provisions of this Letter of Transmittal to transfer any Note from the name of
the holder(s) thereof if the Company does not accept for payment any of the
principal amount of such Note.
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if certificates for Notes in a principal amount not
tendered or not accepted for payment and/or the check for the Offer
Consideration are to be issued in the name of someone other than the
undersigned.
Issue Check and/or Notes to:
Name:_________________________________________________________________________
(Please print)
Address:______________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
5
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, AND 6)
To be completed ONLY if certificates for Notes in a principal amount not
tendered or not accepted for payment and/or the check for the Offer
Consideration are to be sent to someone other than the undersigned at an
address other than that shown above.
Deliver Check and/or Notes to:
Name: ______________________________________________________________________
(Please print)
Address: ___________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING
HOLDERS OF NOTES)
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
(Signature(s) of Holder(s) or Authorized Signatory)
Dated: _________________ , 1998
Must be signed by the registered holder(s) of Registered Regulation S
Notes exactly as their name(s) appear(s) on certificate(s) for the Notes or
by person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, agent or other person acting in a fiduciary or representative
capacity, please provide the following information and see Instruction 4
herein.
Name(s): ___________________________________________________________________
____________________________________________________________________________
Please Print)
Capacity (full title): _____________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
(Including Postal Code)
Area Code and Telephone No.: ( ) _________________________________________
- --------------------------------------------------------------------------------
6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND NOTES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed by Holders if (i)
certificates representing Notes are to be physically delivered to the Tender
Agent herewith by such Holders or (ii) tender of Notes is to be made according
to the guaranteed delivery procedures set forth under the caption "Procedures
for Tendering Notes-- Tendering Notes--Guaranteed Delivery" in the Offer to
Purchase; and, in each case, instructions are not being transmitted through
Euroclear or Cedel. All physically delivered Notes, as well as a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other documents required by this Letter of Transmittal must be
received by the Tender Agent at its address set forth herein prior to the
Expiration Date or the tendering Holder must comply with the guaranteed delivery
procedures set forth below. Delivery of documents to the Company or the Dealer
Manager does not constitute delivery to the Tender Agent.
If a Holder desires to tender Notes pursuant to the Offer and time will not
permit this Letter of Transmittal, certificates representing such Notes and all
other required documents to reach the Tender Agent on or prior to the Expiration
Date, then such Holder must tender such Notes pursuant to the guaranteed
delivery procedures set forth under the caption "Procedures for Tendering
Notes--Tendering Notes--Guaranteed Delivery" in the Offer to Purchase. Pursuant
to such procedures, (i) such tender must be made by or through a Euroclear or
Cedel participant, (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form provided by the Company, must be
received by the Tender Agent, either by hand delivery, mail, telegram or
facsimile transmission prior to the Expiration Date, and (iii) the certificates
for all tendered Notes, in proper form for transfer together with a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other documents required by this Letter of Transmittal must be
received by the Tender Agent within three business days after the date of the
execution of such Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE NOTES AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING HOLDER. If
delivery is by mail, registered mail with return receipt requested, properly
insured, is recommended. In all cases, sufficient time should be allowed for
such documents to reach the Tender Agent. Except as otherwise provided in this
Instruction 1, delivery will be deemed made only when actually received by the
Tender Agent.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their Notes
for payment.
If Holders wish to tender less than the entire principal amount evidenced by
any Note submitted, such Holders must fill in the principal amount that is to be
tendered in the column entitled "Principal Amount of Notes Tendered," but only
in an authorized denomination of Notes. In the case of a partial tender of
Notes, as soon as practicable after the Expiration Date, new certificates for
the remainder of the Notes that were evidenced by such Holder's old certificates
will be sent to such Holder, unless otherwise provided in the appropriate box on
this Letter of Transmittal. The entire amount that is represented by Notes
delivered to the Tender Agent will be deemed to have been tendered, unless
otherwise indicated.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Notes will be
resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders and withdrawals
of Notes that are not in proper form or the acceptance of which would, in the
opinion of the Company or counsel for the Company, be unlawful. The Company also
reserves the right to waive any irregularities or
7
<PAGE>
conditions of a tender as to particular Notes. The Company's interpretation of
the terms and conditions of the Offer (including the instructions in this Letter
of Transmittal) will be final and binding. Unless waived, any irregularities in
connection with tenders and withdrawals of Notes must be cured within such time
as the Company shall determine. Tenders and withdrawals of Notes will not be
deemed to have been made until such irregularities have been cured or waived.
Any Notes received by the Tender Agent that are not properly tendered or
delivered and to which the irregularities have not been cured or waived will be
returned by the Tender Agent to the tendering Holder unless otherwise provided
in this Letter of Transmittal as soon as practicable following the Expiration
Date.
None of the Company, the Tender Agent the Dealer Manager, the Trustee or any
other person shall be obligated to give notification of defects or
irregularities in any tender or withdrawal or shall incur any liability for
failure to give any such notification.
2. INADEQUATE SPACE. If the space provided herein under "Description of
Notes Tendered " is inadequate, the certificate numbers of the Notes and the
principal amount of Notes tendered should be listed on a separate schedule and
attached hereto.
3. WITHDRAWAL OF TENDERS. Tenders of Notes (or any portion of such Notes in
authorized denominations) may be withdrawn at any time on or prior to the
Expiration Date and, unless accepted by the Company, may be withdrawn at any
time after 40 business days after the date of the Offer to Purchase.
For a withdrawal of a tender of Notes to be effective, a written,
telegraphic, or facsimile transmission notice of withdrawal (or, if Notes are
held through Euroclear or Cedel, via the procedures of Euroclear or Cedel, as
the case may be) must be received by the Tender Agent on or prior to the
Expiration Date (or such later date as may be permitted by the preceding
paragraph) at its address set forth on the back cover of the Offer to Purchase.
Any such notice of withdrawal must specify the name of the person who tendered
the Notes to be withdrawn, that such person is withdrawing his or her election
to tender such Notes, and the aggregate principal amount of the Notes to be
withdrawn. If Notes in definitive form have been delivered or otherwise
identified to the Tender Agent, then prior to the physical release of such
Notes, the tendering Holder must submit the serial numbers shown on the
particular Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by a participant in Euroclear or Cedel. Withdrawals of
tenders of Notes may not be rescinded. Notes properly withdrawn will not be
deemed validly tendered for purposes of the Offer, but may be tendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described above under "Procedures for Tendering Notes."
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, in the Company's sole discretion
(whose determination shall be final and binding). No withdrawal of Notes will be
deemed to have been properly made until all defects or irregularities have been
cured or expressly waived. None of the Company, the Tender Agent, the Dealer
Manager, the Trustee or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal, or
incur any liability for failure to give any such notification.
Withdrawal of Notes can only be accomplished in accordance with the
foregoing procedures.
4. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered Holder(s) of the
Registered Regulation S Notes tendered hereby, the signature(s) must correspond
to the name(s) as written on the face of the Notes without alteration,
enlargement or any other change whatsoever. If any Notes tendered hereby are
owned by two or more persons, all such persons must sign this Letter of
Transmittal.
If this Letter of Transmittal is signed by the registered Holder of
Registered Regulation S Notes tendered hereby, no endorsements of such Notes or
separate bond powers are required, unless payment is to be made to, or Notes not
tendered or not accepted for payment are to be issued in the name of, a person
other than the registered Holder(s), in which case the Notes tendered hereby
must be endorsed or
8
<PAGE>
accompanied by appropriate bond powers, in either case signed exactly as the
name(s) of the registered Holders(s) appear(s) on such Notes.
If this Letter of Transmittal or any Notes or bond powers are signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
the Company of such person's authority so to act must be submitted with this
Letter of Transmittal.
5. TRANSFER TAXES. Except as set forth in this Instruction 5, the Company
will pay all transfer taxes, if any, applicable to the purchase of Notes
pursuant to the Offer. If, however, Registered Regulation S Notes for principal
amounts not accepted for tender are to be delivered to, or are to be registered
or issued in the name of, any person other than the registered Holder of the
Notes, or if tendered Notes are registered in the name of any person other than
the person signing the Letter of Transmittal, or if a transfer tax is imposed
for any reason other than the purchase of Notes pursuant to the Offer, then the
amount of any such transfer tax (whether imposed on the Holder or any other
person) will be payable by the tendering Holder. If satisfactory evidence of
payment of such tax or exemption therefrom is not submitted, then the amount of
such transfer tax will be deducted from the Offer Consideration otherwise
payable to such tendering Holder.
6. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the payment of
the Offer Consideration with respect to any Notes tendered hereby is to be
issued or if Registered Regulation S Notes not tendered or not accepted for
payment are to be issued, in the name of a person other than the person(s)
signing this Letter of Transmittal, or if such check or any such Note is to be
sent to someone other than the person(s) signing this Letter of Transmittal or
to the person(s) signing this Letter of Transmittal but at an address other than
that shown in the box entitled "Description of Notes Tendered," the appropriate
boxes in this Letter of Transmittal must be completed. If no such instruction is
given, the Offer Consideration and/or Notes not accepted for payment or not
tendered, as the case may be, will be sent to the person signing this Letter of
Transmittal.
7. CONFLICTS. In the event of any conflict between the terms of the Offer
to Purchase and the terms of this Letter of Transmittal, the terms of the Offer
to Purchase will control.
8. WAIVER OF CONDITIONS. The Company reserves the absolute right, subject
to applicable law, to amend in any respect or waive any of the specified
conditions in the Offer in the case of any particular Note tendered.
9. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. If a Holder desires to
tender Notes held in definitive form pursuant to the Offer, but any such Note
has been mutilated, lost, stolen or destroyed, such Holder should write to or
telephone the Trustee, at the address listed below, concerning the procedures
for obtaining replacement certificates for such Note, arranging for
indemnification or any other matter that requires handling by the Trustee:
The Chase Manhattan Bank
450 West 33rd Street
15th Floor
New York, New York 10001
U.S.A.
Attention: Karen Vera
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the Offer
to Purchase and the related Letter of Transmittal, may be directed to the Tender
Agent or Dealer Manager at its telephone number set forth on the back cover page
of this Letter of Transmittal or such Holder's broker, dealer, commercial bank
or trust company or nominee for assistance concerning the Offer.
9
<PAGE>
THE DEALER MANAGER FOR THE OFFER IS:
BA Robertson Stephens International Limited
105 Piccadilly
London W1V 9FN
Attention: Lars-Chrishan Brask
+(44) 171 518 7100
<PAGE>
ISIN: XS0066478800
COMMON CODE: 6647880
(BEARER NOTES)
ISIN: XS0069763281
COMMON CODE: 6976328
(REGISTERED REGULATION
S NOTES)
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THIS NOTICE OF GUARANTEED DELIVERY OR A FORM SUBSTANTIALLY EQUIVALENT HERETO
MUST BE USED TO ACCEPT THE OFFER BY U.S. OFFICE PRODUCTS COMPANY (THE "COMPANY")
TO PURCHASE FOR CASH ALL OF ITS OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED
NOTES DUE 2003 (THE "NOTES") HELD IN BEARER FORM OR HELD IN THE FORM OF
REGISTERED REGULATION S NOTES, IF TIME WILL NOT PERMIT THE LETTER OF
TRANSMITTAL, CERTIFICATES REPRESENTING THE NOTES OR ANY OTHER REQUIRED DOCUMENTS
TO REACH THE TENDER AGENT, OR THE PROCEDURES FOR BOOK-ENTRY TRANSFER CANNOT BE
COMPLETED, ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED BELOW). THIS FORM MAY
BE DELIVERED BY A A PARTICIPANT IN EUROCLEAR OR CEDEL (AS DEFINED IN THE OFFER
TO PURCHASE) BY HAND DELIVERY, TELEGRAM, FACSIMILE TRANSMISSION OR MAIL TO THE
TENDER AGENT AS SET FORTH BELOW. ALL CAPITALIZED TERMS USED HEREIN BUT NOT
DEFINED HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE OFFER TO PURCHASE
OF THE COMPANY DATED MAY 5, 1998 (AS THE SAME MAY BE AMENDED OR SUPPLEMENTED
FROM TIME TO TIME, THE "OFFER TO PURCHASE").
THE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF NOTES FOR PURCHASE BE
ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING
OR ACCEPTANCE OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION.
THE OFFER WILL EXPIRE AT 3:00 P.M., LONDON TIME, ON WEDNESDAY, JUNE 3, 1998
UNLESS EXTENDED (SUCH DATE AND TIME, AS THE SAME MAY BE EXTENDED, THE
"EXPIRATION DATE"). TENDERS OF NOTES MUST BE RECEIVED BY THE EXPIRATION DATE TO
RECEIVE THE OFFER CONSIDERATION (AS DEFINED IN THE OFFER TO PURCHASE). TENDERS
OF NOTES MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE OFFER TO
PURCHASE.
<TABLE>
<S> <C> <C>
THE TENDER AGENT FOR THE OFFER IS:
The Chase Manhattan Bank London Office or Chase Manhattan Bank Luxembourg S.A.
Trinity Tower 5, rue Plaetis
9 Thomas More Street L-2338 Luxembourg
London E1 9YT Attention: Veronique Cridel
Attention: Kevin Rainbird Telephone: (352) 4626 85-284
Fax No. +(44) 171 777 5410 Facsimile: (352) 4626 85-380
or
+(44) 171 777 5420
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION, OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Offer to Purchase and Letter of Transmittal,
receipt of which is hereby acknowledged, the principal amount of Notes set forth
below, pursuant to the guaranteed delivery procedures set forth in the Offer to
Purchase under the heading "Procedures for Tendering Notes--Tendering
Notes--Guaranteed Delivery."
The undersigned understands that tenders of Notes may be withdrawn by
written notice of withdrawal received by the Tender Agent at any time on or
prior to the Expiration Date. In the event of termination of the Offer, the
Notes tendered pursuant to the Offer will be returned to the tendering Holders
promptly. If the Company makes a material change in the terms of the Offer or
the information concerning the Offer, the Company will disseminate additional
Offer materials regarding such change and extend the Offer, to the extent
required by law.
The undersigned understands that payment by the Tender Agent for Notes
tendered and accepted for payment pursuant to the Offer will be made only after
timely receipt by the Tender Agent of such Notes and a Letter of Transmittal (or
facsimile thereof) with respect to such Notes properly completed and duly
executed with any required signature guarantees and any other documents required
by the Letter of Transmittal or a properly transmitted Book-Entry Confirmation.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<S> <C>
Signature(s) of Holders or Authorized Address(es):
Signatory: Area Code and Telephone No.:
Name(s) of Holder(s):
Principal Amount of Notes Tendered:
Certificate No(s). of Notes (if available)
</TABLE>
This Notice of Guaranteed Delivery must be signed by the holder(s) of Notes
exactly as their name(s) appear(s) on the Notes or by person(s) authorized to
become holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery. If signature is by a trustee, guardian, attorney-in-fact,
officer of a corporation, executor, administrator, agent or other
representative, such person must provide the following information:
Please print name(s) and address(es)
Name(s): ______________________________________________________________________
________________________________________
Capacity: _____________________________________________________________________
________________________________________
DO NOT SEND NOTES WITH THIS FORM. NOTES SHOULD BE SENT TO THE TENDER AGENT,
TOGETHER WITH A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL.
2
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in Euroclear or Cedel, hereby guarantees
that, within three business days from the date of this Notice of Guaranteed
Delivery, a properly completed and validly executed Letter of Transmittal (or a
facsimile thereof), together with Notes tendered hereby in proper form for
transfer and all other required documents will be deposited by the undersigned
with the Tender Agent at its address set forth above.
The institution that completes this form must communicate the guarantee to
the Tender Agent and must deliver the Letter of Transmittal and Notes to the
Tender Agent within the time period shown herein. Failure to do so could result
in a financial loss to the undersigned.
<TABLE>
<S> <C>
Name of Firm: -------------------------------------------
Authorized Signature
Address: Name:
- -------------------------------------------
Title:
Area Code and Date:
Telephone No.:
</TABLE>
3
<PAGE>
ISIN: XS0066478800
COMMON CODE: 6647880
(BEARER NOTES)
ISIN: XS0069763281
COMMON CODE: 6976328
(REGISTERED REGULATION S NOTES)
U.S. OFFICE PRODUCTS COMPANY
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 3:00 P.M.,
LONDON TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE
AND TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
To Our Clients:
Enclosed for your consideration is the Offer to Purchase dated May 5, 1998
(as the same may be amended or supplemented from time to time, the "Offer to
Purchase") and the related Letter of Transmittal and instructions thereto (the
"Letter of Transmittal" and, together with the Offer to Purchase, the "Offer")
relating to the offer by U.S. Office Products Company (the "Company") to
purchase any and all of its outstanding 5 1/2% Convertible Subordinated Notes
due 2003 (the "Notes") held in bearer form or held in the form of Registered
Regulation S Notes (as defined in the Offer to Purchase).
The consideration payable pursuant to the Offer (the "Offer Consideration")
to a Holder who validly tenders Notes prior to the Expiration Date (and does not
validly withdraw such Notes) shall be 94.5% of the aggregate principal amount of
the Notes so tendered, plus accrued and unpaid interest, if any, up to, but not
including, the date upon which the Company pays for Notes tendered and accepted
pursuant to the Offer.
Consummation of the Offer is subject to certain conditions described in the
Offer to Purchase. Capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Offer to Purchase.
THIS MATERIAL RELATING TO THE OFFER IS BEING FORWARDED TO YOU AS THE
BENEFICIAL OWNER OF NOTES CARRIED BY US FOR YOUR ACCOUNT OR BENEFIT BUT NOT
REGISTERED IN YOUR NAME. A TENDER OF ANY SUCH NOTES WITH RESPECT THERETO CAN BE
MADE ONLY BY US PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
NOTES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender any
or all such Notes held by us for your account pursuant to the terms and
conditions set forth in the Offer. We urge you to read the Offer to Purchase
carefully before instructing us to tender your Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to tender Notes on your behalf in accordance with the provisions of
the Offer. The Offer will expire at 3:00 p.m., London time, on Wednesday, June
3, 1998, unless extended. Notes tendered pursuant to the Offer may only be
withdrawn under the circumstances described in the Offer to Purchase.
<PAGE>
Your attention is directed to the following:
1. The Offer is for any and all outstanding Notes held in bearer form or
held in the form of Registered Regulation S Notes (as defined in the Offer to
Purchase).
2. Holders must tender (and not validly withdraw) their Notes on or prior to
the Expiration Date in order to receive the Offer Consideration.
3. Consummation of the Offer is conditioned upon, among other things,
satisfaction of (a) the Financing Condition, (b) the Equity Investment
Condition, (c) the Distribution Condition and (d) the General Conditions (each
as defined in the Offer to Purchase).
4. Tendering holders may withdraw their tender at any time prior to the
Expiration Date.
5. Any transfer taxes incident to the transfer of Notes from the tendering
holder to the Company will be paid by the Company, except as provided in the
Offer to Purchase and the instructions to the Letter of Transmittal.
6. The Offer is not being made to (nor will the surrender of Notes for
purchase be accepted from or on behalf of) holders in any jurisdiction in which
the making or acceptance of the Offer would not be in compliance with the laws
of such jurisdiction.
7. The acceptance for payment of Notes validly tendered and not validly
withdrawn and the payment of the Offer Consideration will be made as promptly as
practicable after the Expiration Date. The Company, however, expressly reserves
the right to delay acceptance of any of the Notes or to terminate the Offer and
not accept for payment any Notes not theretofore accepted if any of the
conditions set forth in the Offer to Purchase under the caption "The
Offer--Conditions of the Offer" shall not have been satisfied or waived by the
Company. The Company will pay the Offer Consideration promptly following
acceptance of the Notes.
8. The Company expressly reserves the right, subject to applicable law and
the terms of the Offer, (i) to delay acceptance for purchase of any Notes or,
regardless of whether such Notes were theretofore accepted for payment, to delay
the purchase of any Notes pursuant to the Offer and to terminate the Offer and
not accept for payment any Notes not theretofore accepted for purchase, upon the
failure of any of the conditions to the Offer specified herein to be satisfied,
by giving oral or written notice of such delay or termination to the Tender
Agent and (ii) at any time, or from time to time, to amend the Offer in any
respect.
9. Consummation of the Offer may have adverse consequences to non-tendering
holders, including that the reduced amount of outstanding Notes as a result of
the Offer may adversely affect the trading market, liquidity and market price of
the Notes.
If you wish to have us tender any or all of the Notes held by us for your
account, please so instruct us by completing, executing and returning to us the
instruction form that follows.
2
<PAGE>
INSTRUCTIONS REGARDING THE OFFER TO PURCHASE ANY AND ALL
OF THE 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF
U.S. OFFICE PRODUCTS COMPANY
The undersigned acknowledge(s) receipt of your letter and the enclosed documents
referred to therein relating to the Offer of U.S. Office Products Company.
This will instruct you whether to tender the principal amount of Notes indicated
below held by you for the account of the undersigned, pursuant to the terms of
and conditions set forth in the Offer to Purchase and the Letter of Transmittal.
Box 1 / / -Please tender the indicated Notes held by you for my account.
Box 2 / / -Please do not tender any Notes held by you for my account.
Date: __________________, 1998
____________________________
____________________________
Signature(s)
____________________________
____________________________
Please print name(s) here
Principal amount of Notes to Be Tendered:
$ ________________________ *
(must be in principal amounts equal to authorized
denominations)
____________________________
____________________________
____________________________
Please type or print address
____________________________
Telephone Number
____________________________
My Account Number with You
- ------------------------
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S) SHALL
CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL NOTES OF SUCH
BENEFICIAL OWNER(S).
3
<PAGE>
ISIN: XS0066478800
COMMON CODE: 6647880
(BEARER NOTES)
ISIN: XS0069763281
COMMON CODE: 6976328
(REGISTERED REGULATION S NOTES)
U.S. OFFICE PRODUCTS COMPANY
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
PURSUANT TO THE OFFER TO PURCHASE
DATED MAY 5, 1998
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 3:00 P.M.,
LONDON TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED (SUCH DATE
AND TIME, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE").
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Enclosed for your consideration is an Offer to Purchase (the "Offer to
Purchase") and a form of Letter of Transmittal (the "Letter of Transmittal" and,
together with the Offer to Purchase, the "Offer"), relating to the offer by U.S.
Office Products Company (the "Company") to purchase for cash any and all of its
outstanding 5 1/2% Convertible Subordinated Notes due 2003 (the "Notes") held in
bearer form or held in the form of Registered Regulation S Notes (as defined in
the Offer to Purchase). Capitalized terms used herein but not defined herein
shall have the meanings ascribed to such terms in the Offer to Purchase.
The consideration payable pursuant to the Offer to a Holder who validly
tenders Notes prior to the Expiration Date (and does not validly withdraw such
Notes) shall be 94.5% of the principal amount of the Notes so tendered, plus
accrued and unpaid interest, if any, up to, but not including, the date upon
which the Company pays for the Notes tendered and accepted pursuant to the
Offer.
We are asking you to contact your clients for whom you hold Notes. The
Company will pay all transfer taxes, if any, applicable to the tender of Notes
to it or to its order, except as otherwise provided in the Offer.
Enclosed herewith are copies of the following documents:
1. An Offer to Purchase dated May 5, 1998;
2. A Letter of Transmittal for the use and information of your clients
who hold Notes in definitive form, which will be physically delivered by
such persons;
3. A Notice of Guaranteed Delivery to be used to accept the Offer if
Notes held in definitive form and all other required documents cannot be
delivered to the Tender Agent prior to the Expiration Date; and
4. A form of a letter which may be sent to your clients for whose
account you hold the Notes in your name or in the name of a nominee, with
space provided for obtaining such clients' instructions with regard to the
Offer.
Euroclear and Cedel participants will be able to tender Notes electronically
through Euroclear or Cedel, as the case may be, in accordance with the standard
procedures of Euroclear or Cedel, respectively. No Letters of Transmittal will
be required to tender Notes electronically through Euroclear or Cedel.
<PAGE>
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting tenders of the Notes pursuant to the Offer. You will
be reimbursed for customary mailing and handling expenses incurred by you in
forwarding the enclosed materials to your clients as described in the Offer to
Purchase under the caption "Fees and Expenses."
PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 3:00 P.M.,
LONDON TIME, ON WEDNESDAY, JUNE 3, 1998, UNLESS EXTENDED. WE URGE YOU TO CONTACT
YOUR CLIENTS AS PROMPTLY AS POSSIBLE IN ORDER TO OBTAIN THEIR INSTRUCTIONS.
Additional copies of the enclosed materials may be obtained from the Tender
Agent, at its address and telephone number set forth on the back cover of the
enclosed Offer to Purchase.
Very Truly Yours,
BA Robertson Stephens International
Limited
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON AS THE AGENT OF THE COMPANY, THE TENDER AGENT, THE TRUSTEE
OR THE DEALER MANAGER OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO
THE OFFER WHICH IS NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF
TRANSMITTAL.
<PAGE>
EXHIBIT (A)(11)
NOTICE OF OFFER TO PURCHASE FOR CASH
ANY AND ALL
OF THE
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2003
OF U.S. OFFICE PRODUCTS COMPANY
AT
94.5% OF THE PRINCIPAL AMOUNT OF THE NOTES PLUS ACCRUED INTEREST
ISIN XS0066478800 CUSIP 912325 AB 3
ISIN XS0069763281 CUSIP 912325 AD 9
NOTICE IS HEREBY GIVEN to the holders of the 5 1/2% Convertible Subordinated
Notes due 2003 (the "Notes") of U.S. Office Products Company (the "Company")
that the Company has offered, on May 5, 1998, to purchase any and all of the
Notes at 94.5% of the principal amount tendered, plus accrued and unpaid
interest up to but excluding the date upon which the Company pays for Notes
accepted for purchase (the "Purchase Price").
The Company is making the offer to holders of Notes in bearer form or in the
form of Registered Regulation S Notes (collectively, the "Non-U.S. Notes")
through the Non-U.S. Note offer materials, dated May 5, 1998, which can be
obtained from Global Trust Services at The Chase Manhattan Bank London Office or
Chase Manhattan Bank Luxembourg S.A. The Company is making the offer to holders
of Notes in registered form (other than the Registered Regulation S Notes) (the
"U.S. Notes"), on the same terms and conditions as to holders of Non-U.S. Notes,
through the U.S. Note offer materials, dated May 5, 1998, which can be obtained
from MacKenzie Partners, Inc. in the United States (telephone: (212) 929-5500).
Holders who hold Non-U.S. Notes through Euroclear or Cedel will receive offer
materials through their Euroclear or Cedel participants.
Holders who tender Notes in the Offer can withdraw their Notes prior to the
Expiration Date. The Expiration Date is June 3, 1998 (at 3:00 P.M., London time,
for purposes of Non-U.S. Notes, and at 5:00 P.M., New York City time, for
purposes of U.S. Notes), unless extended as described in the offer materials.
The Company will pay the Purchase Price in U.S. dollars promptly after the
Expiration Date. Holders who hold Non-U.S. Notes though Euroclear or Cedel will
receive payment of the Purchase Price in accordance with the operating
procedures of Euroclear and Cedel.
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
- ------------------------------------------------------------------------------
For immediate release - May 5, 1998 Release No. 98-012
U.S. OFFICE PRODUCTS COMPANY Contact: Donald H. Platt
(NASDAQ - "OFIS") U.S. Office Products
(202) 339-6700 or (800) 330-6347
or Edelman Financial
Silvia Rosselli (Media)
(212) 704-8217
U.S. OFFICE PRODUCTS COMMENCES CASH TENDER OFFERS
FOR CONVERTIBLE NOTES DUE 2003
Washington, D.C., May 5, 1998 - U.S. Office Products Company (NASDAQ: OFIS)
today announced that it is commencing cash tender offers for its outstanding
5-1/2% Convertible Subordinated Notes due 2003 (the "2003 Notes"). The tender
offers begin today, Tuesday, May 5, 1998.
As previously announced, U.S. Office Products Company ("USOP") is offering to
purchase the 2003 Notes at a price of 94.5% of the principal amount plus
accrued and unpaid interest. The Company said that is has approximately $230
million aggregate principal amount of the 2003 Notes outstanding. The Company
is making separate offers to holders of 2003 Notes held in registered form in
the United States (the "U.S. Offer") and to holders of 2003 Notes originally
issued to non-U.S. persons and held in bearer form (the "International
Offer"). The U.S. Offer and the International Offer are being made through
separate offer materials, which the Company began distributing today. The
terms of the offers are described more fully in such materials. This offer
is one of a series of financing transactions that USOP is undertaking in
connection with its previously announced strategic restructuring plan.
The U.S. Offer will expire on Wednesday, June 3, 1998, at 5:00 p.m., New York
City time. The International Offer will expire on Wednesday, June 3, 1998 at
3:00 p.m., London time.
BancAmerica Robertson Stephens is acting as the dealer manager and MacKenzie
Partners, Inc., is acting as the information agent for the U.S. Offer. BA
Robertson Stephens International Limited is acting as the dealer manager for
the International Offer.
This press release shall not constitute an offer to purchase or the
solicitation of an offer to purchase nor shall there be any purchase of any
2003 Notes in any state in which such offer, solicitation or purchase would
be unlawful prior to registration or qualification under the securities laws
of any such state.
More
<PAGE>
USOP is one of the fastest growing suppliers of a broad range of office
products and business services to corporate, commercial, industrial and
educational customers. USOP operates in the United States, as well as in New
Zealand, Australia, Canada and the United Kingdom, selling a full range of
more than 34,000 office and educational products an services to its
customers. USOP also owns Mail Boxes Etc. ("MBE"), the largest franchiser of
business communication and postal service center, with approximately 3,600
centers operating worldwide, and with master licensing arrangements in place
for the development of MBE business centers in 58 countries around the world.
MBE centers are owned and operated by licensed franchisees of MBE or its
master licensees. On January 13, 1998, USOP announced the adoption by its
Board of Directors of a strategic restructuring plan that includes the
spin-off to USOP stockholders of its educational supplies, print management,
technology solutions and travel services divisions, the equity self-tender
offer, and the purchase by an affiliate of an investment fund managed by
Clayton, Dubilier & Rice, Inc. of an equity interest in the restructured USOP
for a price of $270 million. The Company expects the restructuring
transactions to be completed in the second calendar quarter of 1998.
* * *
This press release included "forward looking statements" that involve
uncertainties and risks. There can be no assurance that actual results will
not differ materially from the Company's expectations. Factors that could
cause such differences include the effects and the timing of the Company's
strategic restructuring plan and other risks described in the Company's
definitive Proxy Statement filed April 30, 1998 with the SEC, its Annual
Report on Form 10-K, its Quarterly Reports on Form 10-Q, and its other
filings with the SEC.
- End -
<PAGE>
Exhibit 99.(b)
THE CHASE MANHATTAN BANK
CHASE SECURITIES INC.
270 Park Avenue
New York, New York 10017
BANKERS TRUST COMPANY
BT ALEX.BROWN INCORPORATED
130 Liberty Street
New York, New York 10016
MERRILL LYNCH CAPITAL CORPORATION
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
World Financial Center
225 Liberty Street
New York, New York 10080-6105
$1,225,000,000 Senior Secured Bank Financing
Commitment Letter
March 24, 1998
U.S. OFFICE PRODUCTS COMPANY
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: Donald H. Platt, Chief Financial Officer
Ladies and Gentlemen:
U.S. Office Products Company, a Delaware corporation (the
"Company"), has advised The Chase Manhattan Bank ("Chase"), Bankers Trust
Company ("Bankers Trust"), Merrill Lynch Capital Corporation ("Merrill Capital",
and collectively with Chase and Bankers Trust, the "Agents"), Chase Securities
Inc. ("CSI"), BT Alex.Brown Incorporated ("BTAB") and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch", and collectively with CSI and
BTAB, the "Co-Arrangers") that Clayton, Dubilier & Rice, Inc. ("CD&R") proposes
a transaction pursuant to which Clayton, Dubilier & Rice Fund V Limited
Partnership ("Fund V"), a private investment partnership managed by CD&R,
intends to invest (the "Investment") approximately $270,000,000 to acquire 24.9%
of the outstanding Company common stock and warrants to acquire one share of
Company common stock for each share so purchased (the "Warrants").
Simultaneously with the Investment, the Company intends to effect a strategic
restructuring plan, which will involve an approximately $1,000,000,000
self-tender for approximately 37,000,000 outstanding shares or share equivalents
at a price of $27 per share, the spin-off (the "Spin-Off") to shareholders of
four of the Company's divisions (the "Spin-Off Companies"), the refinancing of
existing debt (the "Debt Refinancing"), including a tender for all of the
Company's Convertible Notes Due 2003 and a possible conversion of all or part of
the Company's Convertible Notes Due 2001 into equity of the Company (together
with the Investment, the "Transactions").
<PAGE>
2
The Company has informed us that approximately $1,701,000,000
of financing (the "Financing") is contemplated to complete the Transactions, as
follows:
(i) at least $400,000,000 in gross cash proceeds from
the issuance of fixed-rate senior subordinated debt by the
Company (the "Subordinated Debt Financing");
(ii) approximately $887,000,000 in borrowings under a
$1,225,000,000 senior secured bank credit facility in the form
of the Facilities described below, provided that to the extent
the gross cash proceeds from the Subordinated Debt Financing
exceed $400,000,000, such excess proceeds shall be applied pro
rata to reduce the amount under the Tranche A Term Loan
Facility and the Tranche B Term Loan Facility (as defined
below);
(iii) $270,000,000 from the Investment; and
(iv) up to approximately $144,000,000 of value from
the conversion of the Company's Convertible Notes Due 2001
into equity of the Company.
A Sources and Uses Table for the Transactions and the Financing is set forth in
Exhibit A attached hereto.
The Company has advised us that, after giving effect to the
Transactions and the Financing, the Company and its subsidiaries shall not have
any other debt for borrowed money (subject to certain exceptions for any
existing debt not fully retired in the Debt Refinancing as listed on Schedule A
hereto and for immaterial debt to be mutually agreed upon) or preferred equity
securities outstanding, other than permitted intercompany obligations.
The senior secured bank financing referred to above (the
"Facilities") will consist of (i) a $200,000,000 seven-year multi-draw term loan
facility (the "Multi-Draw Term Loan Facility"), (ii) a $400,000,000 seven-year
revolving credit facility (the "Revolving Credit Facility"), (iii) a
$150,000,000 seven-year term loan A facility (the "Tranche A Term Loan
Facility") and (iv) a $475,000,000 eight-year term loan B facility (the "Tranche
B Term Loan Facility"). It is anticipated that the aggregate available amount
under the Tranche A Term Loan Facility and the Tranche B Term Loan Facility and
approximately $262,000,000 under the Revolving Credit Facility will be drawn on
the date of the consummation of the Transactions, (the "Closing Date") and the
Multi-Draw Term Loan Facility will be available for drawing for acquisitions
after the Closing Date. The Facilities will be used to (a) finance a portion of
the Transactions, (b) pay certain transaction fees and expenses of up to
$75,000,000 related to the Transactions and (c) finance the working capital
needs and acquisitions and other business requirements of the Company and of the
Blue Star Group Limited and its subsidiaries (the "Blue Star Group") following
the Transactions.
We are pleased to confirm to the Company that each of Chase
and Bankers Trust hereby severally commits to provide to the Company
$490,000,000, and Merrill Capital hereby severally commits to provide to the
Company $245,000,000, of the Facilities, upon the terms and conditions specified
in this Commitment Letter, the Statement of Principal Terms and Conditions
attached hereto as Exhibit B (the "Term Sheet") and the accompanying Fee
Letters, dated the date hereof (the "Fee Letters"). The Company hereby agrees to
negotiate in good faith with respect to any changes in the pricing, terms or
structure of the Facilities reasonably requested by the Co-Arrangers in order to
facilitate an optimal structure or a successful syndication of the Facilities.
<PAGE>
3
It is agreed that (a) Chase will act as the sole
administrative agent (the "Administrative Agent") for the Facilities, (b)
Bankers Trust will act as the sole syndication agent for the Facilities (the
"Syndication Agent"), (c) Merrill Capital will act as the sole documentation
agent for the Facilities (the "Documentation Agent"), and (d) CSI, BTAB and
Merrill Lynch shall act as the Co-Arrangers for the Facilities. The Agents
anticipate, prior to or after the execution of definitive financing
documentation for the Facilities, to syndicate, through the Co-Arrangers, their
commitment to one or more financial institutions reasonably acceptable to the
Company that will become parties to such definitive financing documentation (the
financial institutions from time to time parties to such documentation,
including the Agents, being collectively referred to herein as the "Lenders").
The appointment of any co-agents for the Facilities would be
subject to the approval of the Agents, the Co-Arrangers and the Company. The
co-agent title and other titles awarded to any Lender, if approved by the Agents
and the Co-Arrangers, would be in name only, and no such Lender would have any
role with respect to the matters referred to in the first sentence of this
paragraph. The Company agrees that no Lender will receive any compensation of
any kind for its participation in the Facilities, except as expressly provided
for in this Commitment Letter, the Term Sheet or the Fee Letters described
below, and that the Agents' commitments hereunder will be reduced by the amount
of any such commitments received prior to the execution of definitive financing
documentation for the Facilities upon such execution.
The Company understands that the Co-Arrangers intend to
commence syndication efforts promptly following execution of this Commitment
Letter and the Company agrees actively to assist the Co-Arrangers in achieving a
syndication that is satisfactory to the Agents, the Co-Arrangers and the
Company. This will be accomplished by a variety of means, including direct
contact during the syndication among senior management and advisors of CD&R and
the Company on the one hand and potential Lenders on the other hand. It is the
preference of the Co-Arrangers, but not their obligation, to bring certain
existing relationship banks of CD&R and the Company into the syndicate on what
the Co-Arrangers believe to be market terms. The Company agrees that, prior to
and during the syndication efforts, the Company will not endeavor to obtain any
competing financings by the Company in the syndication and capital markets,
other than the Subordinated Debt Financing or any lease receivable
securitizations of the Blue Star Group and other than for the benefit of the
Spin-Off Companies in connection with the Spin-Off.
The Company agrees that the Co-Arrangers, in cooperation with
it and CD&R and in consultation with the Agents, will manage all aspects of the
syndication, including decisions as to the selection of financial institutions
to be approached and when they will be approached, when their commitments will
be accepted, which financial institutions will be Lenders (which decision shall
be taken in consultation with the Company), the allocation of the commitments
among the Lenders and the amount and distribution of fees among the Lenders. To
assist the Co-Arrangers in the syndication efforts, the Company agrees (a)
promptly to provide, and to cause its affiliates and advisors to provide, each
of the Co-Arrangers upon request with all information reasonably deemed
necessary by such Co-Arranger to complete successfully the syndication,
including, without limitation, certain information and projections prepared by
the Company or on its behalf relating to the transactions contemplated hereby
(but excluding any information or projections that the Company or CD&R is
advised by counsel are subject to attorney-client privilege and that do not
contain material adverse information concerning the Company) and (b) to assist,
and to cause its affiliates and advisors to assist, CSI upon request in the
preparation of a Confidential Information Memorandum and other marketing
materials to be used in connection with the syndication. The Agents and the
Co-Arrangers shall be entitled, after consultation with the Company, if the
Agents and the Co-Arrangers determine that such changes are necessary in order
to insure a successful syndication of the Facilities:
<PAGE>
4
(a) after May 31, 1998, if the syndication has not then been
completed, to change the pricing, terms and structure of, or eliminate
any of the Facilities, so long as the aggregate amount of the
Facilities remains unchanged; and
(b) at any time, to (i) extend the eighteen month period
referred to in the first paragraph of the section captioned "Special
Provisions Applicable to Tranche B Term Loans" to a period of up to
three years and to change the prepayment premium to be applicable for
such period or extended period (the "Premium Period") to be a premium
of up to 3% for the first year, 2% for the second year and 1% for the
third year, (ii) require any mandatory prepayment of loans under the
Tranche B Term Loan Facility (other than with excess cash flow) during
the Premium Period be accompanied by the applicable prepayment premium
and (iii) increase to seventy-five percent the percentage of excess
cash flow for each fiscal year of the Company that shall be used for
mandatory prepayments and provide that the step-down be to fifty
percent upon satisfaction of the contemplated performance criteria.
The Agents' commitments hereunder are subject to the agreements in this
paragraph. To the extent that the syndication of the credit facility in
connection with any other CD&R investment could disrupt or otherwise interfere
with the orderly syndication of the Facilities, it is understood and agreed that
CD&R will, to the extent permitted by applicable law, provide the Co-Arrangers
with reasonable prior notice of the syndication of such other credit facility
and, upon the Agents' reasonable request, endeavor in good faith to coordinate
"bank meetings" and similar presentation and events in the syndication of such
other credit facility with those in the syndication of the Facilities.
As consideration for the Agents' commitment hereunder and for
the agreement of the Co-Arrangers contained herein as to the management,
structuring and syndication of the Facilities, the Company agrees to pay, or
cause to be paid, the fees set forth in the Term Sheet and the Fee Letters as
and when specified therein. Once paid, such fees shall not be refundable under
any circumstances.
The Company hereby represents and warrants that (a) all
information (other than financial and business projections, budgets, pro forma
data and forecasts) concerning the Company and the Transactions that has been
prepared by the Company or any of its representatives and has been or is
hereafter made available to any of the Agents or the Co-Arrangers (the
"Information"), taken as a whole, is and will be complete and correct in all
material respects and does not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not materially misleading in light of the
circumstances under which such statements are made and (b) all financial
projections concerning the Company that have been or are hereafter prepared by
the Company or any of its representatives and made available to any of the
Agents or the Co-Arrangers or any other participant in the Facilities (the
"Projections") have been or will be prepared in good faith based upon
assumptions believed by the Company's management to be reasonable when so
prepared. The Company agrees to supplement the Information and the Projections
from time to time until the closing date of the Investment, so that the
representations and warranties contained in the preceding sentence remain
correct in all material respects. In arranging, structuring and syndicating the
Facilities, the Co-Arrangers will be using and relying on the Information and
the Projections without independent verification thereof.
The Agents' commitments hereunder are also subject to the
condition, among others, that after the date hereof (a) there shall not have
occurred any material adverse change in the business, assets, operations,
condition (financial or otherwise) or prospects of the Company and its
subsidiaries taken as a whole from that described in the Information and
Projections reviewed by the Agents prior to the date hereof (after giving effect
to the Transactions), (b) there shall not have occurred and be continuing a
material adverse disruption of or material adverse change in financial, banking
or capital market
<PAGE>
5
conditions and (c) the negotiation, execution and delivery of definitive
financing documentation for the Facilities and documentation related to the
Investment and the other Transactions shall be completed, and all of such
documentation shall be reasonably satisfactory to the Agents, the Co-Arrangers,
the Company and their counsel. Such documentation shall reflect the terms and
conditions set forth in the Term Sheet and contain such other indemnities,
covenants, representations and warranties, events of default, conditions
precedent, security and guarantee arrangements and other terms and conditions as
shall be reasonably satisfactory in all respects to the Agents, the Co-Arrangers
and the Company. Those matters that are not covered by or made clear under the
provisions of this Commitment Letter, the Term Sheet and the Fee Letters are
subject to the approval and agreement of the Agents, the Co-Arrangers and the
Company.
By executing this Commitment Letter, the Company agrees (a) to
indemnify and hold harmless each of the Agents, the Co-Arrangers and each of
their officers, directors, employees, affiliates, agents and controlling persons
(each, an "Indemnified Person") from and against any and all losses, claims,
damages, and liabilities or other expenses ("Losses") to which any such
Indemnified Person may become subject arising out of or in connection with this
Commitment Letter, the Term Sheet, the Fee Letters, the Facilities or the loans
thereunder, the use of any proceeds of such loans, the Investment, the other
Transactions or any related transaction or any claim, litigation, investigation
or proceeding relating to any of the foregoing, regardless of whether any such
Indemnified Person is a party thereto or whether any such claim, litigation,
investigation or proceeding is brought by the Company or by any other person,
and to reimburse each such Indemnified Person upon demand for any legal or other
expenses incurred in connection with investigating or defending any of the
foregoing, provided that the foregoing indemnity will not apply to any Losses to
the extent they are found by a final decision of a court of competent
jurisdiction (or a settlement tantamount to such a final decision) to have
resulted from the wilful misconduct, gross negligence or material default under
this Commitment Letter of any Indemnified Person, and (b) to reimburse the
Agents and the Co-Arrangers (x) if the Closing Date occurs, for all reasonable
out-of-pocket expenses (including expenses of the due diligence investigation,
syndication expenses, travel expenses, reasonable fees, charges and
disbursements of one firm of counsel and of local counsel and reasonable fees of
consultants approved by the Company) incurred by the Agents and the Co-Arrangers
in connection with the Facilities and the preparation of this Commitment Letter,
the Term Sheet, the Fee Letters, the definitive financing documentation for the
Facilities and the other transactions contemplated hereby and thereby and (y) if
the Closing Date does not occur, for the out-of pocket syndication expenses and
the reasonable fees, charges and disbursements of one firm of counsel. The
Company's obligations under this paragraph shall remain in full force and effect
regardless of whether definitive financing documentation for the Facilities
shall be executed and delivered and notwithstanding the termination of this
Commitment Letter or the commitments hereunder, provided that effective upon the
consummation of the Investment and the execution of the definitive financing
documentation for the Facilities the provisions contained in this paragraph
shall be superseded in all respects by the terms of the definitive financing
documentation for the Facilities. None of the Agents, Co-Arrangers nor any other
Indemnified Person shall be responsible or liable to any other person for
consequential damages which may be alleged as a result of this Commitment Letter
or the financing contemplated hereby.
This Commitment Letter is delivered to the Company on the
understanding that neither this Commitment Letter, the Fee Letters nor any of
their terms or substance (other than the terms or substance of the Term Sheet or
of the first six paragraphs, the ninth through the fourteenth paragraphs and
penultimate paragraph hereof) shall be disclosed, directly or indirectly, to any
other person except (a) the Company, CD&R and the Company's and CD&R's
affiliates, (b) the respective accountants, attorneys and other advisors of the
Company, CD&R and the Company's and CD&R's affiliates, (c) the Company and its
accountants, attorneys and other advisors, in each case only in connection with
the transactions contemplated hereby and (in the case of the Fee Letters) on a
need-to-know confidential basis or in connection with seeking payment or
reimbursement of any amounts contemplated hereby, or
<PAGE>
6
(d) as may be compelled to be disclosed in a judicial or administrative
proceeding or as otherwise required by law.
This Commitment Letter shall not be assignable by the Company
without the prior written consent of the Agents and the Co-Arrangers (and any
such purported assignment shall be void) and may not be amended or waived except
by a written instrument signed by the Agents, the Co-Arrangers and the Company.
By executing this Commitment Letter, the Agents, the Co-Arrangers and the
Company acknowledge that this Commitment Letter, the Term Sheet and the Fee
Letters are the only agreements between the Company, the Agents, and the
Co-Arrangers with respect to the Facilities and set forth the entire
understanding of the parties with respect thereto. This Commitment Letter may be
executed in any number of counterparts, each of which shall be an original and
all of which, when taken together, shall constitute one agreement. THIS
COMMITMENT LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK AND ANY RIGHT TO JURY TRIAL WITH RESPECT TO ANY
CLAIM, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR CONTEMPLATED BY THIS LETTER
AND/OR THE FEE LETTERS IS HEREBY WAIVED. This Commitment Letter is intended to
be solely for the benefit of the parties hereto and is not intended to confer
any benefits upon, or create any rights in favor of, any person other than the
parties hereto.
If the Company is in agreement with the foregoing, it must
indicate its acceptance of the terms and conditions of this Commitment Letter,
the Term Sheet and the Fee Letters by signing in the appropriate spaces below
and in the Fee Letters and returning, or causing to be returned, to Chase the
enclosed duplicate originals of this Commitment Letter and the Fee Letters not
later than 5:00 p.m., New York City time, on March 27, 1998. The Agents'
commitment hereunder will expire at such time in the event Chase has not
received such executed originals in accordance with the preceding sentence. In
the event that the Closing Date shall not have occurred on or before June 30,
1998 (or such other date as the Company and the other parties hereto may agree),
then this Commitment Letter and the Agents' commitment hereunder shall terminate
unless the Agents and the Co-Arrangers shall agree in writing to an extension;
provided, however, the reimbursement and indemnification provisions contained in
the thirteenth paragraph and the confidentiality provisions contained in the
fourteenth paragraph of this Commitment Letter shall survive any such
termination hereof.
<PAGE>
7
Chase, Bankers Trust, Merrill Capital, CSI, BTAB and Merrill
Lynch are pleased to have been given the opportunity to assist the Company in
connection with the financing of the Investment and we look forward to working
together on this important transaction.
Very truly yours,
THE CHASE MANHATTAN BANK
By: /s/ Lawrence Palumbo, Jr.
----------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
CHASE SECURITIES INC.
By: /s/ Lawrence Palumbo, Jr.
----------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ David J. Bell
---------------------------
Name: David J. Bell
Title: Vice President
BT ALEX.BROWN INCORPORATED
By: /s/ Daniel D. McCready
--------------------------
Name: Daniel D. McCready
Title: Managing Director
MERRILL LYNCH CAPITAL CORPORATION
By: /s/ Christopher K. Stout
--------------------------
Name: Christopher K. Stout
Title: Vice President
<PAGE>
8
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ Christopher K. Stout
-----------------------------
Name: Christopher K. Stout
Title: Director
AGREED AND ACCEPTED
as of the date first above written:
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Donald H. Platt
-------------------------
Name: Donald H. Platt
Title: Chief Financial Officer
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
ESTIMATED SOURCES AND USES TABLE
--------------------------------
(in millions)
Sources Uses
- ------- ----
<S> <C> <C>
Multi-Draw Term Loan $0.0 Stock Repurchase Price $1,000.0
Facility(1)
Revolving Credit 262.0 Refinance Existing Debt 252.0
Facility(2)
Tranche A Term Loan 150.0 Conversion of Convertible 144.0
Facility Notes Due 2001(3)
Tranche B Term Loan 475.0 Tender for Convertible Notes 230.0
Facility Due 2003(4)
Subordinated Debt 400.0 Fees & Expenses 75.0
----- ------
Financing
CD&R Equity 270.0
Conversion of Convertible 144.0
Notes Due 2001(3)
Total $1,701.0 Total $1,701.0
-------- --------
-------- --------
</TABLE>
- --------
(1) The Multi Draw Term Loan Facility of $200,000,000 will be available for
drawing after the Closing Date.
(2) The Revolving Credit Facility of $400,000,000 is expected to be drawn
on the Closing Date only to the extent of approximately $262,000,000.
(3) Assumes full conversion.
(4) Excludes any tender premiums.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
U.S. Office Products Company
Other Current Debt Outstanding as of March 18, 1998
---------------------------------------------------
(in thousands)
<S> <C>
Installment Loans - $1,504
Capital Leases - $6,919
Letters of Credit - $6,051(1)
Foreign Exchange Contracts - $13,207(2)
Other - $2,307
---------------
Total - $29,988
---------------
---------------
</TABLE>
Notes:
(1) $5,617 USD assumes New Zealand Exchange Rate of $.58
(2) Assumes New Zealand Exchange Rate of $.58
<PAGE>
THE CHASE MANHATTAN BANK
CHASE SECURITIES INC.
270 Park Avenue
New York, New York 10017
BANKERS TRUST COMPANY
BT ALEX.BROWN INCORPORATED
130 Liberty Street
New York, New York 10016
MERRILL LYNCH CAPITAL CORPORATION
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
World Financial Center
225 Liberty Street
New York, New York 10080-6105
$1,225,000,000 Senior Secured Bank Financing
--------------------------------------------
First Amendment to the Commitment Letter
----------------------------------------
April 22, 1998
U.S. OFFICE PRODUCTS COMPANY
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: Donald H. Platt, Chief Financial Officer
Ladies and Gentlemen:
We refer to the Commitment Letter, dated as of March 24, 1998 (the
"COMMITMENT LETTER"), among U.S. Office Products Company, a Delaware
corporation, The Chase Manhattan Bank ("CHASE"), Bankers Trust Company,
Merrill Lynch Capital Corporation, Chase Securities Inc., BT Alex.Brown
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Capitalized terms defined in the Commitment Letter and used herein shall have
the meanings given them in the Commitment Letter. Unless otherwise
indicated, all paragraph and subparagraph references are to the Commitment
Letter.
The Commitment Letter is hereby amended as follows:
(1) Paragraph 4 is hereby amended by (a) deleting "$400,000,000" appearing
in clause (ii) and substituting therefor "$250,000,000", (b) deleting
"$150,000,000" appearing in clause (iii) and substituting therefor
"$100,000,000", (c) deleting "$475,000,000" appearing in clause (iv) and
substituting therefor "$675,000,000" and (d)
<PAGE>
2
deleting "$262,000,000" appearing in the second sentence thereof and
substituting therefor "$112,000,000";
(2) Subparagraph 9(a) is hereby amended by deleting the phrase "May 31,
1998" and substituting therefor the phrase "June 30, 1998";
(3) The Sources and Uses Table for the Transactions and the Financing
attached as Exhibit A to the Commitment Letter is hereby amended by deleting
it in its entirety and substituting therefor the Sources and Uses Table for
the Transactions and the Financing attached as Exhibit A hereto; and
(4) The Term Sheet attached as Exhibit B to the Commitment Letter is
hereby amended by deleting it in its entirety and substituting therefor the
Term Sheet attached as Exhibit B hereto.
Except as expressly amended herein, the Commitment Letter shall continue
to be, and shall remain in full force and effect in accordance with its terms.
[Remainder of page intentionally left blank]
<PAGE>
Please confirm that the foregoing is our mutual understanding by signing
and returning to Chase an executed counterpart of this First Amendment to the
Commitment Letter as soon as possible, but in any event by no later than
April 23, 1998.
Very truly yours,
THE CHASE MANHATTAN BANK
By: /s/ Lawrence Palumbo, Jr.
--------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
CHASE SECURITIES INC.
By: /s/ Lawrence Palumbo, Jr.
--------------------------
Name: Lawrence Palumbo, Jr.
Title: Vice President
BANKERS TRUST COMPANY
By: /s/ Patricia Hogan
--------------------------
Name: Patricia Hogan
Title: Principal
BT ALEX. BROWN INCORPORATED
By: /s/ Daniel D. McCready
--------------------------
Name: Daniel D. McCready
Title: Managing Director
MERRILL LYNCH CAPITAL CORPORATION
By: /s/ Christopher K. Stout
--------------------------
Name: Christopher K. Stout
Title: Vice President
3
<PAGE>
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ Christopher K. Stout
----------------------------
Name: Christopher K. Stout
Title: Director
AGREED AND ACCEPTED
as of the date first above written:
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Mark Director
--------------------------------
Name: Mark Director
Title: Executive Vice President - Administration
4
<PAGE>
EXHIBIT A
ESTIMATED SOURCES AND USES TABLE
(in millions)
<TABLE>
<CAPTION>
Sources Uses
- ------- ----
<S> <C> <C> <C>
Multi-Draw Term Loan $0.0 Stock Repurchase Price $1,000.0
Facility (1)
Revolving Credit 112.0 Refinance Existing Debt 252.0
Facility (2)
Tranche A Term Loan 100.0 Conversion of Convertible 144.0
Facility Notes Due 2001 (3)
Tranche B Term Loan 675.0 Tender for Convertible Notes 230.0
Facility Due 2003 (4)
Subordinated Debt 400.0 Fees & Expenses 75.0
Financing _______
CD&R Equity 270.0
Conversion of Convertible 144.0
Notes Due 2001 (3) -----
Total $1,701.0 Total $1,701.0
-------- --------
-------- --------
</TABLE>
- ---------------------------
(1) The Multi Draw Term Loan Facility of $200,000,000 will be available
for drawing after the Closing Date.
(2) The Revolving Credit Facility of $250,000,000 is expected to be drawn
on the Closing Date only to the extent of approximately $112,000,000.
(3) Assumes full conversion.
(4) Excludes any tender premiums.
<PAGE>
EXHIBIT B
SENIOR SECURED
CREDIT FACILITIES
Statement of Principal Terms and Conditions
April 22, 1998
U.S. Office Products Company, a Delaware corporation (the
"Company"), has advised The Chase Manhattan Bank ("Chase"), Bankers Trust
Company ("Bankers Trust"), Merrill Lynch Capital Corporation ("Merrill Capital"
and collectively with Chase and Bankers Trust, the "Agents"), Chase Securities
Inc. ("CSI"), BT Alex.Brown Incorporated ("BTAB") and Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch", and collectively with CSI and
BTAB, the "Co-Arrangers") that Clayton, Dubilier & Rice, Inc. ("CD&R") proposes
a transaction pursuant to which Clayton, Dubilier & Rice Fund V Limited
Partnership ("Fund V"), a private investment partnership managed by CD&R,
intends to invest (the "Investment") approximately $270,000,000 to acquire 24.9%
of the outstanding Company common stock and warrants to acquire one share of
Company common stock for each share so purchased (the "Warrants") in the
Company. Simultaneously with the Investment, the Company intends to effect a
strategic restructuring plan, which will involve an approximately $1,000,000,000
self-tender for approximately 37,000,000 outstanding shares or share equivalents
at a price of $27 per share (the "Stock Repurchase"), the spin-off to
shareholders of four of the Company's divisions, the refinancing of existing
debt (the "Debt Refinancing"), including a tender for all of the Company's
Convertible Notes Due 2003 and a possible conversion of all or part of the
Company's Convertible Notes Due 2001 into equity of the Company (together with
the Investment, the "Transactions"). CD&R has further advised the Agents and the
Co-Arrangers that approximately $1,701,000,000 of financing (the "Financing") is
contemplated to complete the Transactions, as follows:
(i) at least $400,000,000 in gross cash proceeds from
the issuance of fixed rate senior subordinated debt by the
Company (the "Subordinated Debt Financing");
(ii) approximately $887,000,000 in borrowings under
$1,225,000,000 in senior secured bank credit facilities (the
"Facilities"), provided that to the extent the gross cash
proceeds from the Subordinated Debt Financing exceed
$400,000,000, such excess proceeds shall be applied pro rata
to reduce the amount under the Tranche A Term Loan Facility
and the Tranche B Term Loan Facility (as defined below);
(iii) $270,000,000 from the Investment; and
(iv) up to approximately $144,000,000 in value from
the conversion of the Company's Convertible Notes Due 2001
into equity of the Company.
<PAGE>
2
The following statement sets forth the principal terms and conditions for the
Facilities. Terms used but not defined herein shall have the meanings assigned
to such terms in the Commitment Letter to which this Statement of Principal
Terms and Conditions is attached.
Borrower: The Company, and to the extent
provided below, the Blue Star
Group (as defined below).
Administrative Agent: Chase (in such capacity, the
"Administrative Agent").
Syndication Agent: Bankers Trust (in such capacity,
the "Syndication Agent").
Documentation Agent: Merrill Capital (in such capacity,
the "Documentation Agent", and
together with the Administrative
Agent and the Syndication Agent,
the "Agents").
Co-Arrangers: CSI, BTAB and Merrill Lynch.
Lenders: A syndicate of financial
institutions selected in the
syndication of the Facilities (the
"Lenders").
Facilities: An aggregate principal amount of
up to $1,225,000,000 will be
available to the Company, and to
the extent provided below, the
Blue Star Group under the
following credit facilities:
Multi-Draw Term Loan Facility: A
seven-year multi-draw term loan
facility (the "Multi-Draw Term Loan
Facility") in an aggregate
principal amount equal to
$200,000,000. Each loan (a
"Multi-Draw Term Loan") under the
Multi-Draw Term Loan Facility will
be repayable in installments in
amounts to be determined.
Revolving Credit Facility: A
seven-year revolving credit
facility (the "Revolving Credit
Facility") to be made available to
the Company in an aggregate
principal amount equal to
$250,000,000, of which (a) an
amount to be determined (the "L/C
Subfacility Amount") may be used
(to the extent available) for
standby and commercial letters of
credit (each a "Letter of Credit")
and (b) an amount to be determined
may be used for swing line loans.
Letters of Credit will be issued by
The Chase Manhattan Bank (in such
capacity, the "Issuing Bank"), and
each other Lender in the Revolving
Credit Facility will take an
irrevocable and unconditional pro
rata participation in each Letter
of Credit. The loans under the
Revolving Credit Facility (the
"Revolving Credit Loans") will
mature on a date (the
<PAGE>
3
"Revolving Credit Maturity Date")
which is approximately seven years
after the Closing Date (as defined
below). At the option of the
Borrower, the L/C Subfacility
Amount will be increased by up to
$200,000,000 in order to provide
for Letters of Credit ("Blue Star
Letters of Credit") to be issued in
U.S. dollars to support borrowings
under a separate (and separately
documented) credit facility (the
"Blue Star Facility") denominated
in New Zealand dollars for Blue
Star Group Limited and its
subsidiaries (the"Blue Star Group")
arranged by the Co-Arrangers; and,
if such option is elected, the Blue
Star Letters of Credit would be
severally issued by affiliates of
the Co-Arrangers and other Lenders
satisfactory to the Co-Arrangers
and the Company (with the
respective shares of the affiliates
of the Co-Arrangers to be pro rata
in accordance with their initial
commitments), and each other Lender
in the Revolving Credit Facility
would take an irrevocable and
unconditional participation
therein. The U.S. dollar-equivalent
of the Blue Star Facility,
including 90 days interest thereon,
would be initially covered
approximately 110% by the Blue Star
Letters of Credit, and the Blue
Star Facility would require
mandatory prepayments in the event
that its U.S. dollar-equivalent
would otherwise not be fully
covered by the Blue Star Letters of
Credit. The Blue Star Facility
would be for one year, subject to
annual extensions, and would
automatically terminate with any
termination and repayment of the
Revolving Credit Facility. The Blue
Star Letters of Credit would be
drawable by the lenders under the
Blue Star Facility in the event of
an acceleration of the Blue Star
Facility or a bankruptcy of any
obligor thereunder.
Tranche A Term Loan Facility: A
seven-year term loan facility (the
"Tranche A Term Loan Facility") in
an aggregate principal amount equal
to $100,000,000. The loans under
the Tranche A Term Loan Facility
(the "Tranche A Term Loans") will
be repayable in consecutive
quarterly installments in amounts
to be determined, commencing
approximately six months after the
Closing Date.
Tranche B Term Loan Facility: An
eight-year term loan facility (the
"Tranche B Term Loan Facility";
together with the Multi-Draw Term
Loan Facility and Tranche A Term
Loan Facility, the "Term Loan
Facilities") in an aggregate
principal amount equal to
$675,000,000. The loans under the
Tranche B Term Loan Facility (the
"Tranche B Term Loans"; and,
together with the Multi-Draw Term
Loans and
<PAGE>
4
the Tranche A Term Loan, the "Term
Loans") will be repayable,
commencing approximately six months
after the Closing Date, in nominal
consecutive quarterly installments
in amounts to be determined for the
first seven years and thereafter in
substantial consecutive equal
quarterly installments in amounts
to be determined.
To the extent the gross cash
proceeds from the Subordinated Debt
Financing are in excess of
$400,000,000, such excess will be
applied pro rata to reduce the
aggregate principal amount of the
Tranche A Term Loan Facility and of
the Tranche B Term Loan Facility.
At the option of the Company (to be
exercised prior to the Closing
Date), a portion of the Multi-Draw
Term Loan Facility, the Tranche A
Term Loan Facility and the Revolving
Credit Facility will be made
available to the Blue Star Group in
an amount to be agreed upon.
Special Provisions Notwithstanding anything to the
Applicable to Tranche B contrary contained herein, the
Term Loans: Tranche B Term Loans may not be
voluntarily prepaid for any reason
prior to the eighteen month
anniversary of the Closing Date,
except at a price which is equal to
the principal amount of the Tranche
B Loans so prepaid plus a
prepayment premium of 1%. In
addition:
(a) in lieu of the negative
covenants described herein
(including the financial
covenants), the Tranche B Term
Loans shall be subject to negative
covenants which are substantially
similar to those applicable to the
Subordinated Debt Financing,
including limitations (subject to
exceptions to be determined) on
indebtedness, liens, investments,
guarantee obligations, restricted
payments, mergers, sales of assets,
transactions with affiliates and
other provisions customary and
appropriate for financings of that
type; and
(b) in lieu of the events of
default described herein, the
Tranche B Term Loans shall be
subject to events of default which
are substantially similar to those
applicable to the Subordinated Debt
Financing; provided that there
shall be (i) a default upon
nonpayment of principal when due,
(ii) a cross default to the other
Facilities and other debt in excess
of an amount to be determined in
the event that such default is not
cured within a period to be
mutually agreed upon and (iii) a
change of ownership or control
identical to that applicable to the
other Facilities.
<PAGE>
5
All or a portion of the
Optional Prepayments outstanding Term Loans and the
and Commitment: Revolving Credit Loans
(collectively, the "Loans") may be
prepaid at any time without
penalty except as set forth with
respect to Tranche B and the
unutilized portion of the
Revolving Credit Facility and the
Term Loan Facilities may be
terminated in whole or in part (in
minimum amounts to be agreed upon)
at the Company's option, subject
to reimbursement of redeployment
costs in the case of a prepayment
of Loans based on the eurodollar
rate if prepayment occurs other
than at the end of an applicable
interest period and subject to the
"Special Provisions Applicable to
Tranche B Term Loans" above.
Optional prepayments of Term Loans
will be applied to the outstanding
Term Loans ratably and to the then
scheduled installments thereof
ratably in accordance with the
then outstanding amounts thereof,
provided that any such prepayment
may first be applied to the
installments of principal due
within the next twelve months.
Such optional prepayments may not
be reborrowed.
In the event that after the Closing
Mandatory Date a receivables securitization
Prepayments: program is established by the
Company or the Blue Star Group on
terms reasonably satisfactory to
the Lenders (a "Permitted
Receivables Securitization"), an
amount equal to the initial net
cash proceeds thereof will be
applied, as set forth below, first
to reduce the Revolving Credit
Facility and then to prepay
outstanding Term Loans and reduce
the unused portion of the
Multi-Draw Term Loan Facility.
Fifty percent of excess cash flow
(to be defined in a mutually
satisfactory manner) for each
fiscal year of the Company
(commencing with the post-closing
portion of the fiscal year in which
the Closing Date occurs) shall be
applied, as set forth below, first
to prepay outstanding Term Loans
and then to reduce the Revolving
Credit Facility and the unused
portion of the Multi-Draw Term Loan
Facility. Such percentage of excess
cash flow subject to mandatory
prepayment shall not be required
upon achievement of performance
criteria to be agreed upon.
Other mandatory prepayment
provisions relating to proceeds of
certain asset sales (including sale
leasebacks) in excess of an agreed
upon threshold and issuances of
debt to be agreed upon.
Prepayments shall be applied,
first, to prepay outstanding Term
Loans and, second, to prepay
outstanding Revolving
<PAGE>
6
Credit Loans and cash collateralize
or replace outstanding Letters of
Credit (including the Blue Star
Letters of Credit), and
simultaneously reduce commitments
under the Revolving Credit Facility
and, third, to reduce unused
commitments under the Multi-Draw
Term Loan Facility. Each such
prepayment of the Term Loans shall
be applied to the outstanding
Multi-Draw Term Loans, Tranche A
Term Loans and the Tranche B Term
Loans ratably and to the then
scheduled installments thereof
ratably in accordance with the then
outstanding amounts thereof and may
not be reborrowed, provided that
any such prepayment may first be
applied to the installments of
principal due within the next
twelve months. Notwithstanding the
foregoing, so long as any
Multi-Draw Term Loans or Tranche A
Term Loans are outstanding, each
holder of Tranche B Term Loans
shall have the right to refuse all
or any portion of such prepayment
allocable to its Tranche B Term
Loans and the amount so refused
will be applied to prepay ratably
the Multi-Draw Term Loans and
Tranche A Term Loans and the
Tranche B Term Loans as to which
prepayment has not been refused.
Availability: Multi-Draw Term Loan Facility: The
Multi-Draw Term Loans will be
available to be drawn, in minimum
borrowings of $25,000,000, until
the third anniversary of the
Closing Date to finance or
refinance Permitted Acquisitions
made by the Company after the
Closing Date. A "Permitted
Acquisition" will be an acquisition
of a business concern (including a
product or line of business) which
has a positive pro forma EBITDA for
its most recent fiscal year and is
engaged in the same or a related
line of business as the Company,
provided that (x) -------- after
giving effect to such acquisition
and any related borrowing of
Revolving Credit Loans and
Multi-Draw Term Loans, no default
or event of default under the
Facilities will have occurred and
be continuing and, in the exercise
of its best judgment, the Company
believes that the Company and its
subsidiaries will have adequate
financial liquidity to engage in
their business in the ordinary
course for the reasonably
foreseeable future (the making of
any such acquisition and related
borrowing, if clause (y) below does
not apply, being deemed a
representation and warranty by the
Company to the foregoing effect),
and (y) the Company provides a
certificate to the effect of clause
(x) above (excluding the
parenthetical clause therein) and
showing computations of compliance
with the financial covenants on a
pro forma --- ----- basis for the
four most recently ended fiscal
quarters for which financial
statements are available, if:
<PAGE>
7
(i) such acquisition
involves a cash purchase
price of more than
$25,000,000; or
(ii) the cash purchase
price of such acquisition,
together with the
aggregate cash purchase
price of all other such
acquisitions exceeds
$50,000,000, provided,
however, that in making
such computation any
acquisition involving (A)
a cash purchase price of
more than $25,000,000 or
(B) a cash purchase price
of less than $1,000,000
(unless the aggregate cash
purchase price of all
acquisitions in the same
fiscal quarter of less
than $1,000,000 exceeds
$10,000,000) shall be
excluded.
Once a certificate has been
provided for a fiscal quarter
pursuant to clause (y)(ii), the
Company shall not be required to
deliver an additional certificate
unless the aggregate purchase price
of additional acquisitions of the
type referred to in clause (y)(ii)
completed in such quarter shall be
equal to or greater than
$50,000,000.
Revolving Credit Facility: The
Revolving Credit Loans may be made
to, and Letters of Credit may be
issued for the account of, the
Company at any time during the
period from and including the
Closing Date to but excluding the
Revolving Credit Maturity Date, and
will be available to finance
Permitted Acquisitions made by the
Company after the Closing Date,
provided that no more than
$150,000,000 of Revolving Credit
Loans may be made on the Closing
Date. No Letter of Credit shall
have an expiration date after the
Revolving Credit Maturity Date. No
Letter of Credit shall have an
expiration date more than 365 days
after its date of issuance.
Tranche A and Tranche B Term Loan
Facilities: The Tranche A Term
Loans and the Tranche B Term Loans
will be available in a single
drawing on the Closing Date.
Use of Proceeds: Multi-Draw Term Loan Facility: The
proceeds of the Multi-Draw Term
Loans will be used to (a) finance
the cash purchase price of
Permitted Acquisitions after the
Closing Date and (b) pay related
fees and expenses in connection
therewith.
Revolving Credit Facility: The
proceeds of the Revolving Credit
Loans will be used to (a) finance
the Transactions,
<PAGE>
8
(b) finance the cash purchase price
of Permitted Acquisitions after the
Closing Date, (c) pay related fees
and expenses in connection with
Permitted Acquisitions and (d)
finance the working capital needs
and business requirements of the
Company and its subsidiaries in
connection with and following the
Transactions. Standby Letters of
Credit will be available to provide
credit support for the working
capital and business needs of the
Company and its subsidiaries and
commercial Letters of Credit will
be available to provide the primary
means of payment for the purchase
of goods or services by the Company
and its subsidiaries in the
ordinary course of its business.
Any Blue Star Letter of Credit
would support the Blue Star
Facility.
Tranche A and Tranche B Term Loan
Facilities: The proceeds of the
Tranche A Term Loans and Tranche B
Term Loans will be used to (a)
finance the Transactions and (b)
pay fees and expenses related to
the Transactions, such fees and
expenses not to exceed $75,000,000.
Interest Rates: The Company will have an option
from time to time of having the
Loans bear interest by reference to
Dow Jones Market page 3750 to the
eurodollar rate for interest
periods of one, two, three or six
months or the alternate base rate
from time to time in effect, in
each case as determined by Chase in
accordance with the Credit
Agreement. The per annum interest
rate margin applicable to Loans
bearing interest by reference to
the eurodollar rate and to Loans
bearing interest by reference to
the alternate base rate will be as
follows:
<TABLE>
<CAPTION>
Eurodollar ABR Margin
Margin ----------
------
<S> <C> <C>
Multi-Draw Term Loans 2.25% 1.25%
Revolving Credit Loans 2.25% 1.25%
Tranche A Term Loans 2.25% 1.25%
Tranche B Term Loans 2.50% 1.50%
</TABLE>
The interest rate margins applicable
to each of (a) the Multi-Draw Term
Loans, Revolving Credit Loans and
Tranche A Term Loans and (b) Tranche
B Term Loans will be subject after a
period to certain step-downs to be
agreed upon based on the Company's
financial performance, provided that
the eurodollar rate margin
applicable to the Tranche B Term
Loans shall not be lower than 2.00%.
<PAGE>
9
Commitment Fee: There will be a commitment fee of
0.50% per annum on the average
daily unused portions of the
Multi-Draw Term Loan Facility and
the Revolving Credit Facility
(excluding in the computation
thereof any outstanding swing line
loans), payable quarterly in
arrears. The commitment fee will be
subject after a period to
step-downs to be agreed upon based
on the Company's financial
performance.
Letter of Credit Fees: The letter of credit fees
applicable to the Letters of Credit
will be based upon the applicable
interest rate margin for the
Revolving Credit Loans bearing
interest by reference to the
eurodollar rate. The Issuing Bank
(including the issuers of any Blue
Star Letters of Credit) shall
receive a fronting fee equal to
0.25% per annum of the face amount
of the Letters of Credit for its
sole account plus customary fees
for the amendment, negotiation and
payment under the Letters of
Credit; such fees are payable
quarterly in arrears. Closing Date:
On or before June 30, 1998.
Interest Rate Protection: The Company shall have incurred on
a fixed rate basis, or shall
obtain, within 180 days after the
Closing Date, interest rate
protection for at least 50% of the
aggregate principal amount of the
Term Loans and Subordinated Debt
Financing anticipated to be
outstanding, for a period and on
terms and conditions reasonably
satisfactory to the Administrative
Agent.
Guarantees: The obligations of the Blue Star
Group under the Facilities will be
unconditionally guaranteed by the
Company. The Company's obligations
(including any interest rate
protection agreements entered into
with any Lender or affiliate
thereof) under and in respect of
the Facilities will be
unconditionally guaranteed (the
"Guarantees") by each of the
existing and subsequently acquired
or organized material domestic
subsidiaries of the Company. Any
guarantees of the Subordinated Debt
Financing will be subordinated to
the Guarantees.
<PAGE>
10
Security: The Facilities and all guarantees
thereof, and any interest rate
protection agreements with Lenders
or affiliates thereof, will be
secured by substantially all of the
assets (both tangible and
intangible, whether now existing or
hereafter acquired) of the Company
and its material domestic
subsidiaries, including, without
limitation, all accounts
receivable, data bases, equipment,
inventory, trademarks, trade names,
franchise rights, patents,
copyrights and other personal and
real property of the Company and
its subsidiaries and all capital
stock of the Company's
subsidiaries, except that the
pledge of the capital stock of
foreign subsidiaries will be
limited to 65% of the capital stock
of the first-tier foreign
subsidiaries; provided, however,
that in the event of a Permitted
Receivables Securitization the net
initial cash proceeds of which are
used to prepay the Facilities as
set forth in "Mandatory
Prepayments" above, the
Administrative Agent shall release
the receivables subject to such
securitization from the lien in
favor of the Administrative Agent
for the benefit of the Lenders. The
Blue Star Group will secure its
obligations under the Facilities to
the extent that it is practicable
to do so. The Agents acknowledge
the desire of the Company to
perfect the security interests
contemplated in this paragraph in
as cost-effective a manner as is
practicable.
Conditions Precedent to The availability of the Facilities
Initial Borrowing: will be conditioned upon, among
other things, satisfaction of the
following conditions precedent:
(a) execution and delivery of
definitive financing agreements for
the Facilities, including the
Credit Agreement and security and
guarantee agreements, all on terms
reasonably satisfactory to the
Lenders and the Issuing Bank
(including the issuers of the Blue
Star Letters of Credit);
<PAGE>
11
(b) consummation of the Investment
and the other Transactions
substantially in accordance with
the Investment Agreement, dated as
of January 12, 1998, as amended by
Amendment No. 1, dated as of
February 3, 1998, between the
Company and CDR - PC Acquisition,
L.L.C. (without giving effect to
any material modification thereof
not approved by the Lenders), with
(i) the amount of the Investment to
be not less than $270,000,000, (ii)
the amount of the Stock Repurchase
to be not more than $1,000,000,000,
(iii) the aggregate cost of the
Debt Refinancing (including
premiums and penalties) in an
amount which will be reasonably
satisfactory to the Agents and with
any existing debt not retired in
the Debt Refinancing being in an
amount and having terms and
conditions reasonably satisfactory
to the Agents and (iv) the
aggregate cost of the fees and
expenses for the Transactions to be
not more than $75,000,000;
(c) completion of the Subordinated
Debt Financing in either the public
or private 144A market on terms and
conditions (including as to
subordination provisions, covenants
and events of default) reasonably
satisfactory to the Agents;
(d) receipt by the Lenders of (i)
audited consolidated financial
statements of the Company for the
1995, 1996 and 1997 fiscal years,
(ii) unaudited interim consolidated
financial statements of the Company
for each fiscal month and quarterly
period ended after April 26, 1997
and prior to the Closing Date for
which such financial statements
would customarily be available and
(iii) a pro forma balance sheet of
the Company and its subsidiaries as
of the end of the fiscal quarter
most recently ended prior to the
Closing Date for which unaudited
interim consolidated financial
statements of the Company would
customarily be available, such
balance sheet to be prepared after
giving effect to the Transactions
and the Financing contemplated
hereby;
(e) the Lenders' reasonable
satisfaction that the capital
structure of the Company and each
of its subsidiaries following the
Transactions is consistent in all
material respects with the
introductory paragraph of this Term
Sheet and with Exhibit A to the
Commitment Letter to which this
Term Sheet is attached;
<PAGE>
12
(f) the absence of any litigation,
inquiry, injunction or restraining
order pending, entered or
threatened against the Company or
any of its subsidiaries that would
be reasonably expected to have a
material adverse effect on the
Company and its subsidiaries, taken
as a whole, or the Transactions or
the Financing;
(g) the absence of any change,
development or event affecting the
Company or any of its subsidiaries
that would be reasonably expected
to have a material adverse effect
on the Company and its
subsidiaries, taken as a whole, or
the Transactions or the Financing;
(h) receipt of all necessary
consents and approvals required to
be obtained by the Company or any
of its subsidiaries in connection
with the Transactions or the
Financing, other than any the
failure of which to be obtained
would not reasonably be expected to
have a material adverse effect on
the Company and its subsidiaries,
taken as a whole, or the
Transactions or the Financing;
(i) no default or event of default
shall have occurred and be
continuing;
(j) receipt by the Administrative
Agent of (i) appraisals, as may be
reasonably requested under the
Financial Institution Reform,
Recovery and Enforcement Act of
1989, (ii) a recent lien search and
(iii) certain legal opinions;
(k) all necessary or reasonably
advisable filings shall have been
duly made that are required to be
made by the Company or any of the
subsidiaries to perfect the liens
in favor of the Lenders (or shall
be ready to be made promptly
following the closing) and all
collateral shall be free and clear
of all liens, except permitted
liens;
(l) receipt of projections for the
Company through the final maturity
of the Loans, together with a
statement of assumptions underlying
such projections, in form and
substance reasonably satisfactory
to the Lenders; and
(m) receipt by the Administrative
Agent of all fees as agreed in
writing, including all Lenders'
fees, payable on the Closing Date.
Assignments The Lenders shall be permitted to
and Participations: assign and sell participations in
their Multi-Draw Term Loans and
<PAGE>
13
commitments, Revolving Credit Loans
and commitments, Tranche A Term
Loans and Tranche B Term Loans
subject, in the case of assignments
(other than assignments to another
Lender or to an affiliate of a
Lender), to the consent of the
Administrative Agent and the
Company (which consent in each case
shall not be unreasonably
withheld). In the case of partial
assignments (other than to another
Lender or to an affiliate of a
Lender), the minimum assignment
amount shall be (i) in the case of
Tranche A Term Loans, Multi-Draw
Term Loans and commitments, and
Revolving Credit Loans and
commitments, $5,000,000 in the
aggregate (or, if less, the full
amount of such selling Lenders
loans and commitments) or (ii) in
the case of Tranche B Term Loans,
$5,000,000 (or, if less, the full
amount of such selling Lender's
Tranche B Term Loans), in each case
unless otherwise agreed in writing
by the Company and the
Administrative Agent. Voting rights
of participants shall be limited to
those matters with respect to which
the affirmative vote of the Lender
from which it purchased its
participation would be required.
Pledges of loans in accordance with
applicable law shall be permitted
without restriction.
Documentation: The Facilities will be documented
with a credit agreement (the
"Credit Agreement") incorporating
customary representations and
warranties, affirmative and
negative covenants, conditions
precedent and events of default and
such other provisions as the Agents
may reasonably require in the
context of the transactions
contemplated hereby, including,
without limitation, cost and yield
protection, restricted payment
provisions, transfer provisions,
amendment provisions and
indemnification provisions.
Financial Covenants: Financial covenants (consisting of
minimum interest coverage ratio,
maximum total debt leverage ratio
and maximum capital expenditures).
Commitment Termination Date: Definitive financing documentation
for the Facilities must be entered
into, and the Transactions must be
consummated, in each case on or
before June 30, 1998.
Governing Law and Forum: New York.
Counsel to the Agents Simpson Thacher & Bartlett.
and the Co-Arrangers:
<PAGE>
ANNEX B
INVESTMENT AGREEMENT
DATED AS OF JANUARY 12, 1998
AMENDED AS OF FEBRUARY 3, 1998
BETWEEN
U.S. OFFICE PRODUCTS COMPANY
AND
CDR-PC ACQUISITION, L.L.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I
Purchase and Sale of Shares, Special Warrants and Warrants................................................. B-2
1.01 Purchase and Sale of Shares, Special Warrants and Warrants.......................................... B-2
1.02 Time and Place of the Closing....................................................................... B-3
1.03 Transactions at the Closing......................................................................... B-3
ARTICLE II
Covenants.................................................................................................. B-3
2.01 Covenants of the Company............................................................................ B-3
ARTICLE III
Representations and Warranties............................................................................. B-4
3.01 Representations and Warranties of the Company....................................................... B-4
3.02 Representations and Warranties of Purchaser......................................................... B-14
ARTICLE IV
Corporate Governance....................................................................................... B-15
4.01 Composition of the Board of Directors............................................................... B-16
4.02 Supermajority Voting Provisions..................................................................... B-16
4.03 Committees.......................................................................................... B-17
4.04 By-laws............................................................................................. B-17
4.05 Termination of Article IV........................................................................... B-17
ARTICLE V
Equity Purchases from the Company.......................................................................... B-17
5.01 Subscription Rights................................................................................. B-17
5.02 Issuance and Delivery of New Securities and Voting Stock............................................ B-18
ARTICLE VI
Limitations on Purchases of Additional Equity Securities................................................... B-18
6.01 Purchases of Equity Securities...................................................................... B-18
6.02 Additional Limitations.............................................................................. B-18
ARTICLE VII
Transfer of Common Stock................................................................................... B-19
7.01 Transfer of Common Stock............................................................................ B-19
ARTICLE VIII
Covenants and Additional Agreements........................................................................ B-20
8.01 Covenants of the Company............................................................................ B-20
8.02 Transaction Proposals............................................................................... B-22
8.03 Modification of Transaction Agreements; Abandonment of Distributions................................ B-23
8.04 Transaction Agreements and Schedules................................................................ B-23
8.05 Company Stockholder Approval; Proxy Statement....................................................... B-24
8.06 Retained Companies Financing........................................................................ B-24
8.07 Tender Offer........................................................................................ B-25
8.08 Information Statements.............................................................................. B-25
8.09 [Intentionally omitted.]............................................................................ B-26
8.10 Tax Standstill...................................................................................... B-26
</TABLE>
B-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
8.11 Access and Information.............................................................................. B-26
8.12 Further Actions..................................................................................... B-26
8.13 Further Assurances.................................................................................. B-27
ARTICLE IX
Conditions Precedent....................................................................................... B-27
9.01 Conditions to Each Party's Obligations.............................................................. B-27
9.02 Conditions to the Obligations of the Company........................................................ B-28
9.03 Conditions to the Obligations of Purchaser.......................................................... B-29
ARTICLE X
Termination................................................................................................ B-30
10.01 Termination........................................................................................ B-30
10.02 Effect of Termination.............................................................................. B-31
ARTICLE XI
Indemnification............................................................................................ B-31
11.01 Indemnification of Purchaser....................................................................... B-31
11.02 Indemnification Procedures......................................................................... B-32
ARTICLE XII
Interpretation; Definitions................................................................................ B-33
12.01 Interpretation..................................................................................... B-33
12.02 Definitions........................................................................................ B-33
ARTICLE XIII
Miscellaneous.............................................................................................. B-39
13.01 Severability....................................................................................... B-39
13.02 Specific Enforcement............................................................................... B-39
13.03 Entire Agreement................................................................................... B-39
13.04 Counterparts....................................................................................... B-39
13.05 Notices............................................................................................ B-39
13.06 Amendments......................................................................................... B-40
13.07 Cooperation........................................................................................ B-40
13.08 Successors and Assigns............................................................................. B-41
13.09 Expenses and Remedies.............................................................................. B-41
13.10 Transfer of Shares and Warrants.................................................................... B-41
13.11 Governing Law...................................................................................... B-42
13.12 Publicity.......................................................................................... B-42
13.13 No Third Party Beneficiaries....................................................................... B-42
13.14 Consent to Jurisdiction............................................................................ B-42
EXHIBITS
Exhibit 1 Terms of Special Warrants B-46
Exhibit 2 Terms of Warrants B-47
Exhibit 3 Terms of Registration Rights Agreement B-48
Schedule 8.07 B-49
</TABLE>
B-iii
<PAGE>
THIS INVESTMENT AGREEMENT (this "Agreement"), dated as of January 12, 1998,
amended as of February 3, 1998, is entered into between CDR-PC Acquisition,
L.L.C., a Delaware limited liability company ("Purchaser"), and U.S. Office
Products Company, a Delaware corporation (the "Company").
WHEREAS the Board of Directors of the Company has approved a series of
transactions pursuant to which:
(a) the Company will conduct a tender offer (the "Tender Offer") to
repurchase 37,037,037 shares of common stock, par value $.001 per share, of
the Company (the "Common Stock"), at $27 per share,
(b) the Company will enter into arrangements for new high-yield and bank
financing in connection with the Tender Offer and the other transactions
contemplated hereby (the "Proposed Financings"),
(c) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's education division ("School"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "School Distribution"),
(d) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's corporate travel services division
("Travel"), to the holders of record of the Common Stock after completion of
the Tender Offer on a pro rata basis (the "Travel Distribution"),
(e) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's technology solutions division
("Technology"), to the holders of record of the Common Stock after
completion of the Tender Offer on a pro rata basis (the "Technology
Distribution"), and
(f) the Company will distribute all of the issued and outstanding shares
of common stock of a corporation that will own, following the
Pre-Distribution Transactions (as defined herein), the Subsidiaries of the
Company comprising the Company's print management division ("Print"), to the
holders of record of the Common Stock after completion of the Tender Offer
on a pro rata basis (the "Print Distribution", and, together with the School
Distribution, the Travel Distribution and the Technology Distribution, the
"Distributions");
WHEREAS, in connection with the Distributions, the Company expects:
(a) (i) to execute and deliver a distribution agreement to effect the
School Distribution (the "School Distribution Agreement"), (ii) to cause
School to execute and deliver the School Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the School Distribution set forth in the School
Distribution Agreement, and pursuant to the terms of the School Distribution
Agreement, to effect the School Distribution,
(b) (i) to execute and deliver a distribution agreement to effect the
Travel Distribution (the "Travel Distribution Agreement"), (ii) to cause
Travel to execute and deliver the Travel Distribution Agreement, and (iii)
after the satisfaction or waiver of all of the conditions to the Company's
obligation to consummate the Travel Distribution set forth in the Travel
Distribution Agreement, and pursuant to the terms of the Travel Distribution
Agreement, to effect the Travel Distribution,
(c) (i) to execute and deliver a distribution agreement to effect the
Technology Distribution (the "Technology Distribution Agreement"), (ii) to
cause Technology to execute and deliver the Technology Distribution
Agreement, and (iii) after the satisfaction or waiver of all of the
conditions to the Company's obligation to consummate the Technology
Distribution set forth in the Technology
<PAGE>
Distribution Agreement, and pursuant to the terms of the Technology
Distribution Agreement, to effect the Technology Distribution,
(d) (i) to execute and deliver a distribution agreement to effect the
Print Distribution (the "Print Distribution Agreement", and, together with
the School Distribution Agreement, the Travel Distribution Agreement and the
Technology Distribution Agreement, the "Distribution Agreements"), (ii) to
cause Print to execute and deliver the Print Distribution Agreement, and
(iii) after the satisfaction or waiver of all of the conditions to the
Company's obligation to consummate the Print Distribution set forth in the
Print Distribution Agreement, and pursuant to the terms of the Print
Distribution Agreement, to effect the Print Distribution, and
(e) to execute and deliver, and to cause each of School, Travel,
Technology and Print (together, the "Distributed Companies") to execute and
deliver, a tax allocation agreement (the "Tax Allocation Agreement") and
certain other Transaction Agreements;
WHEREAS, prior to the Distributions and pursuant to the terms of the
Distribution Agreements, the Company and the Distributed Companies will
consummate the Pre-Distribution Transactions (as herein defined);
WHEREAS, following the Pre-Distribution Transactions and the record date for
the Distributions:
(a) Purchaser wishes to purchase from the Company, and the Company
wishes to sell to Purchaser, shares of Common Stock and warrants having the
terms and conditions set forth in Exhibit 1 (the "Special Warrants")
entitling the holder thereof to purchase shares of Common Stock together
representing 24.9% of the shares of Common Stock as of the Closing Date (as
herein defined) that would be outstanding after giving effect to the
issuance of such shares (and assuming the conversion into Common Stock of
all of the Company's issued and outstanding 5 1/2% Convertible Subordinated
Notes Due 2001 issued pursuant to an Indenture, dated as of February 7,
1996, between the Company and State Street Bank and Trust Company (the "2001
Notes") that are outstanding on the Closing Date, and after giving effect to
the issuance of any Contingent Stock (as defined herein)), and warrants
entitling the holder thereof to purchase one share of Common Stock for each
share and Special Warrant so purchased on the terms and subject to the
conditions set forth in Exhibit 2 (the "Warrants"), and
(b) the Company and Purchaser wish to enter into a registration rights
agreement (the "Registration Rights Agreement"), the principal terms of
which are attached hereto as Exhibit 3;
WHEREAS Purchaser and the Company are entering into this Agreement to
provide for such purchase and sale and to establish various rights and
obligations in connection therewith;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND WARRANTS
SECTION 1.01 PURCHASE AND SALE OF SHARES, SPECIAL WARRANTS AND
WARRANTS. Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell to Purchaser and Purchaser agrees to purchase from the
Company for an aggregate purchase price of $270 million (the "Purchase Price")
(a) shares of Common Stock representing 24.9% of the outstanding shares of
Common Stock as of the Closing Date after giving effect to the issuance of such
shares (the "Shares"), (b) Special Warrants representing the right to acquire a
number of shares of Common Stock equal to the difference between (i) 24.9% of
the sum of (A) the outstanding shares of Common Stock as of the Closing Date
after giving effect to the issuance of the Shares and the exercise of the
Special Warrants, and assuming the conversion
B-2
<PAGE>
into Common Stock of all the 2001 Notes outstanding on the Closing Date at the
conversion price resulting from adjustments made as a result of the Tender Offer
and the Distributions and (B) the number of any shares of Contingent Stock that
are issued, and (ii) 24.9% of the outstanding shares of Common Stock as of the
Closing Date after giving effect to the issuance of the Shares and (c) Warrants
to purchase one share of Common Stock for each Share so purchased and for each
share into which the Special Warrants become exercisable.
SECTION 1.02 TIME AND PLACE OF THE CLOSING. The closing (the "Closing")
shall take place at the offices of Debevoise & Plimpton, 875 Third Avenue, New
York, New York, 10022, at 10:00 A.M., New York time, on the third Business Day
following the first date on which the conditions to Closing set forth in Article
IX have first been satisfied or waived, or at such other place, time and date as
the parties may agree. The Company shall give Purchaser ten Business Days prior
written notice of the date the Closing is scheduled to occur. The "Closing Date"
shall be the date the Closing occurs.
SECTION 1.03 TRANSACTIONS AT THE CLOSING. At the Closing, subject to the
terms and conditions of this Agreement, (a) the Company shall issue and sell to
Purchaser and Purchaser shall purchase the Shares, the Special Warrants and the
Warrants; (b) the Company shall deliver to Purchaser a certificate representing
the Shares and certificates representing the Special Warrants and the Warrants,
in each case registered in the name of Purchaser against payment of the Purchase
Price with respect thereto by wire transfer of immediately available funds to an
account or accounts previously designated by the Company; and (c) the Company
and Purchaser shall enter into the Registration Rights Agreement.
ARTICLE II
COVENANTS
SECTION 2.01 COVENANTS OF THE COMPANY.
(a) FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants that it
will deliver to Purchaser so long as Purchaser's Percentage Interest exceeds
10%:
(i) as soon as practicable and in any event within 45 days after the end of
each quarterly period (other than the last quarterly period) in each fiscal
year, a consolidated statement of income and a consolidated statement of cash
flow of the Retained Companies for the period from the beginning of the then
current fiscal year to the end of such quarterly period, and a consolidated
balance sheet of the Retained Companies as of the end of such quarterly period,
setting forth in each case in comparative form figures for the corresponding
period or date in the preceding fiscal year, all in reasonable detail and
certified by the principal financial officer of the Company as presenting
fairly, in accordance with GAAP applied (except as specifically set forth
therein) on a basis consistent with such prior fiscal period, the information
contained therein, subject to changes resulting from year-end closing and audit
adjustments; provided, however, that delivery pursuant to clause (iii) below of
a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly
period filed with the SEC shall be deemed to satisfy the requirements of this
clause (i);
(ii) as soon as practicable and in any event within 90 days after the end of
each fiscal year, a consolidated statement of income, a consolidated statement
of cash flow and a consolidated statement of stockholders equity of the Retained
Companies for such year, and a consolidated balance sheet of the Retained
Companies as of the end of such year, setting forth in each case in comparative
form the corresponding figures from the preceding fiscal year, all in reasonable
detail and examined and reported on by independent public accountants of
recognized national standing selected by the Company, which report shall state
that such consolidated financial statements present fairly the financial
position of the Retained Companies as at the dates indicated and the results of
their operations and changes in their financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with
B-3
<PAGE>
prior years (except as otherwise specified in such report) and that the audit by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards; provided,
however, that delivery pursuant to clause (iii) below of a copy of the Annual
Report on Form 10-K of the Company for such fiscal year filed with the SEC shall
be deemed to satisfy the requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as it shall send to its
stockholders and copies of all such registration statements (without exhibits),
and all such regular and periodic reports as it shall file with the SEC;
(iv) promptly upon receipt thereof, copies of all reports submitted to the
Retained Companies by independent public accountants in connection with each
annual, interim or special audit of the books of the Retained Companies made by
such accountants, including the comment letter submitted by such accountants to
management in connection with their annual audit; and
(v) with reasonable promptness, such other financial data of the Retained
Companies as Purchaser may reasonably request.
(b) INSPECTION OF PROPERTY. The Company covenants that so long as
Purchaser's Percentage Interest exceeds 10%, it will permit representatives of
Purchaser to visit and inspect, at Purchaser's expense, any of the properties of
the Retained Companies, to examine the corporate books and make copies or
extracts therefrom and to discuss the affairs, finances and accounts of the
Retained Companies with the officers and employees of the Retained Companies and
independent public accountants (and by this provision the Company authorizes
such accountants to discuss with such representatives the affairs, finances and
accounts of the Retained Companies), all at such reasonable times and as often
as Purchaser may reasonably request. Purchaser agrees not to disclose to any
Person any information or data obtained by it pursuant to this Section 2.01(b)
or Section 2.01(a)(iv) or (a)(v) until such information or data otherwise
becomes publicly available or except pursuant to a valid subpoena, judicial
process or its equivalent or in connection with a claim against the Company;
provided that Purchaser shall have used its reasonable best efforts to give the
Company advance notice of such subpoena or judicial process so that the Company
may seek an appropriate protective order. Purchaser acknowledges that
information obtained pursuant to the rights granted hereby may constitute
material non-public information and agrees that it will comply with all
applicable laws relating to the purchase or sale of securities of the Company
while in possession of such information.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Purchaser as follows:
(a) CORPORATE ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each Retained Subsidiary having assets or annual revenues of $500,000 or more or
which is otherwise material to the Retained Business (each a "Material
Subsidiary") is duly organized and validly existing and, if applicable, except
as set forth in Schedule 3.01(a), is in good standing, under the laws of the
jurisdiction of its incorporation or organization.
Each of the Retained Companies is duly qualified or licensed and, if
applicable, is in good standing as a foreign corporation, in each jurisdiction
in which the properties owned, leased or operated, or the business conducted, by
it require such qualification or licensing, except for any such failure so to
qualify or be in good standing which, individually or in the aggregate, would
not have a Material Adverse Effect on the Retained Companies, taken as a whole.
Each of the Material Subsidiaries has the requisite power and authority to carry
on its businesses as they are now being or will be (immediately after the
Distributions)
B-4
<PAGE>
conducted. The Company has heretofore made available to Purchaser complete and
correct copies of the Certificate of Incorporation of the Company (the "Company
Charter") and the By-laws of the Company (the "Company By-laws") and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each of the Material Subsidiaries, each as amended to date and
currently in full force and effect.
(b) CORPORATE AUTHORITY. Each of the Company, School, Travel, Technology
and Print has (or will have at the time of such act) the requisite corporate
power and authority to execute, deliver and perform each Transaction Agreement
to which it is or will be a party and to consummate the transactions
contemplated thereby other than, with respect to the Distributions, formal
declaration of the Distributions by the Company's Board of Directors (provided
that, with respect to the issuance and sale by the Company of the Shares, the
Special Warrants and the Warrants, the Company shall obtain pursuant to Nasdaq
Stock Market rules the approval of such issuance and sale by the affirmative
vote of the holders of a majority of the shares of Common Stock represented at
the Company Meeting and entitled to vote thereon (the "Company Stockholder
Approval")). The execution, delivery and performance of each Transaction
Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions, the Proposed Financings, the
Tender Offer and the issuance and sale by the Company of the Shares, Special
Warrants and Warrants and of the other transactions contemplated by the
Transaction Agreements have been duly authorized (or will have been duly
authorized at the time of such act) by the Company's Board of Directors, and no
other corporate proceedings on the part of the Company are necessary to
authorize any Transaction Agreement or for the Company to consummate the
Transactions so contemplated (other than, with respect to the issuance and sale
by the Company of the Shares, the Special Warrants and the Warrants, the Company
Stockholder Approval and, with respect to the Distributions, formal declaration
of the Distributions by the Company's Board of Directors). The execution,
delivery and performance by each of School, Travel, Technology and Print of each
Transaction Agreement to which it will be party and the consummation by it of
the Transactions contemplated thereby will be duly authorized at the time of
such act by the Board of Directors and the stockholders of each, if required,
and no other corporate proceedings on the part of School, Travel, Technology or
Print will be necessary to authorize the execution, delivery and performance of
any Transaction Agreement to which they will be a party or for them to
consummate the Transactions so contemplated. Each Transaction Agreement to which
the Company, School, Travel, Technology or Print is or will be a party is, or
when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof,
assuming (in the case of this Agreement and the Registration Rights Agreement)
that each Transaction Agreement to which Purchaser is a party is a valid and
binding agreement of Purchaser.
(c) NO VIOLATIONS; CONSENTS AND APPROVALS. (i) None of the execution,
delivery or performance by the Company, School, Travel, Technology or Print of
each Transaction Agreement to which any of them is or will be a party or the
consummation by the Company or School, Travel, Technology or Print of the
transactions contemplated thereby (A) will result in a violation or breach of
the Company Charter or the Company By-laws, the articles of incorporation or
by-laws of School, Travel, Technology or Print or the organizational documents
of any of the Retained Subsidiaries or (B) will result in a violation or breach
of (or give rise to any right of termination, revocation, cancellation or
acceleration under or increased payments under), or constitute a default (with
or without due notice or lapse of time or both) under, or result in the creation
of any lien, charge, encumbrance or security interest of any kind (a "Lien")
upon any of the properties or assets of the Retained Companies under, (1)
subject to the governmental filings and other matters referred to in clause (ii)
below, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, contract, agreement, obligation, instrument, offer, commitment,
understanding or other arrangement (each a "Contract") or of any license,
waiver, exemption, order, franchise, permit or concession (each a "Permit") to
which any of the Retained Companies is a party or by which any of their
properties or assets may be bound (except for the Company's credit facility with
Bankers Trust Company in effect on the date hereof), or (2) subject to the
governmental filings and other matters referred to in clause (ii) below, any
judgment, order, decree, statute, law, regulation or rule applicable to the
Retained
B-5
<PAGE>
Companies, except, in the case of clause (B), for violations, breaches,
defaults, rights of cancellation, termination, revocation or acceleration or
Liens that would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations, registrations,
declarations or filings as may be required under, and other applicable
requirements of, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), filings under state securities or "blue sky" laws and filings or consents
referred to in Schedule 3.01(c)(ii), no consent, approval, order or
authorization of, or registration, declaration or filing with, any government or
any court, administrative agency or commission or other governmental authority
or agency, federal, state or local or foreign (a "Governmental Entity"), is
required with respect to the Company, School, Travel, Technology or Print or any
of their respective Subsidiaries, in connection with the execution, delivery or
performance by each of the Company, School, Travel, Technology and Print of each
Transaction Agreement to which any of them is or will be a party or the
consummation by the Company and School, Travel, Technology and Print of the
Transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements would not, individually or in the aggregate,
have a Material Adverse Effect on the Retained Companies, taken as a whole).
(d) CAPITAL STOCK. As of the date hereof, the authorized capital stock of
the Company consists of (i) 500,000,000 shares of Common Stock, of which an
aggregate of 132,958,606 shares of Common Stock were issued and outstanding as
of the close of business on January 9, 1998, and (ii) 500,000 shares of
preferred stock, $.001 par value per share, of which none were issued and
outstanding as of the close of business on January 9, 1998. As of the close of
business on January 9, 1998, there were outstanding under the Company's 1994
Long-Term Incentive Plan, the 1994 Amended and Restated Long-Term Incentive
Plan, the 1996 Non-Employee Directors' Stock Plan, the 1997A Stock Option Plan
for Employees of Mail Boxes Etc., the 1997B Stock Option Plan for Employees of
Mail Boxes Etc. and the 1997 Stock Option Plan for former Non-Employee Directors
of Mail Boxes Etc. (collectively, the "Company Stock Plans") options to acquire
an aggregate of 21,236,778 shares of Common Stock (subject to adjustment on the
terms set forth therein) of which 706,778 are subject to allocation pursuant to
option pools, as set forth on Schedule 3.01(d)(ii). As of the close of business
on January 9, 1998, there were outstanding under the Company Stock Plans no
shares of restricted stock and 3,220 deferred shares had been reserved for
issuance pursuant to the 1996 Non-Employee Directors Stock Plan. As of the close
of business on January 9, 1998, the Company had no shares of Common Stock
reserved for issuance of restricted stock. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. As of the date hereof the Company has outstanding
$230,000,000 in 5 1/2% Convertible Subordinated Notes Due 2003 issued pursuant
to an Indenture, dated as of May 22, 1996, between the Company and The Chase
Manhattan Bank, N.A. (the "2003 Notes") and $143,750,000 in 2001 Notes,
convertible into shares of Common Stock at any time prior to maturity at a
conversion price of $31.60 and $19.00 per share, respectively. Except as set
forth on Schedule 3.01(d), there are no preemptive or similar rights on the part
of any holders of any class of securities of the Company or of any of the
Retained Subsidiaries. Except for the Common Stock, the 2003 Notes and the 2001
Notes, as set forth above, the Company has outstanding no bonds, debentures,
notes or other obligations or securities the holders of which have the right to
vote (or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
Except as set forth above or on Schedule 3.01(d), as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights, contracts, commitments,
arrangements or understandings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the Company
or any of its Subsidiaries contingently or otherwise to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of the Retained Subsidiaries.
Except (y) with respect to the withholding of
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exercise price or withholding taxes under any Company Stock Plan or (z) pursuant
to the Tender Offer, there are no outstanding Contracts of the Company or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or of any of the Retained Subsidiaries.
(e) SUBSIDIARIES. (i) Schedule 3.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Retained Companies (other
than the Company). Except for Subsidiaries that will not be Subsidiaries of the
Company after the Distributions, the Company has no equity interests with a
value of $500,000 or more in any Person other than the Retained Companies, and
there are no commitments on the part of the Company or any Material Subsidiary
to contribute additional capital in respect of any equity interest in any
Person. Each of the outstanding shares of capital stock of each of the Retained
Subsidiaries has been duly authorized and validly issued, and is fully paid and
nonassessable. Except as set forth on Schedule 3.01(e)(i), all of the
outstanding shares of capital stock of each Retained Subsidiary are owned,
either directly or indirectly, by the Company free and clear of all Liens.
(ii) Schedule 3.01(e)(ii) contains a complete and correct list of all
Material Subsidiaries of the Company.
(iii) Schedule 3.01(e)(iii) contains a complete and correct list setting
forth the respective Material Subsidiaries of each of the Company, School,
Travel, Technology and Print immediately following the Distributions.
(f) SEC FILINGS. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
SEC under the Securities Act and the Exchange Act since June 30, 1995 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (i) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (ii) did not, at the time it was filed, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) RETAINED BUSINESS FINANCIAL STATEMENTS. (i) Attached hereto as
Annex A(i) are a consolidated balance sheet as of April 26, 1997 (the
"Balance Sheet") and a consolidated balance sheet as of April 30, 1996 and
consolidated statements of income, consolidated statements of cash flow and
consolidated statements of stockholders' equity for the years ended April
30, 1995 and 1996 and April 26, 1997, in each case for the Company (such
financial statements, including the notes thereto, the "Company Business
Financial Statements"), together with the report of the Company's
independent accountants thereon. Each of the Balance Sheet and the
consolidated balance sheet as of April 30, 1996 (including any related notes
and schedules) presents fairly in all material respects the consolidated
financial position of the Company as of their respective dates, and each of
the consolidated statements of income, consolidated statements of cash flow
and consolidated statements of stockholders' equity included in the Company
Business Financial Statements (including any related notes and schedules)
fairly presents in all material respects the income, cash flows and
stockholders equity, as the case may be, of the Company for the periods set
forth therein, in each case in accordance with GAAP applied on a consistent
basis throughout the periods presented therein except as indicated in the
notes thereto, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Company Business Financial Statements
will require adjustment to reflect (i) the change in the accounting
treatment of certain acquisitions from the pooling-of-interests method to
the purchase method; (ii) the treatment of certain of the Distributions as
discontinued operations, and (iii) certain footnote disclosure regarding the
Transactions.
(ii) Attached hereto as Annex A (ii) are the unaudited consolidated
balance sheet for the Company as of October 25, 1997 and the unaudited
consolidated statement of income of the Company for the six months then
ended (such financial statements, including the notes thereto, the
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"Unaudited Company Business Financial Statements"). The Unaudited Company
Business Financial Statements have been prepared in all material respects in
accordance with GAAP consistently applied and on that basis fairly present
the consolidated financial condition and results of operations of the
Company as of the date thereof and for the period indicated, except that the
Company Business Financial Statements omit footnote disclosures required by
GAAP and are subject to normal, recurring year-end closing and audit
adjustments, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Unaudited Company Business Financial
Statements will require adjustment to reflect (i) the change in the
accounting treatment of certain acquisitions from the pooling-of-interests
method to the purchase method; (ii) the treatment of certain of the
Distributions as discontinued operations, and (iii) certain footnote
disclosure regarding the Transactions.
(iii) Attached hereto as Annex A(iii) are the unaudited pro forma
combined balance sheet for the Retained Business as of October 25, 1997 (the
"Pro Forma Balance Sheet"), the unaudited pro forma combined statement of
income for the Retained Business for the fiscal year ended April 26, 1997
and the six month period ended October 25, 1997 (the "Pro Forma Income
Statements"), and the notes to such unaudited pro forma financial statements
(the "Notes to Pro Forma Financial Statements", and, together with the Pro
Forma Balance Sheet and the Pro Forma Income Statements, the "Pro Forma
Retained Business Financial Statements"). The Pro Forma Retained Business
Financial Statements have been prepared in accordance with Article 11 of
Regulation S-X; reflect the adjustments necessary to change accounting
treatment for certain past acquisitions from the pooling of interests method
to the purchase method; and give effect to the Proposed Financings, the
Tender Offer, the Distributions and the purchase of the Shares, Special
Shares and Warrants by Purchaser. The Pro Forma Income Statements have been
prepared as if all such Transactions had occurred at the beginning of fiscal
1997 and the Pro Forma Balance Sheet has been prepared as if all such
transactions had occurred as of October 25, 1997.
(iv) Attached hereto as Annex A(iv) are a consolidated balance sheet for
the Retained Business as of April 26, 1997 (the "Audited Balance Sheet") and
the consolidated statements of income of the Retained Business for the
fiscal year then ended (such financial statements, including the notes
thereto, the "Audited Retained Business Financial Statements"), together
with the report of the Company's independent accountants thereon. The
Audited Retained Business Financial Statements (including any related notes
and schedules) will fairly present in all material respects the consolidated
financial position of the Retained Business as of the date thereof, and
fairly present in all material respects the income of the Retained Business
for the period set forth therein, in accordance with GAAP applied on a
consistent basis throughout the periods presented therein except as
indicated in the notes thereto.
(v) The balance sheets included in the Pro Forma Retained Business
Financial Statements do not include any material assets or liabilities not
intended to constitute a part of the Retained Business after giving effect
to the Transactions. The statements of income, statements of stockholders
equity and statements of cash flows included in the Pro Forma Retained
Business Financial Statements do not reflect the operations of any entity or
business not intended to constitute a part of the Retained Business after
giving effect to all such Transactions. The statements of income included in
the Pro Forma Retained Business Financial Statements reflect all of the
material costs and expenses incurred in connection with the Retained
Business, including those incurred in generating the revenues reflected in
the Pro Forma Retained Business Financial Statements, in each case, for the
periods covered thereby, that would be required to be so reflected under
GAAP in consolidated financial statements of the Retained Business prepared
on a pro forma basis after giving effect to all such transactions.
(h) UNDISCLOSED LIABILITIES. Except (i) for the items listed in Schedule
3.01(h) hereto, (ii) as and to the extent disclosed or reserved against on the
Balance Sheet, the Pro Forma Balance Sheet and the Audited Balance Sheet or in
the footnotes thereto and (iii) as incurred after the date of the Pro Forma
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Balance Sheet in the ordinary course of the Retained Business consistent with
prior practice and not prohibited by this Agreement, the Retained Companies do
not have any liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due,
that, individually or in the aggregate, are or would be material to the Retained
Companies, taken as a whole.
(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof and any amendments filed with respect thereto prior to the date
hereof (the "Filed Company SEC Documents") or as otherwise contemplated or
permitted by this Agreement or the other Transaction Agreements, and except for
any items referred to in Schedule 3.01(i), since October 25, 1997, the Company
and its Subsidiaries have conducted the Retained Business in the ordinary course
consistent with past practice and there has not been any event, change or
development which, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(j) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in the Filed
Company SEC Documents, each of the Retained Companies is in compliance with all
statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to it that relate to the Retained Business, and
neither the Company nor any of the Retained Companies has received any notice
alleging noncompliance except, with reference to all the foregoing, where the
failure to be in compliance would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole. This
Section 3.01(j) does not relate to employee benefits matters (for which Section
3.01(o) is applicable), environmental matters (for which Section 3.01(p) is
applicable) or tax matters (for which Section 3.01(n) is applicable). Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except where the failure
to have such Permits or rights would not, individually or in the aggregate, have
a Material Adverse Effect on the Retained Companies, taken as a whole. All such
Permits are in full force and effect and the Retained Companies are in
compliance with the terms of such Permits, except where the failure to be in
full force and effect or in compliance would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as a
whole.
(k) TITLE TO ASSETS. (i) Except as set forth in Schedule 3.01(k)(i), each
of the Retained Companies owns and has good and valid title to, or a valid
leasehold interest in, or otherwise has sufficient and legally enforceable
rights to use, all of the properties and assets (real, personal or mixed,
tangible or intangible), used by the Retained Business or held for use by the
Retained Business in connection with the conduct of, or otherwise material to,
the Retained Business (the "Assets"), including Assets reflected on the Balance
Sheet or acquired since the date thereof, except for Assets disposed of in the
ordinary course of business consistent with past practice and in accordance with
this Agreement and except for such defects in title which, individually or in
the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case free and clear of any Liens except for
Permitted Liens. This Section 3.01(k) does not relate to intellectual property
(for which Section 3.01(s) is applicable). A list of all owned real property and
leased real property having an annual base rental of more than $20,000 or having
square footage in excess of 5,000 square feet relating to the Retained Business
is set forth on Schedule 3.01(k) and such owned and leased real property
constitutes all the fee and leasehold interests meeting such description held by
the Retained Companies, except for any such fee or leasehold interests acquired
or disposed of in the ordinary course of business consistent with past practice
after the date hereof and in accordance with this Agreement, and constitutes all
the fee and leasehold interests meeting such description used by the Retained
Business or held for use by the Retained Business in connection with the conduct
of the Retained Business.
(ii) Except as referred to in Schedule 3.01(k)(ii), each Retained
Company has (A) good and insurable title to its owned real properties and
(B) valid and subsisting leasehold interests in its leased real properties,
in each case, free and clear of any Liens, except for (1) Permitted Liens
and (2) easements,
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covenants, rights-of-way, other matters of record and other matters subject
to which the leases of the Retained Companies' real properties are granted.
(l) LITIGATION. Except as disclosed in the Filed Company SEC Documents or
referred to on Schedule 3.01(l), as of the date hereof there are no civil,
criminal or administrative actions, suits or proceedings pending or, to the
knowledge of the Company, threatened, against any of the Retained Companies
that, individually or in the aggregate, are likely to have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as disclosed in the
Company SEC Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against any of the Retained Companies
that, insofar as can reasonably be foreseen, individually or in the aggregate,
in the future would have a Material Adverse Effect on the Retained Companies,
taken as a whole.
(m) CONTRACTS. (i) Schedule 3.01(m) contains a complete and correct list,
as of the date hereof, of all Contracts that are of the types listed in clauses
(A) through (G) below to which any of the Retained Companies is a party (the
"Material Contracts"):
(A) employment, consulting, severance, and other material Contracts
relating to or for the benefit of current, future or former employees,
officers or directors (excluding sales persons) of the Retained Business
requiring annual base payments going forward in excess of $250,000;
(B) Contracts relating to the borrowing of money or obtaining of or
extension of credit (other than in the ordinary course of business),
including letters of credit, guarantees and material security agreements;
(C) joint venture, partnership and similar Contracts (excluding joint
purchasing arrangements with no minimum purchase requirements), involving a
sharing of profits or expenses, that are material or involve any obligation
on the part of the Company to commit capital (excluding commitments not
exceeding $100,000 in the aggregate);
(D) Contracts prohibiting or materially restricting the ability of any
Retained Company to conduct its business, to engage in any business or
operate in any geographical area or to compete with any Person;
(E) Contracts that are material to the business, operations, results of
operations, condition (financial or otherwise), assets or properties of the
Retained Companies taken as a whole;
(F) any employment agreement (and any other agreement involving annual
payments in excess of $150,000) with change of control or "event risk"
provisions relating to the Company; and
(G) any employment agreement or other agreement requiring the Company to
compensate any employee for any tax imposed as a result of any excess
parachute payment under Section 280G of the Code.
(ii) All Material Contracts are legal, valid, binding, in full force and
effect and enforceable against each party thereto, except to the extent that
any failure to be enforceable, individually and in the aggregate, would not
reasonably be expected to have or result in a Material Adverse Effect on the
Retained Companies, taken as a whole, provided that no representation is
made as to the enforceability of any non-competition provision in any
employment agreements. Except as set forth in Schedule 3.01(n), there does
not exist under any Material Contract any violation, breach or event of
default, or event or condition that, after notice or lapse of time or both,
would constitute a violation, breach or event of default thereunder, on the
part of any of the Retained Companies or, to the knowledge of the Company,
any other Person, other than such violations, breaches or events of default
as would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as set forth in
Schedule 3.01(m), the enforceability of all Material Contracts will not be
adversely affected in any manner by the execution, delivery or performance
of this Agreement or the consummation of the Transactions, and no Material
Contract contains any change in control or other terms or conditions that
will become applicable or inapplicable as a result of the consummation of
the Transactions.
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(n) TAXES. (i) Except as set forth on Schedule 3.01(n), (A) all Tax
Returns required to be filed by or on behalf of each of the Company and the
Retained Subsidiaries have been filed except to the extent that a failure to
file, individually or in the aggregate, would not have a Material Adverse Effect
on the Retained Companies, taken as a whole; (B) all such Tax Returns filed are
complete and accurate in all respects, other than any incompleteness or any
inaccuracy that would not, individually or in the aggregate, have a Material
Adverse Effect on the Retained Companies taken as a whole, and all Taxes shown
to be due on such Tax Returns have been paid; (C) no written claim (other than a
claim that has been finally settled) has been made by a taxing authority that
any of the Company or the Retained Subsidiaries is subject to an obligation to
file Tax Returns or to pay or collect Taxes imposed by any jurisdiction in which
such Retained Company does not file Tax Returns or pay or collect Taxes, other
than any such claim that would not have a Material Adverse Effect on such
Retained Company or for which adequate reserves have been provided on the
balance sheet contained in the Unaudited Company Business Financial Statements
and the Pro Forma Balance Sheet; (D) there is no deficiency with respect to any
Taxes which would, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole, other than any such
deficiency for which adequate reserves have been provided on the balance sheet
contained in the Unaudited Company Business Financial Statements and the Pro
Forma Balance Sheet; and (E) all material assessments for Taxes due with respect
to completed and settled examinations or concluded litigation have been paid
which, individually or in the aggregate (with respect to any Retained Company),
exceed $100,000. As used in this Agreement, "Taxes" shall include all federal,
state, local and foreign income, franchise, property, sales, excise and other
taxes, tariffs or governmental charges of any nature whatsoever, including
interest and penalties, and additions thereto; and "Tax Returns" shall mean all
federal, state, local and foreign tax returns, declarations, statements,
reports, schedules, forms and information returns relating to Taxes.
(ii) Except as set forth in Schedule 3.01(n), each of the Company and
the Retained Subsidiaries has duly and timely withheld all Taxes required to
be withheld in connection with its business and assets, and such withheld
Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose, except to
the extent that any failure to do so would not have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(iii) Except as set forth in Schedule 3.01(n), (A) none of the Company
and the Retained Subsidiaries is a party to or bound by or has any
obligation under any Tax allocation, sharing, indemnification or similar
agreement or arrangement (other than any agreement for the acquisition of
one or more of the Retained Subsidiaries) with any Person other than any of
the Retained Companies, which might result in a Material Adverse Effect to
the Retained Company which entered into such agreement or arrangement; and
(B) none of the Company and the Retained Subsidiaries is or has been at any
time a member of any group of companies filing a consolidated, combined or
unitary income tax return other than any such group (1) the common parent of
which is the Company or any Retained Subsidiary or (2) the common parent of
which has not held any asset other than shares of one or more of the
Retained Subsidiaries.
(iv) Except as set forth in Section 3.01(n) of the Disclosure Schedule,
(A) all taxable periods of each of the Company and the Retained Subsidiaries
ending before December 31, 1993 are closed or no longer subject to audit;
(B) none of the Company and the Retained Subsidiaries is currently under any
audit by any taxing authority as to which such taxing authority has asserted
in writing any claim which, if adversely determined, could have a Material
Adverse Effect on such Retained Company; and (C) no waiver of the statute of
limitations is in effect with respect to any taxable year of the Company or
any of the Retained Subsidiaries.
(o) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS; ERISA. (i) Employee
Benefit Plans. Each Employee Benefit Plan that provides for equity-based
compensation or that has associated costs that are expected to be material to
the Company or the Retained Companies in the aggregate and that is expected to
provide for contributions to be made by any of the Retained Companies or their
Employees after the date hereof or to permit the accrual of additional benefits
by any Employee of the Retained Companies after the date hereof is either listed
on Schedule 3.01(o) or has been filed with the SEC as a material contract
(collectively, the
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"Retained Plans"). Except as set forth on Schedule 3.01(o), neither the Company
nor any of its Subsidiaries has communicated to any Employee any intention or
commitment to modify any Retained Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement which would, if
it existed on the date hereof, be a Retained Plan.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any material
liability as to which adequate reserves have not been established, each Employee
Benefit Plan intended to be qualified under section 401(a) of the Code, and the
trust (if any) forming a part thereof, (A) has received a favorable
determination letter from the IRS as to its qualification under the Code and to
the effect that each such trust is exempt from taxation under section 501(a) of
the Code, and nothing has occurred since the date of such determination letter
that could adversely affect such qualification or tax-exempt status or (B) a
timely application for such a favorable determination letter was filed and the
Company has no reason to believe that such a favorable determination letter will
not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is reasonably
expected to be incurred under or pursuant to Title I or IV of ERISA or the
penalty, excise Tax or joint and several liability provisions of the Code
relating to employee benefit plans that is or would be material to the Company
or, following the Closing, to the Retained Companies in the aggregate.
(B) Each of the Employee Benefit Plans has been operated and
administered in all respects in compliance with its terms, all applicable
laws and all applicable collective bargaining agreements, except for any
failure so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or obligation on
the part of the Retained Companies in the aggregate. There are no pending or
threatened claims by or on behalf of any of the Employee Benefit Plans, by
any Employee or otherwise involving any such Employee Benefit Plan or the
assets of any Employee Benefit Plan (other than routine claims for benefits,
all of which have been fully reserved for on the regularly prepared balance
sheets of the Company) which would reasonably be expected to result in any
material liability to the Retained Companies in the aggregate.
(C) Except to the extent that it would not give rise to a material
liability or obligation on the part of the Company or the Retained
Companies, no Employee is or will become entitled to post-employment
benefits of any kind by reason of employment with the Company or its
Subsidiaries, including, without limitation, death or medical benefits
(whether or not insured), other than (x) coverage mandated by section 4980B
of the Code, (y) retirement benefits payable under any Plan qualified under
section 401(a) of the Code or (z) accrued deferred compensation. The
consummation of the Transactions will not result in an increase in the
amount of compensation or benefits or the acceleration of the vesting or
timing of payment of any compensation or benefits payable to or in respect
of any Employee by any of the Retained Companies.
(iv) Employees, Labor Matters, etc. Except as set forth on Schedule 3.01(o),
neither the Company nor any of its Subsidiaries is a party to or bound by any
collective bargaining agreement, and there are no labor unions or other
organizations representing, purporting to represent or attempting to represent
any employees employed by the Company or any of its Subsidiaries.
Since April 26, 1997, there has not occurred or been threatened any strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of the Company or any of
its Subsidiaries. Except as set forth on Schedule 3.01(o), there are no labor
disputes currently subject to any grievance procedure, arbitration or litigation
and there is no petition pending or threatened with respect to any employee of
any the Company or its Subsidiaries. The Company and its Subsidiaries has
complied with all applicable Laws pertaining to the employment or termination of
employment of their respective employees, including, without limitation, all
such laws relating to labor relations, equal employment opportunities, fair
employment practices, prohibited discrimination or distinction and other similar
employment activities, except for any failure so to comply that, individually
and in the aggregate, could not result in any material liability to the Retained
Companies in the aggregate.
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(p) ENVIRONMENTAL MATTERS. Except as disclosed in the Filed Company SEC
Documents or as set forth on Schedule 3.01(p) and except for such matters that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole, (i) the Retained Companies are in
compliance with all applicable Environmental Laws (as defined below), (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits"), (iii) none of the Retained Companies has received notice from any
Governmental Entity asserting that any of the Retained Companies may be in
violation of, or liable under, any Environmental Law, and (iv) there are no
actions, proceedings or claims pending (or, to the knowledge of the Retained
Companies, threatened) seeking to impose any liability on the Retained Companies
in respect of any Environmental Laws, Environmental Permits or Hazardous
Substances.
For purposes of this Agreement, "Environmental Law" means any federal,
state, local or foreign law, statute, regulation or decree relating to (x) the
protection of the environment or (y) the use, storage, treatment, generation,
transportation, processing, handling, release or disposal of Hazardous
Substances, in each case as in effect on the date hereof. "Hazardous Substance"
means any waste, substance, material, pollutant or contaminant listed, defined,
designated or classified as hazardous, toxic or radioactive, or otherwise
regulated, under any Environmental Law.
(q) DELAWARE LAW. The Company has taken all action necessary to ensure
that the provisions of Section 203 of the Delaware General Corporation Law (the
"DGCL") will not be applicable to Purchaser or its Affiliates as a result of the
transactions contemplated by this Agreement.
(r) STATUS OF SHARES. The Shares being issued at the Closing have been
duly authorized by all necessary corporate action on the part of the Company,
and at Closing such Shares will have been validly issued and, assuming payment
therefor has been made, will be fully paid and nonassessable, and the issuance
of such Shares will not be subject to preemptive rights of any other stockholder
of the Company. The Warrant Shares and the Special Warrant Shares have been duly
authorized by all necessary corporate action on the part of the Company, and
such shares of Common Stock have been validly reserved for issuance, and,
assuming payment therefor has been made, upon issuance and exercise of the
Warrants or the Special Warrants, as the case may be, will be validly issued and
outstanding, fully paid and nonassessable. Assuming the Company Stockholder
Approval has been obtained, the Shares, Warrants and Special Warrants will be
eligible for listing on the Nasdaq Stock Market.
(s) INTELLECTUAL PROPERTY. The Intellectual Property that is owned by the
Retained Companies constitutes all of the Intellectual Property that is material
to the Retained Companies as a whole, except for Intellectual Property subject
to written or oral licenses, agreements or arrangements pursuant to which the
use of Intellectual Property by any Retained Company is permitted by any Person
(the "Company Intellectual Property"). The Company Intellectual Property that is
owned by the Retained Companies is owned free from any Liens (other than
Permitted Liens). Except as set forth in Schedule 3.01(s), all material
Intellectual Property Licenses are in full force and effect in accordance with
their terms, and are free and clear of any Liens (other than Permitted Liens).
Except as set forth in Schedule 3.01(s), immediately after the Closing, the
Retained Companies will own or have the right to use all the Company
Intellectual Property, in each case free from Liens (except for Permitted Liens
incurred in the ordinary course of business) and on the same terms and
conditions as in effect prior to the Closing. Except as set forth in Schedule
3.01(s), the conduct of the Retained Business does not infringe or conflict with
the rights of any third party in respect of any Intellectual Property, except
where such conduct would not materially affect the ability of the Retained
Companies to conduct their business as presently conducted. Except as set forth
in Schedule 3.01(s), to the knowledge of the Company, none of the Company
Intellectual Property is being infringed by any third party except where such
infringement would not have a Material Adverse Effect on the Retained Companies
taken as a whole. Except as set forth in Schedule 3.01(s), there is no claim or
demand of any Person pertaining to, or any proceeding which is pending or, to
the knowledge of the Company, threatened, that challenges the rights of any of
the Retained Companies in respect of any Company Intellectual Property, or that
claims that any default exists under any Intellectual
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Property License, except where such claim, demand or proceeding would not
materially affect the ability of the Retained Companies to conduct their
business as presently conducted. Except as set forth in Schedule 3.01(s), none
of the Company Intellectual Property is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator, or other Governmental Entity materially adverse to the Company.
Except as set forth in Schedule 3.01(s), the Intellectual Property owned by the
Retained Companies and material to the Retained Companies taken as a whole has
been duly registered with, filed in or issued by, as the case may be, the
appropriate filing offices, domestic or foreign, to the extent necessary or
desirable to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction under any applicable law, and the same
remain in full force and effect. The Retained Companies have taken all necessary
actions to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction of the Company Intellectual Property
(including maintaining the secrecy of all confidential Intellectual Property)
under any applicable law.
(t) Guarantees. Except as set forth on Schedule 3.01(t), none of the
obligations or liabilities of any of the Distributed Companies will be
guaranteed by or subject to a contingent obligation of any of the Retained
Companies following the Distributions (excluding lease guarantees involving
obligations in an aggregate amount not to exceed $100,000).
(u) Brokers or Finders. Except as set forth on Schedule 3.01(u), no agent,
broker, investment banker or other firm is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
(v) Acquisitions. Schedule 3.01(v) sets forth a true and correct list of the
25 largest acquisitions (in terms of aggregate consideration) of businesses made
by the Company since its inception. The Company has provided Purchaser with
copies of the acquisition agreements and all schedules thereto for each
acquisition listed on Schedule 3.01(v).
(w) Disclosure. No representation or warranty by the Company contained in
this Agreement or in any certificate to be furnished by or on behalf of the
Company pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of the circumstances under
which they were made, not misleading with respect to the Retained Business as a
whole or the transactions contemplated by this Agreement.
(x) Fairness Opinion. The Board of Directors of the Company has received a
fairness opinion, customary in form and substance, from Morgan, Stanley & Co.,
Incorporated.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants as of the date hereof as follows:
(a) ORGANIZATION. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) AUTHORITY. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform each Transaction
Agreement to which it is a party and to consummate the Transactions. All
necessary action required to have been taken by or on behalf of Purchaser by
applicable law, its limited liability company agreement or otherwise to
authorize the approval, execution, delivery and performance by Purchaser of
this Agreement and the consummation by it of the Transactions have been duly
authorized, and no other proceedings on its part are or will be necessary to
authorize this Agreement or for it to consummate the Transactions. This
Agreement is a valid and binding agreement of Purchaser, enforceable against
Purchaser in accordance with the terms hereof, assuming that this Agreement
is a valid and binding agreement of the Company.
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(c) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any mortgage, security interest, encumbrance, lien or charge of
any kind upon any of the properties or assets of Purchaser pursuant to, or
require any consent, approval or other action by or any notice to or filing
with any court or administrative or governmental body pursuant to, the
organizational documents or agreements of Purchaser or any agreement,
instrument, order, judgment, decree, statute, law, rule or regulation by
which Purchaser is bound (assuming that the Company shall have made or
obtained all consents, approvals, orders, authorizations, registrations,
declarations or filings referred to in Section 3.01(c)(ii)), except for
filings after the Closing under Section 13(d) of the Exchange Act and
filings under the HSR Act.
(d) ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Shares,
Warrants and Special Warrants being purchased by it for its own account for
the purpose of investment and not with a view to or for sale in connection
with any distribution thereof, and Purchaser has no present intention or
plan to effect any distribution of Shares, Warrants, Special Warrants,
Warrant Shares or Special Warrant Shares; provided that the disposition of
such Purchaser's property shall at all times be and remain within its
control and subject to the provisions of this Agreement and the Registration
Rights Agreement. Purchaser has delivered to the Company a complete and
correct copy of a commitment letter from the Fund for $270 million of common
equity financing. The Fund constitutes a "venture capital operating company"
within the meaning of Section 2510.3-101(d) of the regulations promulgated
under ERISA and the transactions contemplated by this Agreement shall not
adversely affect such status.
(e) OWNERSHIP OF SECURITIES. At the date hereof Purchaser does not
Beneficially Own, directly or, to the knowledge of Purchaser, indirectly (or
have any option or other right to acquire), any securities of the Company
other than the Shares, Warrants and Special Warrants being purchased by it
hereunder.
(f) BROKERS OR FINDERS. Except as set forth in Schedule 3.02(f), no
agent, broker, investment banker or other firm is or will be entitled to any
broker's or finder's fee or any other commission or similar fee from
Purchaser in connection with any of the transactions contemplated by this
Agreement.
(g) FUTURE ACQUISITIONS. Purchaser has no present plan or intention to
acquire, directly or indirectly, shares of capital stock comprising 50% or
more of the Total Voting Power or 50% or more of the total fair market value
of all shares of outstanding capital stock of the Company.
ARTICLE IV
CORPORATE GOVERNANCE
SECTION 4.01 COMPOSITION OF THE BOARD OF DIRECTORS.
(a) At and after the Closing, the Board of Directors of the Company shall
consist of nine directors (subject to the right to increase the Board of
Directors pursuant to Section 4.01(b)(iii)). Three members of the Board of
Directors shall initially be designated by the Purchaser (the "Investor
Directors"). Six members of the Board (the "Non-Investor Directors") shall
initially be designated by the Company, subject to the conditions set forth in
Section 9.03(l), and shall include the chief executive officer of the Company.
So long as Purchaser shall have the right to nominate at least two directors
pursuant to clause (i) below, Purchaser shall be entitled to designate the
Chairman of the Board of Directors, provided that the Chairman of the Board, if
designated by Purchaser, shall be an Investor Director.
(b) Purchaser shall be entitled to nominate three directors for election,
provided:
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(i) if the total number of shares of Common Stock represented by the Shares,
the Special Warrants and the Warrants ("Purchaser's Total Securities") declines
by more than 33 1/3% but less than 66 2/3% from Purchaser's Total Securities at
Closing by reason of sales or other dispositions of Common Stock, Warrants or
Special Warrants by Purchaser, Purchaser shall have the right to nominate two
directors;
(ii) if Purchaser's Total Securities declines by 66 2/3% or more from
Purchaser's Total Securities at Closing, but Purchaser's Percentage Interest
remains at least 5% of the outstanding Voting Securities, by reason of sales or
other dispositions of Common Stock, Warrants or Special Warrants by Purchaser,
Purchaser shall have the right to nominate one director;
(iii) in the event that the size of the Board of Directors shall be
increased, Purchaser shall have the right to at least proportionate
representation on the Board following such increase based on the composition of
the Board as between Investor Directors and Non-Investor Directors immediately
prior to such increase; provided that in no event shall the Board consist of
more than 12 directors; and
(iv) if the chief executive officer of the Company is not then a member of
the Board of Directors or a nominee for membership thereon, the Purchaser shall
be entitled to approve an additional nominee to the Board of Directors.
(c) The Company shall not, and shall not permit its Affiliates to, solicit
proxies (as such terms are used in the proxy rules of the SEC) of the
stockholders of the Company to vote against any of the nominees selected by the
Purchaser or for the approval of any stockholder or other proposals that are
inconsistent with the rights afforded the Purchaser pursuant to this Agreement
and the other Transaction Agreements.
SECTION 4.02 SUPERMAJORITY VOTING PROVISIONS. So long as Purchaser has the
right to designate at least two nominees to the Board of Directors of the
Company pursuant to Section 4.01(b):
(a) neither the Company nor the Board of Directors shall cause or permit to
occur any of the following events without the affirmative vote of not less than
three-fourths of the members of the Board of Directors of the Company:
(i) any issuance of Equity Securities other than (A) issuances pursuant to
employee stock option or incentive compensation plans of Equity Securities
(other than in respect of options outstanding as of the date hereof) in an
aggregate amount not to exceed 5% of the Common Stock outstanding immediately
following the Closing on a fully diluted basis ("Permitted Options"), or (B)
issuances pursuant to acquisitions or in public offerings, such issuances not to
exceed 5% of the Common Stock outstanding immediately following the Closing on a
fully diluted basis in any one issuance or 20% in the aggregate, provided,
however, that no such issuance shall be permitted if as a result thereof any
Person would own 10% of the Common Stock outstanding immediately following such
issuance on a fully diluted basis;
(ii) (A) any merger, consolidation or other business combination to which
the Company is a party or any decision whether to approve a tender offer
involving the Company's Equity Securities, in any case other than a Cash
Transaction (as defined in Section 4.02(b)(i) below) or a Permitted Securities
Transaction (as defined in Section 4.02(b)(ii)) below, or (B) any amendment of
any shareholder rights plan (or "poison pill") maintained by the Company and any
redemption of the rights issued thereunder, except to permit a Cash Transaction
or a Permitted Securities Transaction;
(iii) any sale, lease, transfer or other disposition in one transaction or a
series of related transactions of all or substantially all the assets of the
Company, in any case other than a Cash Transaction or Permitted Securities
Transaction; or
(iv) any major recapitalization or similar transaction or series of
transactions involving the Company;
(v) any dissolution or complete or partial liquidation of the Company; or
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(vi) any amendment or modification of the Company Charter or the Company
By-laws that is inconsistent with the provisions of this Agreement and the
rights afforded to Purchaser hereunder.
(b) For purposes of this Agreement:
(i) "Cash Transaction" means any merger, consolidation or other business
combination or sale of all or substantially all the assets of the Company to
which the Company is a party or any decision whether to approve a tender offer
for all of the Company's Equity Securities, in any case if the consideration
involved in such transaction is all cash;
(ii) "Permitted Securities Transaction" means any merger, consolidation or
other business combination to which the Company is a party or any decision
whether to approve a tender or exchange offer for all of the Company's Equity
Securities, in any case if all consideration involved in such transaction is
cash and/ or shares of a registered, freely tradeable, listed common equity
security for which there was an aggregate public market capitalization equal to
at least the greater of $5 billion or the market capitalization of the Company's
Equity Securities, in each case determined immediately prior to the approval of
such transaction by the Board of Directors of the Company.
SECTION 4.03 COMMITTEES. Subject to any law or stock exchange rule
prohibiting committee membership by Affiliates of the Company, Purchaser shall
be entitled to at least proportionate representation by Investor Directors on
any committee of the Board of Directors, based on the composition of the Board
as between Investor Directors and Non-Investor Directors.
SECTION 4.04 BY-LAWS. The Company and Purchaser shall take or cause to be
taken all lawful action necessary to ensure at all times as of and following the
Closing Date that the Company By-laws are not inconsistent with the provisions
of this Agreement or the transactions contemplated hereby.
SECTION 4.05 TERMINATION OF ARTICLE IV. This Article IV shall terminate and
be of no further force or effect on the earlier to occur of (a) the fifth
anniversary of the Closing and (b) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of this Agreement) is greater than 50%.
ARTICLE V
EQUITY PURCHASES FROM THE COMPANY
SECTION 5.01 SUBSCRIPTION RIGHTS. So long as Purchaser has the right to
nominate an Investor Director pursuant to Section 4.01, if the Company's Board
of Directors shall authorize the issuance of New Securities for cash (other than
any New Securities issued (i) to officers, employees or directors of the Company
or any of its Subsidiaries pursuant to any employee stock offering, plan or
arrangement (x) in effect on the date hereof, (y) which constitutes Permitted
Options or (z) approved by any Investor Director, (ii) in connection with any
acquisition transaction, (iii) in any public offering registered under the
Securities Act or in any financing transaction in which sales or resales are
effected through Rule 144A or Regulation S under the Securities Act or any
successor or comparable provisions thereto and (iv) to Purchaser or its
Affiliates (other than the Company and its Subsidiaries)), then, prior to each
such issuance of New Securities, the Company shall offer to Purchaser a Pro Rata
Share of such New Securities. Any offer of New Securities made to Purchaser
under this Section 5.01 shall be made by notice in writing (the "Subscription
Notice") at least 10 Business Days prior to the date on which the meeting of the
Company's Board of Directors is held to authorize the issuance of such New
Securities. The Subscription Notice shall set forth (i) the number of New
Securities proposed to be issued to Persons other than Purchaser and the terms
of such New Securities, (ii) the consideration (or manner of determining the
consideration), if any, for which such New Securities are proposed to be issued
and the terms of payment, (iii) the number of
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New Securities offered to Purchaser in compliance with the provisions of this
Section 5.01 and (iv) the proposed date of issuance of such New Securities. Not
later than 20 Business Days after its receipt of a Subscription Notice,
Purchaser shall notify the Company in writing whether it elects to purchase all
or any portion of the New Securities offered to Purchaser pursuant to the
Subscription Notice. If Purchaser shall elect to purchase any such New
Securities, the New Securities which it shall have elected to purchase shall be
issued and sold to Purchaser by the Company at the same time and on the same
terms and conditions as the New Securities are issued and sold to third parties.
If, for any reason, the issuance of New Securities to third parties is not
consummated, Purchaser's right to its Pro Rata Share of such issuance shall
lapse, subject to Purchaser's ongoing subscription right with respect to
issuances of New Securities at later dates or times.
SECTION 5.02 ISSUANCE AND DELIVERY OF NEW SECURITIES AND VOTING STOCK. The
Company represents and covenants to Purchaser that (i) upon issuance, all the
shares of New Securities sold to Purchaser pursuant to this Article V shall be
duly authorized, validly issued, fully paid and nonassessable and will be
approved (if outstanding securities of the Company of the same type are at the
time already approved) for listing on the Nasdaq Stock Market or for quotation
or listing on the principal trading market for the securities of the Company at
the time of issuance, (ii) upon delivery of such shares, they shall be free and
clear of all claims, Liens, encumbrances, security interests and charges of any
nature and shall not be subject to any preemptive right of any stockholder of
the Company and (iii) in connection with any such issuance, the Company shall
take such actions as are specified in Section 3.01(q) with respect to such
shares. Each share issued or delivered by the Company hereunder shall bear the
legend set forth in Section 13.11.
ARTICLE VI
LIMITATIONS ON PURCHASES OF ADDITIONAL EQUITY SECURITIES
SECTION 6.01 PURCHASES OF EQUITY SECURITIES. (a) Except as permitted by
Section 6.01(b) or 6.01(c), neither Purchaser nor its Affiliates will directly
or indirectly acquire any securities (including by exercise of the Warrants or
Special Warrants) or take any other action that would cause the percentage of
the Total Voting Power represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 25%.
(b) Nothing herein shall prevent Purchaser from purchasing any Securities
pursuant to the terms of this Agreement (including through exercise of the
Warrants and the Special Warrants in accordance with their respective terms) and
the Purchaser shall not be treated as having breached any covenant in this
Agreement solely as a result of such purchase.
(c) This Section 6.01 shall terminate and be of no further force or effect
on the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
SECTION 6.02 ADDITIONAL LIMITATIONS. Other than in connection with a Buyout
Transaction that is not solicited or proposed by Purchaser or its Affiliates or
as specifically approved by a majority of the Non-Investor Directors, during the
five-year period beginning on the date of this Agreement, Purchaser shall not,
and shall not permit its Affiliates to:
(i) contrary to the recommendation of the Company's Board of Directors, in
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the SEC), vote any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or more
stockholder proposals or induce or attempt to induce any other individual, firm,
corporation, partnership or other entity to initiate any stockholder proposal,
provided, however, that this clause shall be
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inapplicable to any solicitation of proxies, or inducement or attempt to induce
any other entity to initiate any stockholder proposal, in respect of any Cash
Transaction or Permitted Securities Transaction approved by the Board of
Directors of the Company without the approval of at least one Investor Director;
(ii) deposit any Voting Securities into a voting trust or subject any Voting
Securities to any arrangement or agreement with respect to the voting of such
securities or form, join a partnership, limited partnership, syndicate or other
group, or otherwise act in concert with any other Person, for the purpose of
acquiring, holding, voting or disposing of Voting Securities, or otherwise
become a "person" within the meaning of Section 13(d)(3) of the Exchange Act; or
(iii) make a public request to the Company (or its directors, officers,
stockholders, employees or agents) to amend or waive any provisions of this
Section 6.02.
ARTICLE VII
TRANSFER OF COMMON STOCK
SECTION 7.01 TRANSFER OF COMMON STOCK. (a) Other than as specifically
approved by a majority of the Non-Investor Directors, prior to the second
anniversary of the Closing, Purchaser will not, directly or indirectly, sell,
transfer or otherwise dispose of any Shares, Special Warrants or Warrants
(except to any Affiliate of Purchaser).
(b) Other than as specifically approved by a majority of the Non-Investor
Directors, prior to the fifth anniversary of the Closing, Purchaser will not,
directly or indirectly, sell, transfer or otherwise dispose of any Shares except
(i) pursuant to a registered underwritten public offering intended to achieve a
broad distribution in accordance with the Registration Rights Agreement, (ii) in
accordance with the volume and manner-of-sale limitations of Rule 144
promulgated under the Securities Act (regardless of whether such limitations are
applicable), (iii) in a transaction exempt from the registration requirements of
the Securities Act to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) of Persons, if, prior to and after giving effect
to such sale, such Person or group of Persons (A) does not or would not to
Purchaser's knowledge after due inquiry, Beneficially Own (provided that for
purposes of this Section 7.01(a) a Person shall be deemed to Beneficially Own
all shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time) 5% or more of the
then outstanding shares of Common Stock or (B) is an investment company
registered under the Investment Company Act of 1940, as amended, or (iv) in
connection with a Buyout Transaction. Purported transfers of shares of Common
Stock that are not in compliance with this Article VII shall be of no force or
effect.
(c) The provisions of clauses (a) and (b) of this Article VII shall
terminate and be of no further force or effect on the earlier to occur of (i)
the fifth anniversary of the Closing and (ii) the date on which the percentage
of the Total Voting Power represented by the aggregate voting power of all
Voting Securities then owned by Purchaser (other than any Voting Securities
acquired in violation of this Agreement) is greater than 50%.
(d) Prior to the seventh anniversary of the Closing, the Purchasers will
not, directly or otherwise dispose of Shares representing 15% or more of the
then outstanding Common Stock to any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) without first offering the Company the
right to make an offer to purchase the Shares proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on the date on which the percentage of the
Total Voting Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%.
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ARTICLE VIII
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 8.01 COVENANTS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the Closing, the Company agrees as to itself
and the Retained Subsidiaries that, except as set forth in the Distribution
Agreements or in Schedule 8.01, or to the extent that Purchaser otherwise
consents in writing:
(a) ORDINARY COURSE. The Retained Business will be conducted in the
ordinary course in substantially the same manner as presently conducted and the
Company will use commercially reasonable efforts to keep available the services
of the current officers and employees engaged primarily in the Retained Business
and to preserve the relationships with customers, suppliers and others having
business dealings with the Retained Business.
(b) NO ACQUISITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, acquire or agree to acquire (excluding any non-binding
letters of intent) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets (other
than inventory) involving aggregate consideration having a value in excess of
$25 million in any case or $150 million in the aggregate (in either case whether
payable in cash, stock or a combination thereof); provided that (i) no such
consideration shall be payable in Common Stock or stock of any Retained
Subsidiary and (ii) any such consideration payable in stock of a Distributed
Company shall not be payable prior to completion of the Distributions; and
provided, further, that this paragraph (b) shall not limit the ability of the
Company or the Retained Subsidiaries to make acquisitions in respect of
businesses which will constitute part of a Distributed Company if all
acquisition debt associated therewith is allocated to such Distributed Company.
(c) NO DISPOSITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any of
the Assets of the Retained Business other than at fair market value in the
ordinary course of business consistent with past practice.
(d) OTHER TRANSACTIONS. The Company will not, nor will it permit any of
the Retained Subsidiaries to, do any of the following (except as otherwise
expressly provided herein or in any other Transaction Agreement):
(i) Amend its Certificate of Incorporation (except to the extent necessary
to implement a shareholder rights plan pursuant to clause (ii) below), By-laws
or other organizational documents (except for immaterial amendments to the
Certificate of Incorporation or By-laws of any Subsidiaries, provided such
amendments in no way adversely affect Purchaser or the rights granted to
Purchaser hereunder);
(ii) declare or pay any non-cash dividend or make any non-cash distribution
with respect to the Assets; provided, however, that the Company shall be
permitted to issue rights under a customary shareholder rights plan or "poison
pill" that (A) expires at Closing and (B) expressly exempts Purchaser and its
Affiliates from its operation;
(iii) redeem or otherwise acquire any shares of its capital stock or issue
any capital stock (except upon exercise of options issued prior to the date
hereof under a Company Stock Plan), or any option, or warrant or right relating
thereto (other than grants under the Company's 1994 Amended and Restated Long
Term Incentive Plan of options to acquire not more than 685,778 shares of Common
Stock in the aggregate from the separate "pools" of options that the Company has
heretofore allocated in connection with certain acquisitions that the Company
has made for award to employees of such acquired companies; provided that each
such option shall (A) have a per share exercise price that is not less than the
fair market value
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per share of Common Stock at the date of grant, (B) vest and become exercisable
no more rapidly than 25% on each of the first four anniversaries of the date of
grant, and (C) shall not vest or become earlier exercisable as a result of the
consummation of the Transactions);
(iv) incur any liabilities, obligations or indebtedness for borrowed money
or guarantee any such liabilities, obligations or indebtedness, other than in
the ordinary course of business consistent with past practice (except as
otherwise provided herein with respect to the Proposed Financings or as incurred
in connection with acquisitions to the extent permitted hereby) and in an
aggregate amount that would not be material to the Company;
(v) permit, allow or suffer any assets of the Retained Business to be
subject to any Lien other than Permitted Liens;
(vi) guarantee or otherwise become contingently liable for any obligation of
any of the Distributed Companies;
(vii) cancel any material indebtedness (individually or in the aggregate)
relating to the Retained Business or waive any claims or rights of substantial
value relating to the Retained Business;
(viii) pay, loan or advance any amount to, or sell, transfer or lease any of
its assets relating to the Retained Business, or enter into any agreement or
arrangement relating to the Retained Business with, any of the Distributed
Companies or any of their respective Affiliates other than in the ordinary
course of business consistent with past practice;
(ix) make any change in any method of accounting or accounting practice or
policy, except as may be required by GAAP;
(x) modify, amend, terminate or permit the lapse of any lease of real
property used in connection with, and which is material to, the Retained
Business (except modifications or amendments associated with renewals of such
leases in the ordinary course of business consistent with past practice of the
Retained Companies with respect to which Purchaser shall have the right to
participate and to approve);
(xi) enter into, terminate, renew or modify any Contract to which the
Company or any Retained Subsidiary is a party or by which any of their assets
are bound and which is material to the Company;
(xii) enter into any agreement or take any action in violation of the terms
of this Agreement or any of the other Transaction Agreements;
(xiii) settle any material tax audit, make or change any tax election or amend
any Tax Returns; or
(xiv) agree, whether in writing or otherwise, to do any of the foregoing.
(e) EMPLOYEE BENEFITS. Except (w) as set forth in Schedule 8.01(e), (x) in
connection with acquisitions to the extent permitted by this Agreement or (y) in
the ordinary course of business and as consistent with past practice (which
shall include normal periodic performance reviews and related benefit increases)
or (z) pursuant to the existing terms of any collective bargaining agreement,
the Company will not, nor will it permit any of the Retained Subsidiaries to (i)
increase in any manner the compensation of any of the officers or other
employees of the Retained Companies; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required by any existing
plan, agreement or arrangement to any such officer or employee, whether past or
present; (iii) enter into, or negotiate, any collective bargaining agreement
with respect to employees of the Retained Companies except as required by law,
in which case the Company or such Retained Subsidiary shall first notify
Purchaser; or (iv) commit itself to any additional pension, profit-sharing,
bonus, incentive, deferred compensation, stock purchase, stock option, equity
purchase (or other equity based plan), stock appreciation right, group
insurance, severance pay, retirement or other employee benefit plan, policy,
program, understanding, agreement or arrangement, or to any employment agreement
or consulting agreement (arising out of prior employment), regardless of the
applicable funding arrangements, with or for the benefit of any officer or
employee of the Retained
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Companies, or amend, renew or extend any of such plan or any of such agreements
in existence on the date hereof in any manner which would, in the case of
clauses (i), (ii), (iii) and (iv) above, result in liabilities that are material
to the Retained Companies taken as a whole.
SECTION 8.02 TRANSACTION PROPOSALS. (a) Subject to Section 8.02(d), the
Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize or permit any officer, director or employee of, or any investment
banker, attorney, accountant or other advisor, agent or representative of, the
Company or any of its Subsidiaries to, (i) solicit or initiate, or encourage
(including by furnishing non-public information) the submission of, any
Transaction Proposal (as defined below) or (ii) participate in any discussions
or negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Transaction Proposal; provided, however, that prior to the Company Meeting, in
response to an unsolicited written bona fide Transaction Proposal that in the
good faith opinion of the Board of Directors of the Company could reasonably be
expected to result in a Superior Proposal (as defined below), if the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that failure to do so could reasonably be expected to result in
a breach of its fiduciary duties to stockholders under applicable law, the
Company may, subject to compliance with Section 8.02(c), (A) furnish information
with respect to the Company to such Person making such proposal pursuant to a
customary confidentiality and standstill agreement with such Person and (B)
participate in negotiations regarding such Transaction Proposal. For purposes of
this Agreement, "Transaction Proposal" means any inquiry, proposal or offer from
any Person relating to (x) any purchase or other acquisition from the Company of
assets representing 25% or more of the net revenues, net income or profits of
the Company and its Subsidiaries, taken as a whole, (y) any purchase or other
acquisition of 10% or more of any class of Equity Securities of the Company, or
(z) any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company (or any
Subsidiary whose business constitutes 25% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole), in each
case other than the transactions contemplated by this Agreement. Immediately
after the execution and delivery of this Agreement, the Company will, and will
cause its Subsidiaries and Affiliates, and their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents to, cease
and terminate any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any possible Transaction Proposal.
(b) Nothing contained in this Section 8.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act; provided that except as set forth
in this Section 8.02(b) or as permitted by Section 8.02(d), neither the Board of
Directors of the Company nor any committee thereof shall (A) withdraw or modify,
or propose to withdraw or modify, in a manner adverse to Purchaser, the approval
or recommendation by such Board of Directors or any such committee of this
Agreement or the Transactions, (B) approve or recommend, or propose to approve
or recommend, any Transaction Proposal (C) cause or permit the Company or any of
its Subsidiaries to enter into any agreement with respect to any Transaction
Proposal or (D) terminate this Agreement in response to a Transaction Proposal.
Notwithstanding the foregoing, if prior to the Company Meeting the Company has
received a Transaction Proposal that the Board determines in good faith is a
Superior Proposal, then the Board of Directors of the Company, if it determines
in good faith, after consultation with outside counsel, that failure to do so
could reasonably be expected to result in a breach of its fiduciary duties to
stockholders under applicable law, may (subject to the terms of this sentence
and compliance with the following sentence) (i) withdraw or modify its
recommendation of this Agreement, or the transactions contemplated hereby, (ii)
approve or recommend such Superior Proposal, (iii) cause the Company to enter
into an agreement with respect to a Superior Proposal and (iv) terminate this
Agreement, in each case (as contemplated by this Section 8.02(b)) no earlier
than five Business Days following Purchaser's receipt of a written notice from
the Company advising Purchaser that the Board of Directors of the Company has
received a Superior Proposal, specifying the terms and conditions of such
Superior Proposal and identifying the person making such Superior Proposal;
provided, however, that neither the Company nor its Board of Directors shall
take any of the actions specified in such clauses (i),
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(ii), (iii) or (iv) unless the Company shall have furnished Purchaser with
written notice on a date prior to the date any such actions are proposed to be
taken specifying such actions to be taken. In addition, if the Company or the
Board of Directors of the Company proposes to take any of the actions permitted
by the preceding sentence with respect to any Transaction Proposal, then the
Company shall, prior to the taking of any such action, pay, or cause to be paid,
to Purchaser, Purchaser's Expenses and the Termination Fee (each as defined in
Section 12.09). The term "Superior Proposal" shall mean any bona fide written
Transaction Proposal that has the following characteristics: (1) it is a
proposal to acquire, directly or indirectly, for consideration consisting of
cash and/or readily marketable securities, (x) shares of Common Stock
representing at least 20% of the Total Voting Power, or (y) at least 25% of the
assets of the Retained Subsidiaries and (2) the terms of such proposal in the
good faith judgment of the Board of Directors of the Company, based on advice
from the Company's financial adviser, provide consideration to the Company or
the Company's stockholders that is superior to the consideration provided
pursuant to this Agreement (after taking into account any modifications to this
Agreement proposed by Purchaser).
(c) The Company shall immediately advise Purchaser orally and in writing of
(i) any request for information which may relate to a Transaction Proposal, (ii)
any Transaction Proposal, (iii) any inquiry with respect to or that could lead
to any Transaction Proposal or (iv) any action taken in accordance with Section
8.02(a)(A) or (B), and in each case the material terms and conditions of such
request, Transaction Proposal, inquiry or action and the identity of the Person
making any such request, Transaction Proposal or inquiry with respect to which
such action is taken. The Company will keep Purchaser reasonably informed of
material developments concerning the status and details (including amendments or
proposed amendments) of any such request, Transaction Proposal, inquiry or
action.
SECTION 8.03 MODIFICATION OF TRANSACTION AGREEMENTS; ABANDONMENT OF
DISTRIBUTIONS. Notwithstanding anything to the contrary in this Agreement, the
Company may in its sole discretion modify each of the Transaction Agreements
relating to the Distributions and, if the Board of Directors of the Company
determines in good faith that it is in the best interest of the Company to do
so, abandon the Distributions.
SECTION 8.04 TRANSACTION AGREEMENTS AND SCHEDULES. The Company shall use
reasonable best efforts to cause (i) each of the Transaction Agreements to be
entered into by the Company, School, Travel, Technology or Print, as the case
may be, in connection with the Distributions, and each of the Annexes called for
in this Agreement that have not been provided to Purchaser prior to the
execution of this Agreement, to be delivered to Purchaser and its counsel by
7:00 p.m., New York Time, February 13, 1998 (the "Agreement Delivery Cut-Off
Time"); and (ii) each of the Schedules called for in this Agreement that have
not been provided to Purchaser prior to execution of this Agreement (and prior
to the Schedule Review Cut-Off Time (as defined below) may supplement Schedules
that have previously been supplied or may unilaterally amend this Agreement to
add additional Schedules) to be delivered to Purchaser and its counsel by 7:00
p.m., New York time, January 20, 1998 (the "Schedule Delivery Cut-off Time").
Purchaser shall review such Transaction Agreements, Schedules and Annexes in
good faith. Prior to the applicable Review Cut-off Time (as defined below) the
Company shall make available to Purchaser and its counsel at their request all
documentation related to any item set forth on any Schedule or Annex. Purchaser
shall complete its review of the Transaction Agreements, and the Annexes and
notify the Company that such review is complete by 7:00 p.m., New York time, on
February 27, 1998 (the "Agreement Review Cut-off Time") and shall complete its
review of the Schedules and notify the Company that such review is complete by
7:00 p.m., New York time, on February 3, 1998 (the "Schedule Review Cut-Off
Time"); provided, however, that if any Transaction Agreement, Schedule or Annex
is delivered after the applicable Delivery Cut-off Time, the applicable Review
Cut-off Time for all Transaction Agreements and Annexes and for the Schedules,
as the case may be shall be extended by the number of days elapsed (which, in
any case, shall not be less than one) between the date of such Delivery Cut-off
Time and the date of receipt by Purchaser and its counsel of such Transaction
Agreement or Annex or such Schedule, as the case may be; and provided further,
however, that if (A) the Transaction Agreements are not satisfactory to
Purchaser in its good faith reasonable judgment, (B) the Audited Retained
Business Financial Statements reflect
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financial information materially different from that presented in the Pro Forma
Retained Business Financial Statements, or (C) any new Schedule or change or
addition to the Schedules made after the date hereof is not satisfactory to
Purchaser in its good faith reasonable judgment, Purchaser may terminate this
Agreement upon written notice to the Company without further liability on the
part of Purchaser or the Company other than pursuant to Sections 10.02 and
13.09.
SECTION 8.05 COMPANY STOCKHOLDER APPROVAL; PROXY STATEMENT. (a) The Company
shall call a meeting of its stockholders (the "Company Meeting") for the
purpose, among others, of voting upon the issuance (the "Issuance") of the
Shares, the Special Warrants and the Warrants to Purchaser (the "Company Meeting
Proposal").
(b) The Company will prepare and file with the SEC a proxy statement
relating to the Company Meeting (as amended or supplemented and including
documents incorporated by reference therein, the "Proxy Statement") and shall
use its reasonable best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be cleared by the SEC. The Company
shall notify Purchaser of the receipt of any comments from the SEC or its staff
and of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and shall supply Purchaser and its
counsel with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. The Company shall give Purchaser and its
counsel the opportunity to review the Proxy Statement prior to its being filed
with the SEC and shall give Purchaser and its counsel the opportunity to review
all amendments and supplements to the Proxy Statement and all responses to
requests for additional information and replies to comments prior to their being
filed with, or sent to, the SEC. Each of the Company and Purchaser agrees to use
its reasonable best efforts, after consultation with the other party hereto, to
respond promptly to all such comments of and requests by the SEC. After the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
Company Meeting there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, the Company will prepare and
mail to its stockholders such an amendment or supplement.
(c) The Proxy Statement will not, at the date mailed to the Company's
stockholders and at the date of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
(d) Subject to Section 8.02(b), the Board of Directors of the Company shall
recommend that the Company's stockholders approve the Company Meeting Proposal
and the Company shall use its best efforts to obtain the necessary approvals by
its stockholders of the Company Meeting Proposal.
SECTION 8.06 RETAINED COMPANIES FINANCING. In connection with the Proposed
Financings, the Company and Purchaser shall jointly select all sources of the
Proposed Financings, including determining the respective roles of such sources;
provided, however, that Bankers Trust Company shall have the opportunity to be a
lead in the bank financing with economics at least as favorable as any other
lead in the bank financing if Bankers Trust Company's pricing is competitive. In
addition, (i) Purchaser and its counsel shall have the right to participate in
any discussions or negotiations between the Company and any of its
representatives, on the one hand, and its prospective lenders and their counsel,
on the other, and to comment on draft loan and other documentation in respect of
any such Proposed Financings and (ii) the Company shall provide Purchaser and
its counsel copies of all correspondence between the Company and its lenders
relating thereto. If, prior to the execution of any definitive documentation
with respect to the Proposed Financings, based on its review of such definitive
documentation, Purchaser determines in the
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good faith exercise of its reasonable judgment not to proceed with the
transactions contemplated by this Agreement, Purchaser may terminate this
Agreement upon written notice to the Company.
SECTION 8.07 TENDER OFFER. (a) The Company shall cause the commencement (as
such term is defined in Rule 13e-4(a)(4) under the Exchange Act) of the Tender
Offer to purchase 37,037,037 shares of Common Stock, at a price per share equal
to $27, net to the seller in cash, no later than the date specified in Schedule
8.07. Unless Purchaser shall otherwise agree, the Company's obligation to
complete the Tender Offer shall be subject only to the conditions (the "Offer
Conditions") set forth in Schedule 8.07. Subject to the provisions hereof, the
Tender Offer shall expire on the date set forth in Schedule 8.07; provided that
the Tender Offer shall be extended from time to time if the Offer Conditions
shall not have been satisfied, so long as this Agreement shall remain in effect.
(b) On the date of commencement of the Tender Offer, the Company shall file
with the SEC an Issuer Tender Offer Statement on Schedule 13E-4 with respect to
the Tender Offer (the "Tender Offer Statement"), which shall contain an offer to
purchase and a related letter of transmittal (such Tender Offer Statement and
the documents therein pursuant to which the Tender Offer will be made, together
with any supplements or amendments thereto, are referred to hereinafter as the
"Offer Documents"). After the Offer Documents are filed with the SEC, the
Company shall disseminate the Offer Documents to the stockholders of the
Company. If at any time prior to the expiration of the Tender Offer there shall
occur any event that should be set forth in an amendment or supplement to the
Offer Documents, the Company will prepare and file with the SEC and disseminate
to its stockholders such an amendment or supplement.
(c) The Company shall give Purchaser and its counsel the opportunity to
review the Offer Documents prior to their being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Offer Documents and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. The Company shall notify Purchaser of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Offer Documents or for additional information and shall
supply Purchaser and its counsel with copies of all correspondence between the
Company or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Offer Documents.
(d) The Offer Documents will not, on the date filed with the SEC and as of
the date first published, sent or given to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
except that no representation is made by the Company with respect to statements
made therein based on information concerning Purchaser or its Affiliates
supplied in writing by Purchaser or any of its Affiliates specifically for
inclusion in the Offer Documents. The Offer Documents will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.08 INFORMATION STATEMENTS. (a) The Company shall give Purchaser
and its counsel the opportunity to review the information statements to be
disseminated to stockholders of the Company in connection with the Distributions
(the "Information Statements") prior to its being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Information Statements and all responses to requests for
additional information and replies to comments prior to their being filed with,
or sent to, the SEC. The Company shall notify Purchaser of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Information Statements or for additional
information and shall supply Purchaser and its counsel with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the
Information Statements. If at any time prior to completion of the Distributions
there shall occur any event that should be set forth in an amendment or
supplement to the Information Statement, the Company will prepare and file with
the SEC and disseminate to its stockholders such an amendment or supplement.
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(b) The Information Statements will not, on the date filed with the SEC and
as of the date first disseminated to the Company's stockholders, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading except that
no representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the
Information Statements. The Information Statements will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.09 [INTENTIONALLY OMITTED.]
SECTION 8.10 TAX STANDSTILL. Except as permitted by Section 6.01(b) or
6.01(c), during the period ending two years after the date of the Distributions,
(i) Purchaser shall not acquire any Securities or take any other action that
would cause Purchaser's Percentage Interest to equal or exceed 50%, (ii) none of
Purchaser, the Fund or CD&R shall act in concert with any other Person to
acquire any Securities if aggregating such acquisition with the Purchaser's
holdings would cause the Purchaser's Percentage Interest to equal or exceed 50%,
and (iii) none of Purchaser, the Fund or CD&R shall solicit the acquisition of
any Securities, provided that the provision by the Fund to its limited partners
of customary reports and information, and customary communication with such
limited partners on behalf of the Fund, with respect to the Fund's investment in
the Company that, in either case, do not recommend any such acquisition, shall
not be treated as a solicitation by the Purchaser within the meaning of this
clause (iii).
SECTION 8.11 ACCESS AND INFORMATION. (a) So long as this Agreement remains
in effect, prior to the Closing, the Company will (and will cause each of the
Retained Companies, and each of their respective accountants, counsel,
consultants, officers, directors, employees, agents and representatives of or to
any of the Retained Companies, to) give Purchaser and its Representatives, full
access during reasonable business hours to all of their respective properties,
assets, books, contracts, commitments, reports and records relating to the
Retained Companies, and furnish to them all such documents, records and
information with respect to the properties, assets and business of the Retained
Companies and copies of any work papers relating thereto as Purchaser shall from
time to time reasonably request. The Company will keep Purchaser generally
informed as to the affairs of the Retained Business.
(b) In addition, the Company shall deliver to Purchaser, not later than the
35th day following the end of each fiscal month prior to the Closing, updated
Pro Forma Retained Business Financial Statements as of the end of such fiscal
month.
SECTION 8.12 FURTHER ACTIONS. (a) The Company shall, and shall cause each
of the Retained Companies to, use reasonable best efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for each of the Retained Companies to fulfill and
perform its obligations in respect of this Agreement and the Transaction
Agreements to which it is a party, or otherwise to consummate and make effective
the transactions contemplated hereby and thereby.
(b) The Company shall (and shall cause each of the Retained Companies to),
as promptly as practicable, (i) make, or cause to be made, all filings and
submissions (including but not limited to under the HSR Act and foreign
antitrust filings) required under any law applicable to any of the Retained
Companies, and give such reasonable undertakings as may be required in
connection therewith, and (ii) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
any of the Retained Companies, in each case in connection with this Agreement or
the Transaction Agreements, the sale and transfer of the Shares, the Special
Warrants and the Warrants pursuant hereto, or the consummation of the other
transactions contemplated hereby or thereby.
(c) The Company shall, and shall cause each of the Retained Companies to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may
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be reasonably requested by Purchaser in connection with the filings and other
actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article IX to be satisfied, promptly upon becoming aware of the
same.
SECTION 8.13 FURTHER ASSURANCES. Following the Closing Date, the Company
shall, and shall cause each of the Retained Companies to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and the Transaction Agreements and
render effective the consummation of the transactions contemplated hereby and
thereby, or otherwise to carry out the intent and purposes of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of the
Company and Purchaser to consummate the transactions contemplated to occur at
the Closing shall be subject to the satisfaction prior to the Closing of each of
the following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) HSR AND OTHER APPROVALS. Any applicable waiting period under the HSR
Act relating to the transactions contemplated hereby shall have expired or been
terminated, and all other material authorizations, consents, orders or approvals
of, or regulations, declarations or filings with, or expirations of applicable
waiting periods imposed by, any Governmental Entity (including, without
limitation, any foreign antitrust filing) necessary for the consummation of the
transactions contemplated hereby, shall have been obtained or filed or shall
have occurred.
(b) NO LITIGATION, INJUNCTIONS, OR RESTRAINTS. No statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any Governmental Entity or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
or any of the Transaction Agreements shall be in effect.
(c) STOCKHOLDERS VOTE. The Company Stockholder Approval shall have been
obtained.
(d) NASDAQ LISTING. The Shares shall have been approved for listing on the
Nasdaq Stock Market, subject only to official notice of issuance.
(e) CONSUMMATION OF DISTRIBUTIONS. The distribution of the businesses of
School, Travel, Technology, Print and their respective Subsidiaries shall have
occurred pursuant to the Distribution Agreements, which shall contain
provisions:
(i) effecting the Pre-Distribution Transactions;
(ii) allocating assets and liabilities among the Distributed Companies and
the Retained Companies;
(iii) allocating among the Distributed Companies an aggregate of $130 million
of corporate debt, in addition to acquisition debt incurred in respect of
acquisitions effected after the date hereof;
(iv) allocating among the Distributed Companies and the Company on a pro
rata basis all liabilities of the Distributed Companies not properly allocable
to any specific Distributed Company or to the Company;
(v) with respect to current and planned cross-selling opportunities between
the Distributed Companies and the Retained Companies; and
(vi) allocating on a pro rata basis the transaction costs associated with
the Transactions.
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(f) Tax Allocation Agreement. The Tax Allocation Agreement shall have been
executed and shall contain the following provisions:
(i) a joint and several indemnity from the Distributed Companies in favor of
the Company and the Retained Subsidiaries from and against any Losses with
respect to Taxes resulting from any Adverse Tax Act of any of the Distributed
Companies or their Subsidiaries;
(ii) an indemnity from each of the Distributed Companies in favor of the
Company from and against any Losses with respect to Taxes resulting from the
Pre-Distribution Transactions or the Distributions, as a result of the failure
of the Pre-Distribution Transactions or the Distributions to qualify under
sections 355 or 368 of the Code or otherwise, including, without limitation, by
reason of any stock or securities of any Distributed Company failing to qualify
as "qualified property" within the meaning of section 355(c)(2) of the Code,
except to the extent such Losses result from any Adverse Tax Act by any of the
Company, the Retained Subsidiaries, the Distributed Companies or any of their
Subsidiaries, provided that each Distributed Company shall be only liable for
the portion of such Losses that bears the same ratio to the aggregate amount of
such Losses as the Market Capitalization of such Distributed Company bears to
the aggregate Market Capitalization of the Company and the Distributed Companies
and provided, further, that each Distributed Company shall be liable for 100% of
any such Losses attributable to any "deferred intercompany transaction" to the
extent such Loss is attributable to any "intercompany item" that such
Distributed Company or any of its Subsidiaries is required to take into account
immediately prior to the Distributions pursuant to Treasury Regulations section
1.1502-13;
(iii) customary provisions providing for control and participation rights
with respect to any administrative and judicial proceedings with respect to
Taxes, including the right of the Person primarily responsible for the relevant
indemnification obligation thereunder to control any such proceeding.
Notwithstanding anything to the contrary in the preceding sentence, no
Distributed Company shall be entitled to assume control of any portion of any
administrative or judicial proceeding with respect to Taxes unless such
Distributed Company shall have theretofore acknowledged in writing its liability
for such Taxes pursuant to the Tax Allocation Agreement; and
(iv) Any tax saving or other benefit attributable any compensation deduction
arising from or in connection with the exercise by any Employee of the Company
or any of its Subsidiaries of any option granted under any of the Company Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising from
or in connection with any such exercise on or prior to the Closing Date by any
Employee of any Distributed Company or any of its Subsidiaries shall be
apportioned to such Distributed Company.
SECTION 9.02 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the time of
the Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such
earlier date) and the Company shall have received a certificate signed by an
authorized officer of Purchaser to such effect.
(b) OPINION OF PURCHASER'S COUNSEL. The Company shall have received an
opinion dated as of the Closing of Debevoise & Plimpton, counsel to
Purchaser, in form and substance reasonably satisfactory to the Company.
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(c) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered the Registration Rights Agreement.
SECTION 9.03 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver thereof prior to the Closing of
each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and Purchaser shall have received a certificate signed by the chief executive
officer and chief financial officer of the Company to such effect.
(b) TRANSACTION AGREEMENTS. Each Transaction Agreement to which the
Company is a party shall have been executed without modification from the forms
as in existence at the Review Cut-off Time or such earlier date as Purchaser
completed its review of such agreement.
(c) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under this
Agreement, and Purchaser shall have received a certificate signed by the chief
executive officer and chief financial officer of the Company to such effect.
(d) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received
opinions dated as of the Closing of the general counsel of the Company, and
Wilmer, Cutler & Pickering, counsel to the Company, in form and substance
reasonably satisfactory to Purchaser.
(e) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and
delivered the Registration Rights Agreement.
(f) FINANCINGS. The Company shall have entered into definitive
documentation for the Proposed Financings and such definitive documentation
shall be satisfactory in form and substance to Purchaser.
(g) TENDER OFFER. The Company shall have consummated the Tender Offer as
provided for herein.
(h) CONSULTING AGREEMENT; TRANSACTION FEE. The Company shall have (A)
entered into a consulting agreement with CD&R providing for an annual fee of
$500,000 (plus reasonable out-of-pocket expenses) in connection with consulting
and advisory services and a related indemnification agreement and (B) authorized
payment to CD&R of the Transaction Fee and the Transaction Fee shall have been
paid to CD&R. The consulting agreement shall terminate at the later of (i) the
fifth anniversary of the Closing Date and (ii) such time as Purchaser is
entitled to nominate only one Investor Director.
(i) OTHER PARTIES. (A) No Person or "group" (as defined in the Exchange
Act), other than Purchaser, shall have acquired beneficial ownership of more
than 15% of the outstanding shares of Voting Securities, and (B) no Person
(other than Purchaser or one or more of its Affiliates) shall have entered into
an agreement in principle or definitive agreement with the Company with respect
to a tender or exchange offer for any shares of Common Stock or a merger,
consolidation or other business combination with or involving the Company.
(j) CORPORATE PROCEEDINGS. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and the
Transaction Agreements, and all documents and instruments incident thereto,
shall be satisfactory in form and substance to Purchaser and its counsel, and
Purchaser and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
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(k) MANAGEMENT PLAN. Purchaser shall have completed discussions with
management which satisfactorily confirm to Purchaser that the operating
prospects of the Retained Business (exclusive of acquisitions), are, taken as a
whole, not materially inconsistent with the Company's forecasts (excluding (i)
the impact on the Company's earnings for fiscal quarters ending prior to or
including the Closing caused by the inability of the Company to complete
acquisitions following announcement of the Transactions and/or to account for
acquisitions as poolings of interest and (ii) the effect on the Company of being
required as a result of the Transactions to change accounting treatment for past
acquisitions from poolings of interests to purchases); provided, however, that
this condition shall be deemed satisfied if Purchaser shall not have given
notice to the Company on or prior to February 3, 1998 that Purchaser has
concluded that this condition has not been satisfied.
(l) BOARD OF DIRECTORS. The Board of Directors of the Company shall
consist of 9 persons, including the chief executive officer of the Company,
three designees of Purchaser, three persons selected by the current Board of
Directors and two persons who shall be satisfactory to both Purchaser and the
current Board of Directors of the Company.
(m) MATERIAL ADVERSE EFFECT. No event, change or development shall exist
or have occurred since October 25, 1997 which has had or is reasonably likely to
have a Material Adverse Effect on the Retained Companies, taken as a whole.
(n) DEBT AMOUNTS. The outstanding debt of the Retained Companies shall not
exceed $1.4 billion (after giving effect to the Transactions and assuming
conversion of all issued and outstanding 2001 Notes) and the outstanding debt of
the Distributed Companies shall be at least $130 million plus the expenditures
by the entities comprising such Distributed Companies for acquisitions after the
date hereof.
(o) OPTIONS. The Company's arrangements with respect to Management options
shall be satisfactory to Purchaser in its good faith reasonable judgment.
ARTICLE X
TERMINATION
SECTION 10.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing, whether before or after the Company Stockholder Approval
has been obtained:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company:
(i) if the Closing shall not have occurred prior to September 30, 1998,
provided, that the right to terminate this Agreement pursuant to this clause (i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement results in the failure of the Closing to occur;
(ii) if the Company Stockholder Approval shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at the
Company Meeting, or such meeting shall not have been held by September 30, 1998;
(iii) if there shall be any statute, law, regulation or rule that makes
consummating the transactions contemplated hereby illegal or if any court or
other Governmental Entity of competent jurisdiction shall have issued a
judgment, order, decree or ruling, or shall have taken such other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby and such judgment, order, decree or ruling
shall have become final and non-appealable;
(c) by Purchaser:
(i) if the Company shall have failed to perform in any material respect any
of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or shall
have breached in any material respect any representation or warranty not so
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qualified, and the Company has failed to perform such obligation or cure such
breach, within 30 days of its receipt of written notice thereof from Purchaser,
and such failure to perform shall not have been waived in accordance with the
terms of this Agreement;
(ii) if the Board of Directors of the Company or any committee thereof
withdraws or modifies (or publicly announces its intention to do so, or
resolves to do so) in a manner adverse to Purchaser (as determined by
Purchaser in its reasonable judgment) its approval or recommendation of this
Agreement or the transactions contemplated hereby or approves or recommends
a Transaction Proposal;
(iii) if the Board of Directors of the Company publicly announces its
determination not to effect the Distributions;
(iv) if any of the conditions set forth in Section 9.01 or 9.03 shall
become impossible to fulfill (other than as a result of any breach by
Purchaser of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(v) if permitted pursuant to Section 8.04 or 8.06;
(vi) if the Company shall make any substantive amendment to any
Transaction Agreement after the Review Cut-Off Time without Purchaser's
consent;
(d) by the Company:
(i) if Purchaser shall have failed to perform in any material respect
any of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or
shall have breached in any material respect any representation or warranty
not so qualified, and Purchaser has failed to perform such obligation or
cure such breach, within 30 days of its receipt of written notice thereof
from the Company, and such failure to perform shall not have been waived in
accordance with the terms of this Agreement;
(ii) if any of the conditions set forth in Section 9.01 or 9.02 shall
become impossible to fulfill (other than as a result of any breach by the
Company of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(iii) if permitted pursuant to Section 8.02(b).
SECTION 10.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Purchaser as provided in Section 10.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Purchaser or the Company, other than the provisions
of this Section 10.02, Section 13.09 and Article XI and except to the extent
that such termination results from the wilful and material breach by a party of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01 INDEMNIFICATION OF PURCHASER. The Company covenants and
agrees to defend, indemnify and hold harmless each of Purchaser, its Affiliates
(other than the Company and any Retained Companies), and their respective
officers, directors, partners, employees, agents, advisers and representatives
including, without limitation, the Fund, CD&R Investment Associates, Inc., a
Delaware corporation, and CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership, and CD&R (collectively, the "Purchaser
Indemnitees") from and against, and pay or reimburse the Purchaser Indemnitees
for, any and all claims, demands, liabilities, obligations, losses, costs,
expenses, fines or damages (whether absolute, accrued, conditional or otherwise
and whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and
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reasonable attorneys' and accountants' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of their respective rights hereunder (collectively, "Losses"),
resulting from or based on (or allegedly resulting from or based on):
(i) any actions (including by any shareholders of the Company in
connection with any derivative actions) resulting from or based on (or
allegedly resulting from or based on) any of the Transactions, provided that
the indemnity provided in this clause (i) shall not include (A) actions
brought by any limited partner of the Fund against Purchaser or any of its
Affiliates relating to the transactions contemplated by this Agreement, (B)
Losses resulting from or based on the acts or omissions of a Purchaser
Indemnitee following the Closing, (C) claims resulting from or based on (1)
a breach by Purchaser of its obligations under this Agreement, (2) any
contract, agreement, obligation, commitment, understanding or other
arrangement between the claimant and any Purchaser Indemnitee, (3) any
intentional tort by a Purchaser Indemnitee or (4) any fee, compensation or
other payment to be paid to any Purchaser Indemnitee;
(ii) subject to the limitations set forth in Section 11.03, any breach
by the Company of any representation, warranty, covenant or obligation of
the Company hereunder; and
(iii) any failure of any of the Distributed Companies to satisfy its
stated obligations and liabilities under the Distribution Agreements, the
Tax Allocation Agreement or any of the other Transaction Agreements to which
it is a party, whether by virtue of such agreement's unenforceability, the
Distributed Company's bankruptcy or otherwise.
The Losses described in clauses (i), (ii) and (iii) of this Section 11.01(a)
are herein referred to as "Purchaser Indemnifiable Losses". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
SECTION 11.02 INDEMNIFICATION PROCEDURES. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "Indemnifying
Person"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by a Purchaser Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Purchaser Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (i) constitute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (ii)
relieve it from any liability or obligation that it may otherwise have to such
Purchaser Indemnitee. In case any such action or claim shall be brought or
asserted against any Purchaser Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Purchaser Indemnitee, provided, however, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Purchaser Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
provided further that a Purchaser Indemnitee shall not enter into any settlement
of any such claim without the prior consent of the Company, such consent not to
be unreasonably withheld or delayed.
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SECTION 11.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on the first anniversary of the Closing Date, except for
the representations and warranties contained in Sections 3.01(n), 3.01(o) and
3.01(p), which shall expire for all purposes upon expiration of the applicable
statute of limitations.
ARTICLE XII
INTERPRETATION; DEFINITIONS
SECTION 12.01 INTERPRETATION. As used in this Agreement:
(a) any reference to the Company and its Subsidiaries means the Company and
each of its Subsidiaries;
(b) any reference to the "Retained Company" and its Subsidiaries or the
"Retained Companies" means the Company and those of its Subsidiaries included in
the Retained Business;
(c) any reference to the "Retained Subsidiaries" means the Subsidiaries of
the Company included in the Retained Business;
(d) any reference to School, Travel, Technology or Print and their
Subsidiaries means School, Travel, Technology or Print immediately after
completion of the Distributions and those entities that immediately after the
completion of the Distributions will be Subsidiaries of School, Travel,
Technology or Print.
SECTION 12.02 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"2001 Notes" is defined in the recitals to this Agreement.
"2003 Notes" is defined in Section 3.01(d).
"Adverse Tax Act" means, for any Person, any action of such Person, or any
omission by such Person of an action reasonably available to it, after the date
of the Distributions, that materially contributes to a Final Determination that
the Pre-Distribution Transactions or any of the Distributions results in the
recognition of gain to the Company by virtue of the Pre-Distribution
Transactions or any of the Distributions failing to qualify under sections 355
or 368 of the Code, including, without limitation, by reason of any stock or
securities of any Distributed Company failing to qualify as "qualified property"
within the meaning of section 355(c)(2) of the Code, or otherwise.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"Agreement" is defined in the recitals to this agreement.
"Assets" is defined in Section 3.01(k).
"Audited Balance Sheet" is defined in Section 3.01(g)(iv).
"Audited Retained Business Financial Statements" is defined in 3.01(g)(iv).
"Balance Sheet" is defined in Section 3.01(g)(i).
"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"Business Day" means any day on which banking institutions are open in the
City of New York.
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"Buyout Transaction" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such holder for the same consideration.
"Cash Transaction" is defined in Section 4.02(b)(i).
"CD&R" means Clayton, Dubilier & Rice, Inc., a Delaware corporation.
"Closing" is defined in Section 1.02.
"Closing Date" is defined in Section 1.02.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" is defined in the recitals to this Agreement.
"Company" is defined in the recitals to this Agreement.
"Company Business Financial Statements" is defined in Section 3.01(g)(i).
"Company By-laws" is defined in Section 3.01(a).
"Company Charter" is defined in Section 3.01(a).
"Company Intellectual Property" is defined in Section 3.01(s).
"Company Meeting" is defined in Section 8.05(a).
"Company Meeting Proposal" is defined in Section 8.05(a).
"Company SEC Documents" is defined in Section 3.01(f).
"Company Stock Plans" is defined in Section 3.01(d).
"Company Stockholder Approval" is defined in Section 3.01(b).
"Contingent Stock" means Common Stock issued after the Closing Date pursuant
to (i) the Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by
and between the Company and Eric Watson or (ii) any security, option, warrant,
call, subscription, right, contract, commitment, arrangement or understanding
required to be disclosed on Schedule 3.01(d) but not disclosed thereon.
"Contract" is defined in Section 3.01(c)(i).
"Delivery Cut-off Time" is defined in Section 8.04.
"DGCL" is defined in Section 3.01(q).
"Distribution Agreements" is defined in the recitals to this Agreement.
"Distributions" is defined in the recitals to this Agreement.
"Distributed Companies" is defined in the recitals to this Agreement.
"Employee" means any employee or former employee of any member of the
Company or any of its Subsidiaries or any beneficiary or dependent of any such
employee or former employee.
"Employee Benefit Plans" means all defined contribution, defined benefit,
welfare benefit, bonus, incentive compensation, stock option, stock purchase,
stock appreciation right, stock bonus, incentive, deferred compensation,
insurance, medical, dental, vision, life, death benefit, fringe benefit or other
employee benefit plans, programs, policies or arrangements, including without
limitation, any employment, consulting, offer, secondment, severance or other
termination agreement, whether or not an employee
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benefit plan within the meaning of section 3(3) of ERISA, maintained by the
Company or any of its Subsidiaries.
"Environmental Law" is defined in Section 3.01(p).
"Environmental Permits" is defined in Section 3.01(p).
"Equity Security" means (i) any Common Stock or other Voting Securities,
(ii) any securities of the Company convertible into or exchangeable for Common
Stock or other Voting Securities or (iii) any options, rights or warrants (or
any similar securities) issued by the Company to acquire Common Stock or other
Voting Securities.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" is defined in Section 3.01(c)(ii).
"Filed Company SEC Documents" is defined in Section 3.01(i).
"Final Determination" means the final resolution of liability for any Tax
for any taxable period, including any related interest or penalties, by or as a
result of: (i) a final and unappealable decision, judgment, decree or other
order of a court of competent jurisdiction; (ii) a closing agreement or accepted
offer in compromise under Section 7121 or 7122 of the Code, or comparable
agreement under the laws of other jurisdictions, which resolves the entire tax
liability for any tax period; (iii) any allowance of a refund or credit in
respect of an overpayment of Tax, but only after the expiration of all periods
during which such refund may be recovered (including by way of offset) by the
applicable taxing jurisdiction; or (iv) any other final disposition, including
by reason of the expiration of the applicable statute of limitations.
"Fund" means Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman
Islands exempted limited partnership.
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" is defined in Section 3.01(c)(ii).
"Hazardous Substance" is defined in Section 3.01(p).
"HSR Act" is defined in Section 3.01(c)(ii).
"Indemnifying Person" is defined in Section 11.02.
"Information Statement" is defined in Section 8.08(a).
"Intellectual Property" means trademarks, trade names, trade dress, service
marks, copyrights, domain names, and similar rights (including registrations and
applications to register or renew the registration of any of the foregoing),
patents and patent applications, trade secrets, ideas, inventions, improvements,
practices, processes, formulas, designs, know-how, confidential business or
technical information, computer software, firmware, data and documentation,
licenses of or agreements relating to any of the foregoing, rights of privacy
and publicity, moral rights, and any other similar intellectual property rights
and tangible embodiments of any of the foregoing (in any medium including
electronic media).
"Investor Directors" is defined in Section 4.01.
"Issuance" is defined in Section 8.05(a).
"knowledge of the Company" or any like expression means to the knowledge of
the persons listed on Schedule 12.02 after due inquiry.
"Lien" is defined in Section 3.01(c)(i).
"Losses" is defined in Section 11.01(a).
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"Market Capitalization" means, for any entity, the market capitalization of
such entity determined on the basis of the average closing price for the common
stock of such entity for the five-day period ending on the tenth day after the
date of the Distributions.
"Material Adverse Effect" on or with respect to an entity (or group of
entities taken as a whole) means any state of facts, event, change or effect
that has had, or would reasonably be expected to have, a material adverse effect
on the business, properties, results of operations or financial condition of
such entity (or, if with respect thereto, of such group of entities taken as a
whole), or on the ability of such entity (or group of entities) to consummate
the transactions contemplated hereby, including the Pre-Distribution
Transactions and the Distributions, or to perform its obligations under the
Transaction Agreements to which it is or will be a party; provided, however,
that a "Material Adverse Effect" shall exclude (i) the impact on the Company's
earnings for fiscal quarters ending prior to or including the Closing caused by
the inability of the Company to complete acquisitions following the announcement
of the Transactions and/or to account for acquisitions as poolings of interest
and (ii) the effect on the Company of being required as a result of the
Transactions to change accounting treatment for past acquisitions from poolings
of interests to purchases.
"Material Contracts" is defined in Section 3.01(m).
"Material Subsidiary" is defined in Section 3.01(a).
"New Security" means any Equity Security issued by the Company after the
Closing; provided that "New Security" shall not include (i) any securities
issuable upon conversion of any convertible Equity Security, (ii) any securities
issuable upon exercise of any option, warrant or other similar Equity Security
or (iii) any securities issuable in connection with any stock split, stock
dividend or recapitalization of the Company where such securities are issued to
all stockholders of the Company on a pro rata basis.
"Non-Investor Directors" is defined in Section 4.01.
"Notes to Pro Forma Financial Statements" is defined in Section
3.01(g)(iii).
"Offer Conditions" is defined in Section 8.07(a).
"Offer Documents" is defined in Section 8.07(b).
"Other Holders" means the holders of the Other Shares.
"Other Shares" means Voting Securities not Beneficially Owned by Purchaser
or its Affiliates.
"Permit" is defined in Section 3.01(c)(i).
"Permitted Liens" shall mean those Liens (A) securing debt that is reflected
on the Balance Sheet or the notes thereto or securing debt incurred as part of
the Proposed Financings, (B) referred to in Schedule 3.01(l), (C) for Taxes not
yet due or payable or being contested in good faith and for which adequate
reserves have been established in accordance with GAAP, (D) that constitute
mechanics', carriers', workmens' or like liens, liens arising under original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course, (E) Liens incurred or deposits made
in the ordinary course of business consistent with past practice in connection
with workers' compensation, unemployment insurance and social security,
retirement and other legislation and (F) easements, covenants, declarations,
rights of way, encumbrances, or similar restrictions in connection with real
property owned by certain of the Retained Subsidiaries that do not materially
impair the use of such real property by such Retained Subsidiaries, and in the
case of Liens described in clauses (B), (C), (D), (E) or (F) that, individually
or in the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole.
"Permitted Options" is defined in Section 4.02(a)(i).
"Permitted Securities Transaction" is defined in Section 4.02(b)(ii).
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"Person" means any individual, partnership, joint venture, corporation,
limited liability company, trust, unincorporated organization, government or
department or agency of a government.
"Plans" is defined in Section 3.01(o)(ii).
"Pre-Distribution Transactions" means the contribution of certain assets,
the assumption of certain liabilities and other transfers contemplated by the
respective Distribution Agreements, pursuant to which the respective businesses
of School, Travel, Technology and Print will be consolidated under such
corporations prior to the Distributions.
"Print" is defined in the recitals to this Agreement.
"Print Distribution" is defined in the recitals to this Agreement.
"Print Distribution Agreement" is defined in the recitals to this Agreement.
"Pro Forma Balance Sheet" is defined in Section 3.01(g)(iii).
"Pro Forma Income Statements" is defined in Section 3.01(g)(iii).
"Pro Forma Retained Business Financial Statements" is defined in Section
3.01(g)(iii).
"Pro Rata Share" means the fraction of an entire issuance of New Securities,
the numerator of which shall be the number of shares of Common Stock owned or
receivable upon exercise of the Warrant and the Special Warrant by Purchaser and
its Affiliates (other than the Company and its Subsidiaries) immediately prior
to such issuance of such New Securities and the denominator of which shall be
the aggregate number of shares of Common Stock outstanding immediately prior to
such issuance of such New Securities and receivable upon exercise of the Warrant
and the Special Warrant.
"Proposed Charter Amendments" is defined in Section 4.05.
"Proposed Financings" is defined in the recitals to this Agreement.
"Proxy Statement" is defined in Section 8.05(b).
"Purchase Price" is defined in Section 1.01.
"Purchaser" is defined in the recitals to this Agreement.
"Purchaser Indemnifiable Losses" is defined in Section 11.01(a).
"Purchaser Indemnitees" is defined in Section 11.01(a).
"Purchaser's Expenses" is defined in Section 13.09(b).
"Purchaser's Percentage Interest" means the greater of (i) the percentage of
Total Voting Power, determined on the basis of the number of Voting Securities
actually outstanding, that is controlled directly or indirectly by Purchaser or
any Subsidiary or Affiliate of Purchaser (other than the Company and its
Subsidiaries), including by beneficial ownership and (ii) the percentage of the
total Fair Market Value of all classes of outstanding capital stock of the
Company that is owned directly or indirectly by Purchaser or any Subsidiary or
Affiliate of Purchaser (other than the Company and its Subsidiaries), including
by beneficial ownership. For purposes of determining Purchaser's Percentage
Interest, (a) any options, rights, warrants (including the Warrants and the
Special Warrants) and similar securities that entitle the holder thereof to
acquire shares of any class of capital stock of the Company, whether voting or
non-voting, shall be treated as exercised; (b) any debt security that is
convertible into shares of any class of capital stock of the Company, whether
voting or non-voting, shall be treated as converted; and (c) any equity security
that is convertible into shares of any class of capital stock of the Company,
whether voting or non-voting, shall be treated as converted, but only to the
extent that such conversion would result in Purchaser's Percentage Interest
being greater than such interest would be if such conversion had not been deemed
to occur.
"Purchaser's Total Securities" is defined in Section 4.01(b)(i).
"Registration Rights Agreement" is defined in the recitals to this
Agreement.
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"Retained Business" means the business and operation of the Retained
Companies.
"Retained Companies" is defined in Section 12.01(b).
"Retained Plans" is defined in Section 3.01(O)(i).
"Retained Subsidiaries" is defined in Section 12.01(c).
"Review Cut-off Time" is defined in Section 8.04.
"School" is defined in the recitals to this Agreement.
"School Distribution" is defined in the recitals to this Agreement.
"School Distribution Agreements" is defined in the recitals to this
Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" is defined in Section 3.01(c)(ii).
"Security" means at any time Equity Securities and any shares of any class
of capital stock of the Company.
"Shares" is defined in Section 1.01.
"Special Warrants" is defined in the recitals to this Agreement.
"Special Warrant Shares" means shares of Common Stock issuable upon exercise
of the Special Warrants.
"Subscription Notice" is defined in Section 5.01.
"Subsidiary" means, as to any Person, any corporation at least a majority of
the shares of stock of which having general voting power under ordinary
circumstances to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency) is, at the time as of which the determination is being made, owned
by such Person, or one or more of its Subsidiaries or by such Person and one or
more of its Subsidiaries.
"Superior Proposal" is defined in Section 8.02(b).
"Tax Allocation Agreement" is defined in the recitals to this Agreement.
"Tax Returns" is defined in Section 3.01(n)(i).
"Taxes" is defined in Section 3.01(n)(i).
"Technology" is defined in the recitals to this Agreement.
"Technology Distribution" is defined in the recitals to this Agreement.
"Technology Distribution Agreement" is defined in the recitals to this
Agreement.
"Tender Offer" is defined in the recitals to this Agreement.
"Tender Offer Statement" is defined in Section 8.07(b).
"Termination Fee" is defined in Section 13.09(b).
"Total Voting Power" means at any time the total combined voting power in
the general election of directors of all the Voting Securities then outstanding.
"Transactions" means the execution, delivery and performance of each
Transaction Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions,
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<PAGE>
the Proposed Financings, the Tender Offer, the issuance and sale by the Company
of the Shares, the Special Warrants and the Warrants, and of the other
transactions contemplated by the Transaction Agreements.
"Transaction Agreements" means, collectively, this Agreement, the Special
Warrant, the Warrant, the Registration Rights Agreement, the Distribution
Agreements, the Tax Allocation Agreement, the tax representation letters to be
delivered in connection with the Distributions and such other agreements as are
entered into to effect the Pre-Distribution Transactions, including, without
limitation, any employee benefits agreement, intellectual property agreement and
transitional services agreement.
"Transaction Fee" means an amount equal to $15 million plus out-of-pocket
expenses.
"Transaction Proposal" is defined in Section 8.02.
"Travel" is defined in the recitals to this Agreement.
"Travel Distribution" is defined in the recitals to this Agreement.
"Travel Distribution Agreement" is defined in the recitals to this
Agreement.
"Unaudited Company Business Financial Statements" is defined in Section
3.01(g)(ii).
"Voting Securities" means at any time shares of any class of capital stock
of the Company which are then entitled to vote generally in the election of
directors.
"Warrants" is defined in the recitals to this Agreement.
"Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01 SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such which may be hereafter declared invalid, void or unenforceable.
SECTION 13.02 SPECIFIC ENFORCEMENT. Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which they may be entitled at law or equity.
SECTION 13.03 ENTIRE AGREEMENT. This Agreement (including the documents set
forth in the Exhibits and Schedules hereto) and the other Transaction Agreements
contain the entire understanding of the parties with respect to the transactions
contemplated hereby.
SECTION 13.04 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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<PAGE>
SECTION 13.05 NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered personally, by telecopy (except for legal process) or sent by
registered mail, postage prepaid, if to:
The Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention of: Mark D. Director
Telecopy No.: (202) 339-6727
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention of: George P. Stamas
Telecopy No.: (202) 663-6363
Purchaser:
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware
with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attention of: Brian D. Finn
Telecopy No.: (212) 407-5200
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention of: Franci J. Blassberg
Telecopy No.: (212) 909-6836
or to such other address or telex number as any party may, from time to time,
designate in a written notice given in a like manner.
SECTION 13.06 AMENDMENTS. This Agreement may be amended as to Purchaser and
their successors and assigns (determined as provided in Section 13.08), and the
Company may take any action herein prohibited, or omit to perform any act
required to be performed by it, if the Company shall obtain the written consent
of Purchaser. This Agreement may not be waived, changed, modified, or discharged
orally, but only by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification or discharge is
sought or by parties with the right to consent to such waiver, change,
modification or discharge on behalf of such party.
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<PAGE>
SECTION 13.07 COOPERATION. Purchaser and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement, including, without limitation, making all required filings under the
HSR Act, if any; provided, however, that the foregoing shall not limit the
ability of the Company to abandon the Distributions pursuant to Section 8.03.
SECTION 13.08 SUCCESSORS AND ASSIGNS.
All covenants and agreements contained herein shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that neither party may assign any of its rights under this
Agreement without the written consent of the other party.
SECTION 13.09 EXPENSES AND REMEDIES.
(a) Whether or not the Closing takes place, all costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be borne by the party incurring such expense, except as set forth in the next
seven paragraphs.
(b) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(ii), (c)(iii) or (c)(vi) the Company shall
reimburse Purchaser for the reasonable out-of-pocket expenses (including
reasonable fees and expenses of legal counsel) incurred by Purchaser in
connection with this Agreement or the matters contemplated hereby ("Purchaser's
Expenses") and shall pay CD&R a termination fee of $25 million (the "Termination
Fee").
(c) Notwithstanding Section 13.09(a), if the Company terminates this
Agreement pursuant to Section 10.01(d)(iii), the Company shall pay Purchaser's
Expenses to Purchaser and the Termination Fee to CD&R.
(d) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to any provision of Section 10.01 other than those referred to in
Sections 13.09(b) or the Company terminates this Agreement pursuant to any
provision of Section 10.01 other than those referred to in Section 13.09(c) and
other than pursuant to Section 10.01(d)(i), the Company shall pay Purchaser's
Expenses to Purchaser; provided that if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(iv) by reason of the failure to be satisfied of the
condition set forth in Section 9.03(k), Purchaser's Expenses shall be limited to
$2,000,000.
(e) Notwithstanding Section 13.09(a), if (i) the Company terminates this
Agreement pursuant to any provision of Section 10.01 other than those referred
to in Sections 13.09(c) or Purchaser terminates this Agreement pursuant to
Section 10.01(b)(ii), (ii) a Transaction Proposal was made prior to September
30, 1998 and (iii) during the period ending 12 months after termination the
Company enters into an agreement relating to or publicly announces, a
transaction including the sale or other disposition of Equity Securities
representing in excess of 20% of the Total Voting Power or 20% of the assets of
the Company and its Subsidiaries, taken as a whole, then upon consummation of
such transaction, the Company shall pay Purchaser's Expenses (without
duplication of any Purchaser's Expenses paid pursuant to Section 13.09(d)) and
the Termination Fee to CD&R.
(f) Notwithstanding Section 13.09(a), upon the occurrence of the Closing,
the Company shall pay Purchaser's Expenses to Purchaser.
(g) Notwithstanding Section 13.09(a), if Purchaser terminates this Agreement
pursuant to Section 10.01(c)(i) the Company shall reimburse Purchaser for
Purchaser's Expenses and shall pay CD&R a termination fee of $10 million.
B-41
<PAGE>
SECTION 13.10 TRANSFER OF SHARES AND WARRANTS.
Purchaser understands and agrees that neither any shares of Common Stock or
any Warrants, Special Warrants, Warrant Shares or Special Warrant Shares have
been registered under the Securities Act or the securities laws of any state and
that they may be sold or otherwise disposed of only in one or more transactions
registered under the Securities Act and, where applicable, such laws or as to
which an exemption from the registration requirements of the Securities Act and,
where applicable, such laws is available. Purchaser acknowledges that except as
provided in the Registration Rights Agreement, Purchaser has no right to require
the Company to register shares of Common Stock, the Warrants, the Special
Warrants, the Warrant Shares or the Special Warrant Shares. Purchaser
understands and agrees that each certificate representing shares of Common
Stock, Warrants, Special Warrants, Warrant Shares or Special Warrant Shares
(other than, with respect to the first legend, shares of Common Stock, Warrants,
Special Warrants, Warrant Shares or Special Warrant Shares that are no longer
subject to the provisions of Article VII and other than, with respect to the
second legend, shares of Common Stock, Warrants, Special Warrants, Warrant
Shares or Special Warrant Shares which have been transferred in a transaction
registered under the Securities Act or exempt from the registration requirements
of the Securities Act pursuant to Rule 144 thereunder or any similar rule or
regulation) shall bear the following legends:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
and Purchaser agrees to transfer shares of Common Stock, Warrants and Warrant
Shares only in accordance with the provisions of such legends.
SECTION 13.11 GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, except to the extent that
Delaware law mandatorily governs.
SECTION 13.12 PUBLICITY.
The Company and Purchaser will consult and cooperate with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press releases or otherwise making public statements with respect to the
transactions contemplated by this Agreement.
SECTION 13.13 NO THIRD PARTY BENEFICIARIES.
(a) Nothing contained in this Agreement is intended to confer upon any
person or entity other than the parties hereto and their respective successors
and permitted assigns, any benefit, right or remedies under or by reason of this
Agreement; provided, however, that the parties hereto hereby acknowledge and
agree that the Distributed Companies are each third party beneficiaries of
Section 6.01 of this Agreement and that the Purchaser Indemnitees (other than
Purchaser) are third party beneficiaries of Article XI of this Agreement.
(b) Purchaser shall cooperate with the Company in connection with any tax
audits or administrative or judicial proceedings with respect to the application
of Section 355(e) (as ultimately enacted), including in rebutting any
presumption arising under Section 355(e) of the Code.
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<PAGE>
SECTION 13.14 CONSENT TO JURISDICTION.
Each of the Company and Purchaser irrevocably submits to the personal
exclusive jurisdiction of the United States District Court for the Southern
District of New York for the purposes of any suit, action or other proceeding
arising out of this Agreement or any transaction contemplated hereby (and, to
the extent permitted under applicable rules of procedure, agrees not to commence
any action, suit or proceeding relating hereto except in such court). Each of
the Company and Purchaser further agrees that service of any process, summons,
notice or document hand delivered or sent by registered mail to such party's
respective address set forth in Section 13.05 will be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction as set forth in the
immediately preceding sentence. Each of the Company and Purchaser irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the United States District Court for the Southern
District of New York, and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in such court that any such action, suit or
proceeding brought in such court has been brought in an inconvenient forum.
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<PAGE>
IN WITNESS WHEREOF, Purchaser and the Company have caused this Agreement to
be duly executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
U.S. OFFICE PRODUCTS COMPANY
/S/ THOMAS I. MORGAN
-----------------------------------------
Name: Thomas I. Morgan
TITLE: PRESIDENT
CDR-PC ACQUISITION, L.L.C.
By: /s/ DONALD J. GOGEL
-----------------------------------------
Name: Donald J. Gogel
TITLE: PRESIDENT
</TABLE>
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<PAGE>
EXHIBIT 1
TO INVESTMENT AGREEMENT
TERMS OF SPECIAL WARRANTS
<TABLE>
<S> <C>
Exercise Price: $.01 per share.
Expiration Date: 12 years from date of issuance.
Exercisability: To the extent of 24.9% of sum of (A) the number of shares
of Common Stock issued upon conversion of the 2001
Notes, (B) the number of any shares of Contingent Stock
that are issued, and (C) the number of shares of Common
Stock issuable pursuant to this Special Warrant in
respect of shares described in clauses (A) and (B)
above; or after the second anniversary of the issuance
of this Special Warrant, whichever is earlier.
Shares Subject to Warrant: Equal to the number of shares of Common Stock that is the
difference between (i) 24.9% of the sum of (A) the
outstanding shares of Common Stock as of the Closing
Date after giving effect to the issuance of the Shares
and the exercise of this Special Warrant, and assuming
the conversion into Common Stock of all the 2001 Notes
outstanding on the Closing Date at the conversion price
resulting from adjustments made as a result of the
Tender Offer and the Distributions and (B) the number of
any shares of Contingent Stock that are issued, and (ii)
24.9% of the outstanding shares of Common Stock as of
the Closing after giving effect to the issuance of the
Shares.
Transferability: Transferable to the same extent as Shares.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Special Warrant will be limited.
</TABLE>
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<PAGE>
EXHIBIT 2
TO INVESTMENT AGREEMENT
TERMS OF WARRANTS
<TABLE>
<S> <C>
Exercise Price: 1.5 times $270 million divided by the total number of
Shares and shares of Common Stock subject to Special
Warrants.
Expiration Date: 12 years from date of issuance.
Exercisability: Only after the second anniversary of issuance.
Shares Subject to Warrant: Equal to the number of the Shares.
Transferability: Transferable to the same extent as the Shares under
Section 7.01.
Cashless Exercise: Permitted.
Antidilution Protection: Customary.
Registration Rights: Same as for Shares.
Listing of Warrants: Upon request of Purchaser.
Listing of Shares issuable upon
exercise of Warrants: Prior to Closing.
Listing of Special Covenants: The Company will not be permitted to repurchase Common
Stock if as a result thereof the exercisability of the
Warrant will be limited.
</TABLE>
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<PAGE>
EXHIBIT 3
TO INVESTMENT AGREEMENT
TERMS OF REGISTRATION RIGHTS AGREEMENT
<TABLE>
<S> <C>
Registrable Securities: Shares issued under Investment Agreement, Warrants,
Special Warrants and other Common Stock purchased by
Purchaser in compliance with the Investment Agreement.
Demand Registrations: Four.
Piggyback Registrations: Unlimited.
Registration Fees and Expenses: Payable by the Company, including counsel for selling
stockholder.
Selection of Underwriters: Purchaser selects underwriters for Demand Registrations
subject to Company's consent which shall not be
unreasonably withheld. Company selects underwriters for
Piggyback Registrations subject to Purchaser's consent
which shall not be unreasonably withheld.
Priority in Exercise of
Registration of Rights: In the event of cutbacks, securities to be registered for
the account of the Purchaser shall have priority over
other securities to be registered in connection with
Demand Registrations and over other securities to be
registered for the account other selling stockholders in
Piggyback Registrations.
Indemnification: Customary.
Registration Procedures: Customary including, without limitation, provision of
opinions of counsel and comfort letter.
</TABLE>
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<PAGE>
SCHEDULE 8.07
TO INVESTMENT AGREEMENT
TENDER OFFER TIMING AND CONDITIONS
The capitalized terms used in this Schedule 8.07 have the meaning set forth
in the attached Agreement.
COMMENCEMENT DATE:
Approximately 20 business days preceding the date of the Company Meeting set
forth in the Proxy Statement
EXPIRATION DATE:
No earlier than 20 business days following the Commencement Date.
CONDITIONS:
The conditions to the Tender Offer shall be as set forth below (capitalized
terms set forth below shall have the meaning given them in the Tender
Offer):
Notwithstanding any other provisions of the Tender Offer, and in addition to
(and not in limitation of) the Company's rights to extend and amend the Tender
Offer at any time in its sole discretion (subject to the provisions of the
Investment Agreement), the Company shall not be required to accept for payment
or, subject to any applicable rules and regulations of the Commission, including
Rule 14e-1(c) under the Exchange Act (relating to the Tender Offer), pay for,
and may delay the acceptance for payment of or, subject to the restriction
referred to above, the payment for, any tendered shares of Common Stock, and may
amend the Tender Offer consistent with the terms of the Investment Agreement or
terminate the Tender Offer if (i) the Minimum Condition (as defined below) has
not been satisfied; (ii) the Financing Condition (as defined below) has not been
satisfied; (iii) the Equity Investment Condition (as defined below) has not been
satisfied; (iv) the Distribution Condition (as defined below) has not been
satisfied; or (v) any of the General Conditions (as defined below) shall not
have been satisfied.
The Minimum Condition will be satisfied if, at the Acceptance Date, a
minimum of 37,037,037 Shares (including Option Shares) have been validly
tendered pursuant to the terms of the Tender Offer and not withdrawn.
The Financing Condition will be satisfied upon (a) the availability to the
Company on terms and conditions satisfactory to the Company in its sole
discretion of funds sufficient to pay the Tender Offer Price for 37,037,037
Shares and related costs and expenses of the Tender Offer from the Subordinated
Debt Offering, through borrowings under the Credit Facility, and/or from the
Equity Investment, or any combination of the foregoing, and (b) the Company
having obtained all necessary consents from lenders for completion of the Tender
Offer and the Distributions.
The Equity Investment Condition will be satisfied when all conditions to
closing under the Investment Agreement have been satisfied or waived other than
the following conditions: the condition set forth in Section 9.01(e) of the
Investment Agreement relating to consummation of the Distributions; and the
condition set forth in Section 9.03(g) of the Investment Agreement relating to
consummation of the Tender Offer.
The Distributions Condition shall be satisfied when all conditions,
including among others (a) the registration statements relating to the
distribution of shares in the Distributions having been declared effective by
the Commission and (b) the Company having received an opinion of Wilmer, Cutler
& Pickering regarding the tax treatment of the Distributions, to the obligation
of the Company to consummate the Distributions under the Distribution Agreement
have been satisfied or waived, other than the
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<PAGE>
condition set forth in Section 8.01(g) of the Distribution Agreement relating to
consummation of the Tender Offer.
For purposes of the foregoing provisions, all the General Conditions shall
be deemed to have been satisfied unless any of the following conditions shall
occur prior to the Acceptance Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, that
challenges the making of or the consummation of the transactions
contemplated by the Tender Offer, the Equity Investment or the
Distributions; or that has, or is reasonably likely to have, in the sole
judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise); assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of the Company, would or might prohibit, prevent,
restrict or delay in consummation of the Tender Offer, the Equity Investment
or the Distributions or that has, or is reasonably likely to have, in the
sole judgment of the Company, a material adverse effect on the business,
operations, properties, condition (financial or otherwise), assets,
liabilities or prospects of the Company and its subsidiaries taken as a
whole;
(iii) there shall have occurred or be likely to occur any event that, in
the sole judgment of the Company, would or might prohibit, prevent, restrict
or delay consummation of the Tender Offer, the Equity Investment or the
Distributions or that will, or is reasonably likely to, materially impair
the contemplated benefits to the Company of the Tender Offer, the Equity
Investment or the Distributions, or otherwise result in the consummation of
the Tender Offer, the Equity Investment or the Distributions not being, or
not being reasonably likely to be, in the best interests of the Company and
its subsidiaries taken as a whole;
(iv) a tender or exchange offer for some or all of the Shares (other
than the Tender Offer) or a proposal with respect to a merger, consolidation
or other business combination with or involving the Company or any
subsidiary shall have been proposed to be made or shall have been made by
another person; or
(v) (1) any entity, "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) or person (other than Investor and entities, groups or
persons, if any, who have filed with the Commission, on or before
January 12, 1998, a Schedule 13G or Schedule 13D with respect to any of
the Shares) shall have acquired or proposed to acquire beneficial
ownership of more than 5% of the outstanding Shares; or
(2) such entity, group or person that has publicly disclosed any such
beneficial ownership of more than 5% of the Shares prior to such date
shall have acquired, or proposed to acquire, beneficial ownership of
additional Shares constituting more than 2% of the outstanding Shares or
shall have been granted any option or right to acquire beneficial
ownership of more than 2% of the outstanding Shares (other than the
Equity Investment); or
(3) any entity, person or group shall have filed a Notification and
Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 reflecting an intent to acquire the Company or any of its Shares; or
(vi) there shall have occurred (a) any general suspension of trading in,
or limitation on prices for, securities in the United States national
securities exchanges or over-the-counter markets, (b) any significant
adverse change in the trading prices for the Common Stock or in the
Company's other securities, or in any financial markets, (c) a material
impairment in the trading market for securities that could, in the sole
judgment of the Company, affect the Equity Investment, the Tender Offer, the
Distributions or the New Borrowings, (d) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States, (e) any limitation (whether or not mandatory) by any government or
governmental, administrative or regulatory authority or agency, domestic or
foreign, on (or other event that, in the reasonable judgment of the Company,
might affect) the extension of credit by banks or other lending institutions
in the United States, (f) a commencement of a war or armed hostilities or
other national or international calamity directly or indirectly involving
the United States, or (g) in the case of any of the foregoing existing on
the date hereof, a material acceleration or worsening thereof.
B-49
