<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)
Common Stock, Par Value $.001 Per Share
- --------------------------------------------------------------------------------
(Title of Class of Securities)
912 325 107
- --------------------------------------------------------------------------------
(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:
<TABLE>
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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 4, 1998
- --------------------------------------------------------------------------------
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation $930,000,000* Amount of Filing Fee $186,000
- ------------------------
* Assumes purchase at $27.00 per Share of approximately 32 million Shares and
5 million Option Shares (with an average exercise price of $14.00 per
Share).
/ / 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: U.S. Office Products Company
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 subject to the Offer are the Company's Common
Stock, par value $.001 per share (such shares, together with all other
outstanding shares of Common Stock of the Company, are referred to as "Shares").
Information with respect to the exact number of Shares being sought and the
consideration being offered therefor is incorporated herein by reference to
Section 1 of the Offer to Purchase, dated May 4, 1998 (the "Offer to Purchase"),
filed as Exhibit (a)(ii) hereto. The number of Shares to be purchased by the
Company includes Shares that may be tendered upon the exercise of stock options
with an exercise prices of less than $27.00 per Share ("Option Shares"). As of
April 27, 1998, there were approximately 133,782,354 Shares issued and
outstanding, approximately 22 million Option Shares reserved for issuance in
connection with outstanding stock options, approximately 8,889,920 additional
Shares reserved for issuance upon conversion of the Company's 5 1/2% Convertible
Subordinated Notes due 2001 (giving effect to the temporarily reduced conversion
price in connection with the Company's offer to exchange such notes for Shares)
and 7,278,481 additional Shares reserved for issuance upon conversion of the
Company's 5 1/2% Convertible Subordinated Notes due 2003. See "Background and
Purpose of the Offer" in the Offer to Purchase and "The Strategic Restructuring
Plan--Financing Transactions" in Annex A to the Offer to Purchase.
The Company has been advised that its executive officers and directors,
except for the Chief Executive Officer, Thomas Morgan, intend to participate in
the offer to which this statement relates (the "Offer").
(c) The information set forth in Section 8 of the Offer to Purchase is
incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in Section 9 of the Offer to Purchase is
incorporated herein by reference.
(b) The information set forth in Section 9 of the Offer to Purchase and "The
Strategic Restructuring Plan--Financing Transactions" in Annex A thereto is
incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a) The information set forth in Section 10 of the Offer to Purchase, the
"The Strategic Restructuring Plan--Equity Investment," "Background and Purpose
of the Equity Investment," "-- Financing Transactions" and "-- Adjustment to
Employee Stock Options" in Annex A thereto is incorporated herein by reference.
(b) The information set forth in "Background and Purpose of the Offer" in
the Offer to Purchase and "The Strategic Restructuring Plan" in Annex A to the
Offer to Purchase is incorporated herein by reference.
(c) The information set forth in "Background and Purpose of the Offer" in
the Offer to Purchase and "The Strategic Restructuring Plan" in Annex A to the
Offer to Purchase is incorporated herein by reference.
2
<PAGE>
(d) The information set forth in "The Strategic Restructuring Plan--Equity
Investment," "--Background and Purpose of the Equity Investment" and
"--Information About the Board of Directors After the Equity Investment" in
Annex A to the Offer to Purchase is incorporated herein by reference.
(e) The information set forth in "Background and Purpose of the Offer" and
Section 9 of the Offer to Purchase and "The Strategic Restructuring
Plan--Financing Transactions" in Annex A thereto is incorporated herein by
reference.
(f) The information set forth in "Background and Purpose of the Offer" in
the Offer to Purchase and "The Strategic Restructuring Plan" in Annex A to the
Offer to Purchase is incorporated herein by reference.
(g) The information set forth in "Background and Purpose of the Offer" in
the Offer to Purchase and "The Strategic Restructuring Plan" in Annex A to the
Offer to Purchase is incorporated herein by reference.
(h)-(j) Not applicable.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in Section 10 of the Offer to Purchase is
incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO
THE ISSUER'S SECURITIES.
The information set forth in "Background and Purpose of the Offer" in the
Offer to Purchase 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 Section 13 of the Offer to Purchase is
incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION
(a) The information set forth in "Index to Financial Statements" in Annex A
to the Offer to Purchase is incorporated herein by reference.
(b) The information set forth in "Index to Financial Statements" in Annex A
to the Offer to Purchase is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) None.
(b) The information set forth in Section 11 of the Offer to Purchase is
incorporated herein by reference.
(c) Not applicable.
(d) The information set forth in Section 11 of the Offer to Purchase is
incorporated herein by reference.
(e) Reference is made to the exhibits hereto, including the Offer to
Purchase, which are incorporated herein by reference in their entirety.
3
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) (i) Form of Press Release dated May 4, 1998.
(ii) Form of Offer to Purchase dated May 4, 1998.
(iii) Form of Letter dated May 4, 1998 from Thomas Morgan, President
and Chief Executive Officer of U.S. Office Products Company to
Stockholders.
(iv) Form of Letter dated May 4, 1998 from Morgan Stanley & Co.
Incorporated (Dealer Manager) to Brokers, Dealers, Commercial
Banks, Trust Companies and Nominees.
(v) Form of Letter to Clients for use by Brokers, Dealers, Commercial
Banks, Trust Companies and other Nominees.
(vi) Form of Letter of Transmittal.
(vii) Form of Notice of Guaranteed Delivery.
(viii) Form of proposed advertisement to be printed in the Wall Street
Journal on May 4, 1998.
(ix) (1) Form of Memorandum dated May 4, 1998 from U.S. Office Products
Company to Holders of USOP Options; (2) Form of Questions and
Answers on Tender Offer and Procedures for Holders of Options; and
(3) Form of Notice of Instructions (Options).
(x) (1) Form of Memorandum dated May 4, 1998 from U.S. Office Products
Company to Participants in the Employee Stock Purchase Plan; (2)
Form of Questions and Answers on Tender Offer and Procedures for
Participants in the U.S. Office Products Company Employee Stock
Purchase Plan; (3) Form of Tender Instruction Form for Shares in
the U.S. Office Products Company Employee Stock Purchase Plan; and
(4) Form of Notice to Participants in the U.S. Office Products
Company Employee Stock Purchase Plan from American Stock Transfer &
Trust Company dated May 4, 1998.
(xi) (1) Form of Memorandum dated May 4, 1998 from the Company to
Stockholders who own Pledged Shares; (2) Form of Question and
Answers on Tender Offer and Procedures for Stockholders who own
Pledged Shares; and (3) Form of Notice of Instructions, Power of
Attorney and Agreement (Pledged Shares).
(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, and 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).
(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.
<TABLE>
<S> <C> <C>
U.S. OFFICE PRODUCTS COMPANY
By: /s/ THOMAS MORGAN
-----------------------------------------
Thomas Morgan
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: May 4, 1998
5
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
- -----------------------------------------------------------------------------
FOR IMMEDIATE RELEASE - MAY 4, 1998 RELEASE NO. 98-011
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 EQUITY SELF-TENDER
Washington, D.C., May 4, 1998 - U.S. Office Products Company (NASDAQ: OFIS)
today announced that it is commencing the equity self-tender offer that is
part of its strategic restructuring plan. The self-tender offer begins today,
Monday, May 4, 1998, and will expire at 12:00 Midnight, New York City time,
on Monday, June 1, 1998, unless extended.
As previously announced, U.S. Office Products Company ("USOP") is offering to
purchase 37,037,037 shares of its common stock (including shares that may be
issued upon the exercise of stock options) at a price of $27 per share (or,
in the case of shares underlying stock options, $27 minus the exercise price
of the options). Terms of the self-tender offer are described more fully in
the Offer to Purchase and Letter of Transmittal and related materials that
the Company began distributing today.
On Friday, May 1, 1998, the closing price of the Company's common stock was
$17 15/16 per share.
Morgan Stanley Dean Witter is acting as the dealer manager for the offer.
MacKenzie Partners, Inc. is acting as the information agent.
USOP also said that it expects to commence tomorrow the cash tender offer for
its outstanding 5-1/2% Convertible Subordinated Notes due 2003.
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
shares of common stock 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 and services to its
customers. USOP also owns Mail Boxes Etc. ("MBE"), the largest franchiser of
business communication and postal service centers, 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 includes "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>
OFFER TO PURCHASE FOR CASH
37,037,037 SHARES OF ITS COMMON STOCK
AT
$27 PER SHARE
BY
U.S. OFFICE PRODUCTS COMPANY
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, JUNE 1, 1998, UNLESS THE OFFER IS EXTENDED.
---------------------
U.S. OFFICE PRODUCTS COMPANY, A DELAWARE CORPORATION ("U.S. OFFICE PRODUCTS"
OR THE "COMPANY"), IS OFFERING TO PURCHASE 37,037,037 SHARES OF ITS COMMON
STOCK, PAR VALUE $.001 PER SHARE (THE "SHARES"), AT A PRICE OF $27 PER SHARE
(THE "OFFER PRICE"). THE NUMBER OF SHARES TO BE PURCHASED BY THE COMPANY
INCLUDES SHARES THAT MAY BE TENDERED UPON EXERCISE OF STOCK OPTIONS WITH AN
EXERCISE PRICE OF LESS THAN $27 PER SHARE ("OPTION SHARES"), AS DESCRIBED
HEREIN. UNLESS OTHERWISE NOTED, THE TERM SHARES INCLUDES OPTION SHARES. THE
COMPANY'S OFFER IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THIS OFFER
TO PURCHASE AND IN THE RELATED LETTER OF TRANSMITTAL (WHICH, TOGETHER WITH ANY
AMENDMENTS OR SUPPLEMENTS, COLLECTIVELY CONSTITUTE THE "OFFER"). IN THE CASE OF
TENDERS OF PLEDGED SHARES (AS DEFINED HEREIN), ESPP SHARES (AS DEFINED HEREIN)
AND OPTION SHARES, THE RELEVANT NOTICE OF INSTRUCTIONS OR TENDER INSTRUCTION
FORM (AS THE CASE MAY BE) CONTAINED IN THE RESPECTIVE SPECIAL INSTRUCTIONS (AS
DEFINED HEREIN) ARE ALSO PART OF THE TERMS OF THE OFFER.
IF, PRIOR TO THE EXPIRATION DATE, MORE THAN 37,037,037 SHARES (OR SUCH OTHER
NUMBER OF SHARES AS THE COMPANY MAY ELECT TO PURCHASE) ARE PROPERLY TENDERED IN
THE OFFER AND NOT WITHDRAWN, THE COMPANY WILL, UPON THE TERMS AND SUBJECT TO THE
CONDITIONS OF THE OFFER, PURCHASE SHARES ON A PRO RATA BASIS FROM HOLDERS WHOSE
SHARES ARE PROPERLY TENDERED IN THE OFFER AND NOT WITHDRAWN. ANY STOCKHOLDER MAY
TENDER SHARES SUBJECT TO THE CONDITION THAT ALL OR A SPECIFIED MINIMUM NUMBER OF
SHARES (WHICH, EXCEPT IN CERTAIN CASES, MAY BE REPRESENTED BY DESIGNATED STOCK
CERTIFICATES) OR NONE OF SUCH SHARES BE PURCHASED.
IF A HOLDER PLANS TO TENDER SHARES THAT (1) CAN BE RECEIVED UPON THE
EXERCISE OF STOCK OPTIONS GRANTED UNDER THE COMPANY'S OPTION PLANS (AS DEFINED
HEREIN), (2) ARE PLEDGED TO THE COMPANY TO SECURE POTENTIAL FUTURE OBLIGATIONS
IN CONNECTION WITH THE SALE OF A BUSINESS TO THE COMPANY ("PLEDGED SHARES"), OR
(3) WERE ACQUIRED THROUGH THE COMPANY'S EMPLOYEE STOCK PURCHASE PLAN ("ESPP
SHARES"), THE HOLDER MUST FOLLOW SEPARATE PROCEDURES TO VALIDLY TENDER THOSE
SHARES. SEE "IMPORTANT--SPECIAL INFORMATION FOR HOLDERS OF CERTAIN TYPES OF
SHARES" AND SECTION 2.
--------------------------
THE OFFER IS CONDITIONED UPON A MINIMUM OF 37,037,037 SHARES BEING TENDERED AND
NOT WITHDRAWN, AND ON CERTAIN OTHER CONDITIONS, INCLUDING RECEIPT OF
FINANCING ON ACCEPTABLE TERMS AND SATISFACTION OF ALL CONDITIONS TO
THE CONSUMMATION OF THE DISTRIBUTIONS DESCRIBED HEREIN AND THE
EQUITY INVESTMENT DESCRIBED HEREIN (OTHER THAN IN RESPECT
OF THE OFFER). SEE SECTION 5.
--------------------------
THE SHARES ARE QUOTED ON THE NASDAQ STOCK MARKET-SM- ("NASDAQ"). ON JANUARY
12, 1998, THE LAST FULL TRADING DAY PRIOR TO THE ANNOUNCEMENT OF THE STRATEGIC
RESTRUCTURING PLAN (AS DEFINED BELOW) WHICH INCLUDES THE OFFER, THE CLOSING
PRICE AS REPORTED ON NASDAQ WAS $17 3/4 PER SHARE. ON MAY 1, 1998, THE LAST FULL
TRADING DAY PRIOR TO THE COMMENCEMENT OF THE OFFER, THE CLOSING PRICE AS
REPORTED ON NASDAQ WAS $17 15/16 PER SHARE. HOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE SHARES. SEE SECTION 8.
--------------------------
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
HOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES. HOLDERS MUST
MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY
SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS AND
EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS
MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
--------------------------
THE OFFER IS PART OF A COMPREHENSIVE RESTRUCTURING PLAN APPROVED BY THE
BOARD OF DIRECTORS OF THE COMPANY (THE "STRATEGIC RESTRUCTURING PLAN"). THE
STRATEGIC RESTRUCTURING PLAN HAS THREE PRINCIPAL ELEMENTS: (1) THE OFFER; (2)
THE DISTRIBUTION, AFTER COMPLETION OF THE OFFER, TO THE COMPANY'S STOCKHOLDERS
OF THE SHARES OF FOUR NEWLY-FORMED COMPANIES (THE "SPIN-OFF COMPANIES") THAT
WILL CONDUCT THE COMPANY'S TECHNOLOGY SOLUTIONS, PRINT MANAGEMENT, EDUCATIONAL
SUPPLIES AND CORPORATE TRAVEL SERVICES BUSINESSES (THE "DISTRIBUTIONS"); AND (3)
THE SALE TO AN AFFILIATE ("INVESTOR") OF AN INVESTMENT FUND MANAGED BY CLAYTON,
DUBILIER & RICE, INC. ("CD&R") OF EQUITY SECURITIES IN THE COMPANY FOLLOWING
COMPLETION OF THE OFFER AND THE DISTRIBUTIONS (THE "EQUITY INVESTMENT"). THE
PURPOSES OF THE COMPANY'S STRATEGIC RESTRUCTURING PLAN ARE DESCRIBED IN
"BACKGROUND AND PURPOSE OF THE OFFER" IN THIS OFFER TO PURCHASE AND IN "THE
STRATEGIC RESTRUCTURING PLAN" IN ANNEX A. IN CONJUNCTION WITH THIS STRATEGIC
RESTRUCTURING PLAN, THE COMPANY PLANS TO UNDERTAKE CERTAIN FINANCING
TRANSACTIONS WHICH INCLUDE: (I) ENTERING INTO A NEW SENIOR CREDIT FACILITY, (II)
SELLING IN A PRIVATE PLACEMENT AT LEAST $400.0 MILLION OF SENIOR SUBORDINATED
NOTES, (III) OFFERING TO PURCHASE FOR CASH ANY AND ALL OF ITS 5 1/2% CONVERTIBLE
SUBORDINATED NOTES DUE 2003 (THE "2003 NOTES"), AND (IV) OFFERING TO EXCHANGE
FOR SHARES OF COMMON STOCK ANY AND ALL OF ITS 5 1/2% CONVERTIBLE SUBORDINATED
NOTES DUE 2001 (THE "2001 NOTES"). STOCKHOLDERS WHOSE SHARES ARE ACCEPTED FOR
PAYMENT AND PAID FOR IN THE OFFER WILL NOT PARTICIPATE IN THE DISTRIBUTIONS OF
THE SPIN-OFF COMPANIES WITH RESPECT TO SUCH SHARES.
(CONTINUED ON FOLLOWING PAGE)
--------------------------
THE DEALER MANAGER FOR THE OFFER IS:
MORGAN STANLEY DEAN WITTER
MAY 4, 1998
<PAGE>
(CONTINUED FROM PRECEDING PAGE)
IMPORTANT
GENERAL
ANY STOCKHOLDER DESIRING TO TENDER ALL OR ANY PORTION OF HIS SHARES SHOULD
EITHER (1) COMPLETE AND SIGN THE LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF)
IN ACCORDANCE WITH THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND DELIVER IT
AND ALL OTHER REQUIRED DOCUMENTS TO FIRST CHICAGO TRUST COMPANY OF NEW YORK
("FIRST CHICAGO" OR THE "DEPOSITARY") AND EITHER MAIL OR DELIVER THE STOCK
CERTIFICATES FOR SUCH SHARES TO THE DEPOSITARY OR FOLLOW THE PROCEDURE FOR
BOOK-ENTRY DELIVERY SET FORTH IN SECTION 2, OR (2) REQUEST HIS BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO EFFECT THE TRANSACTION FOR
HIM. STOCKHOLDERS HAVING SHARES REGISTERED IN THE NAME OF A BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE SHOULD CONTACT SUCH PERSON OR
INSTITUTION IF THEY DESIRE TO TENDER SUCH SHARES.
STOCKHOLDERS DESIRING TO TENDER SHARES AND WHOSE CERTIFICATES FOR SUCH
SHARES ARE NOT IMMEDIATELY AVAILABLE OR WHO CANNOT COMPLY WITH THE PROCEDURE FOR
BOOK-ENTRY TRANSFER BY THE EXPIRATION OF THE OFFER MUST TENDER SUCH SHARES BY
FOLLOWING THE PROCEDURES FOR GUARANTEED DELIVERY SET FORTH IN SECTION 2.
STOCKHOLDERS MUST PROPERLY COMPLETE THE LETTER OF TRANSMITTAL IN ORDER TO EFFECT
A VALID TENDER OF THEIR SHARES.
QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO MACKENZIE PARTNERS,
INC., THE INFORMATION AGENT, OR MORGAN STANLEY & CO. INCORPORATED, THE DEALER
MANAGER, AT THEIR RESPECTIVE ADDRESSES AND TELEPHONE NUMBERS SET FORTH ON THE
BACK COVER OF THIS OFFER TO PURCHASE, AND ADDITIONAL COPIES OF THIS OFFER TO
PURCHASE, THE LETTER OF TRANSMITTAL AND THE NOTICE OF GUARANTEED DELIVERY MAY BE
OBTAINED FROM THE INFORMATION AGENT.
SPECIAL INFORMATION FOR HOLDERS OF CERTAIN TYPES OF SHARES
HOLDERS OF PLEDGED SHARES, ESPP SHARES OR VESTED (BUT UNEXERCISED) OR
UNVESTED OPTIONS GRANTED UNDER ONE OF THE OPTION PLANS (AS DEFINED BELOW) WHO
WISH TO PARTICIPATE IN THE OFFER MUST FOLLOW THE SEPARATE INSTRUCTIONS AND
PROCEDURES DESCRIBED BELOW (COLLECTIVELY, THE "SPECIAL INSTRUCTIONS"). ALL
HOLDERS OF OPTIONS GRANTED UNDER THE FOLLOWING PLANS (THE "OPTION PLANS") ARE
ELIGIBLE TO PARTICIPATE IN THE OFFER: U.S. OFFICE PRODUCTS COMPANY AMENDED AND
RESTATED 1994 LONG-TERM INCENTIVE PLAN (AND ITS PREDECESSOR); U.S. OFFICE
PRODUCTS COMPANY 1996 NON-EMPLOYEE DIRECTORS' STOCK PLAN; U.S. OFFICE PRODUCTS
COMPANY 1997 STOCK OPTION PLAN FOR FORMER NON-EMPLOYEE DIRECTORS OF MAIL BOXES
ETC.; U.S. OFFICE PRODUCTS COMPANY 1997A STOCK OPTION PLAN FOR EMPLOYEES OF MAIL
BOXES ETC.; AND U.S. OFFICE PRODUCTS COMPANY 1997B STOCK OPTION PLAN FOR
EMPLOYEES OF MAIL BOXES ETC.
- HOLDERS OF PLEDGED SHARES WHO WISH TO TENDER SOME OR ALL OF THEIR PLEDGED
SHARES IN THE OFFER SHOULD REVIEW THE INFORMATION AND MUST FOLLOW THE
INSTRUCTIONS CONTAINED IN THE MATERIALS PRINTED ON PURPLE PAPER.
- HOLDERS OF ESPP SHARES WHO WISH TO TENDER SOME OR ALL OF THEIR ESPP SHARES
IN THE OFFER SHOULD REVIEW THE INFORMATION AND MUST FOLLOW THE
INSTRUCTIONS CONTAINED IN THE MATERIALS PRINTED ON GOLD PAPER.
- HOLDERS OF OPTIONS WHO WISH TO TENDER SOME OR ALL OF THEIR OPTION SHARES
IN THE OFFER SHOULD REVIEW THE INFORMATION AND MUST FOLLOW THE
INSTRUCTIONS CONTAINED IN THE MATERIALS PRINTED ON GREEN PAPER.
HOLDERS OF PLEDGED SHARES, ESPP SHARES AND OPTIONS GRANTED UNDER ONE OF THE
OPTION PLANS SHOULD READ THIS OFFER TO PURCHASE AND THE RELATED LETTER OF
TRANSMITTAL, AS THEY CONTAIN THE TERMS OF THE OFFER. THE SPECIAL INSTRUCTIONS
SUPPLEMENT THAT INFORMATION. HOLDERS OF PLEDGED SHARES, ESPP SHARES AND OPTIONS
SHOULD ALSO SEE "TAX CONSIDERATIONS FOR HOLDERS OF PLEDGED SHARES, ESPP SHARES
AND OPTION SHARES" IN SECTION 12 FOR INFORMATION ABOUT TAX CONSIDERATIONS AND
SECTION 4 FOR SPECIAL PAYMENT PROCEDURES THAT APPLY TO SUCH HOLDERS IF THEY
PARTICIPATE IN THE OFFER.
ADDITIONAL COPIES OF THE SPECIAL INSTRUCTIONS MAY BE OBTAINED FROM THE
INFORMATION AGENT OR FIRST CHICAGO.
------------------------
THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON BEHALF
OF THE COMPANY AS TO WHETHER STOCKHOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING SHARES 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 OR IN THE SPECIAL
INSTRUCTIONS. IF GIVEN OR MADE, ANY SUCH RECOMMENDATION OR ANY
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY.
------------------------
THE OFFER IS NOT BEING MADE TO (NOR WILL ANY TENDER OF SHARES 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 SHARES 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.
------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
INTRODUCTION..................................................................................................... 2
Summary Terms of the Offer............................................................................ 2
General Information................................................................................... 3
Forward-Looking Information........................................................................... 3
BACKGROUND AND PURPOSE OF THE OFFER.............................................................................. 4
THE OFFER........................................................................................................ 6
1. Number of Shares; Proration; Expiration Date.......................................................... 6
2. Procedures for Tendering Shares....................................................................... 7
3. Withdrawal Rights..................................................................................... 11
4. Acceptance for Payment and Payment for Shares......................................................... 12
5. Certain Conditions of the Offer....................................................................... 13
6. Extension of the Offer; Termination; Amendments....................................................... 15
7. Certain Effects of the Offer.......................................................................... 16
8. Price Range of Shares; Dividends...................................................................... 17
9. Source and Amount of Funds............................................................................ 18
10. Transactions and Arrangements Concerning the Shares................................................... 20
11. Certain Legal Matters; Regulatory Approvals........................................................... 20
12. U.S. Federal Income Tax Considerations................................................................ 20
13. Fees and Expenses..................................................................................... 25
14. Miscellaneous......................................................................................... 26
</TABLE>
ANNEX A -- INFORMATION CONCERNING THE STRATEGIC RESTRUCTURING PLAN, THE COMPANY
AND INVESTOR
------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (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. 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 2003 Note Offer (as defined herein). In addition, each of
the Spin-Off Companies has filed a registration statement on Form S-1 (each, a
"Spin-Off Company Registration Statement") relating to the Distributions. 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.
This Offer to Purchase also constitutes part of a Tender Offer Statement on
Schedule 14D-1 (the "Schedule 14D-1") filed with the Commission by Investor and
Clayton, Dubilier & Rice Fund V Limited Partnership pursuant to Section 14(d) of
the Exchange Act and the rules and regulations promulgated thereunder. The
Schedule 14D-1 and all exhibits thereto are incorporated by reference in this
Offer to Purchase.
In addition, no less than ten (10) days prior to the Expiration Date, the
Company will distribute to each holder of Shares of record on such date a copy
of the information statement of each Spin-Off Company contained in the Spin-Off
Company Registration Statements.
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TO THE HOLDERS OF COMMON STOCK OF
U.S. OFFICE PRODUCTS COMPANY:
INTRODUCTION
SUMMARY TERMS OF THE OFFER
U.S. Office Products hereby offers to purchase 37,037,037 shares of its
Common Stock (the "Shares") at a price of $27 per Share (or, in the case of
Shares underlying stock options, at $27 minus the exercise price of the options
and any applicable withholding taxes) (the "Offer Price"). The number of Shares
to be purchased by the Company includes Option Shares that may be tendered upon
exercise of options with an exercise price of less than $27 per Share as
described herein. Unless otherwise noted, the term Shares includes Option
Shares. The Company's offer is subject to the terms and conditions set forth in
this Offer to Purchase and the related Letter of Transmittal (which, together
with any amendments or supplements, collectively constitute the "Offer"). In the
case of tenders of Pledged Shares, ESPP Shares and Option Shares, the relevant
Notice of Instructions or Tender Instruction Form (as the case may be) contained
in the respective Special Instructions are also part of the terms of the Offer.
Each stockholder who has properly tendered and not withdrawn Shares will
receive the Offer Price, net to the stockholder in cash, for all Shares
purchased, upon the terms and subject to the conditions of the Offer, including
the provisions relating to proration and the conditions described herein. If
more than 37,037,037 Shares are properly tendered and not withdrawn, the Company
will, upon the terms and subject to the conditions of the Offer, accept Shares
for purchase on a pro rata basis from stockholders whose Shares are properly
tendered and not withdrawn. Any stockholder (other than option holders tendering
Option Shares) may tender Shares subject to the condition that all, a specified
minimum number of Shares (which, except in certain cases, may be represented by
designated stock certificates) or none of such Shares be purchased. See Section
1. The Company will return all Shares not purchased, including Shares not
purchased because of proration or conditional tenders. Shares, other than Option
Shares, not accepted in the Offer will be eligible to receive shares of the
Spin-Off Companies in the Distributions. See "The Strategic Restructuring
Plan--Spin-Off Distributions" in Annex A.
If all eligible Shares are validly tendered by stockholders and option
holders in the Offer, the proration percentage (that is, the percentage of
validly tendered Shares that would be purchased in the Offer) would be
approximately 22.5%. This percentage assumes that all 2001 Notes are exchanged
for shares of Common Stock in the 2001 Note Offer (as defined below), and all
such shares are tendered in the Offer, and all 2003 Notes are tendered and
accepted for purchase in the 2003 Note Offer (as defined below).
Tendering stockholders will not be obligated to pay brokerage fees or
commissions or, except as set forth in Instruction 7 of the Letter of
Transmittal, stock transfer taxes on the purchase of Shares by the Company
pursuant to the Offer. The Company will pay all fees and expenses of First
Chicago Trust Company of New York ("First Chicago" or the "Depositary"),
MacKenzie Partners, Inc. (the "Information Agent"), First Chicago, as agent for
option holders and holders of Pledged Shares, American Stock Transfer & Trust
Company (the "ESPP Agent"), as agent for ESPP participants, and Morgan Stanley &
Co. Incorporated ("Morgan Stanley"), which is acting as Dealer Manager, in
connection with the Offer. See Section 13.
THE OFFER IS CONDITIONED UPON A MINIMUM OF 37,037,037 SHARES BEING VALIDLY
TENDERED AND NOT WITHDRAWN, AND ON CERTAIN OTHER CONDITIONS, INCLUDING RECEIPT
OF FINANCING ON ACCEPTABLE TERMS AND SATISFACTION OF ALL CONDITIONS TO THE
CONSUMMATION OF THE DISTRIBUTIONS AND THE EQUITY INVESTMENT (OTHER THAN IN
RESPECT OF THE OFFER).
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NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
HOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES. HOLDERS MUST
MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO
TENDER. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS,
EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES
IN THE OFFER.
GENERAL INFORMATION
As of April 27, 1998, the Company had issued and outstanding 133,782,354
Shares (excluding Option Shares). As of that date, approximately 22 million
Option Shares were reserved for issuance in connection with outstanding stock
options under the Option Plans, 8,889,920 additional Shares (excluding Option
Shares) were reserved for issuance upon conversion of the 2001 Notes (giving
effect to the temporarily reduced conversion price in connection with the 2001
Note Offer (as defined below)) and 7,278,481 additional Shares (excluding Option
Shares) were reserved for issuance upon conversion of the 2003 Notes. The
37,037,037 Shares that the Company is offering to purchase represent
approximately 27.7% of the Shares (excluding Option Shares and other Shares
reserved for issuance upon conversion of the 2001 Notes and the 2003 Notes)
outstanding at April 27, 1998. Further, such 37,037,037 Shares represent
approximately 22.5% of the sum of the shares of Common Stock issued and
outstanding at April 27, 1998 plus Option Shares and Shares reserved for
issuance upon conversion of the 2001 Notes (giving effect to the temporarily
reduced conversion price). The Shares are quoted on The Nasdaq Stock Market
("Nasdaq") under the symbol "OFIS." On January 12, 1998, the last full trading
day prior to the announcement of the Strategic Restructuring Plan (which
includes the Offer), the closing price as reported on Nasdaq was $17 3/4 per
Share. On May 1, 1998, the last full trading day prior to the commencement of
the Offer, the closing price as reported on Nasdaq was $17 15/16 per Share.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. SEE
SECTION 8.
Shares acquired by the Company pursuant to the Offer may be re-issued in
connection with the Equity Investment described herein, held as treasury stock
or retired by the Company. See "Background and Purpose of the Offer" in this
Offer to Purchase and "The Strategic Restructuring Plan--Equity Investment" in
Annex A.
Certain U.S. federal income tax consequences of the sale of Shares
(including tax consequences applicable to Pledged Shares, ESPP Shares and Option
Shares) pursuant to the Offer are described in Section 12.
Certain conditions of the Offer are described in Section 5. The Company
reserves the right (but is not obligated) to waive any or all such conditions,
other than those that are legally mandated.
FORWARD-LOOKING INFORMATION
This Offer to Purchase (including Annex A hereto) 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. This Offer to Purchase also contains pro
forma financial information that gives effect to certain events. 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.
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BACKGROUND AND PURPOSE OF THE OFFER
The Board of Directors of the Company has adopted a comprehensive
restructuring plan. The principal elements of this plan, including modifications
the Board of Directors has made since first adopting the plan (as so modified,
the "Strategic Restructuring Plan"), are as follows:
- THE OFFER. In the Offer, the Company will purchase 37,037,037 Shares, at a
price of $27 per Share. As described below, the Company will pay for the
Offer with borrowed money and proceeds of the Equity Investment.
- 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 shares of the Company's Common Stock
representing 24.9% of the outstanding equity of the Company (after giving
effect to the Offer and such investment) and warrants to purchase
additional shares of 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 its 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 (the "Financing Transactions"):
- 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").
- 2003 NOTE OFFER. The Company is offering to purchase any and all of its
$230.0 million outstanding 2003 Notes for a purchase price of 94.50% of
the principal amount, plus accrued interest (the "2003 Note Offer").
- 2001 NOTE OFFER. The Company is offering to exchange its 2001 Notes for
Common Stock (the "2001 Note Offer") at an exchange rate of 61.483 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.
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The Company intends to use the proceeds of the Equity Investment and the
Subordinated Debt Offering, together with borrowings under the Credit Facility,
to refinance the Company's existing credit facility, to pay the purchase price
of the Offer and the 2003 Note Offer, and to pay fees and expenses incurred in
connection with the Strategic Restructuring Plan and the Financing Transactions.
The Credit Facility also will be available for future borrowings, including to
fund future acquisitions and capital needs. For a more detailed description of
the Financing Transactions, see "The Strategic Restructuring Plan-- Financing
Transactions" in Annex A.
The Company hired Morgan Stanley to advise it about the Strategic
Restructuring Plan. Morgan Stanley delivered an opinion, dated January 12, 1998,
to the Board of Directors (the "Morgan Stanley Opinion") that, as of such date
and subject to certain conditions identified in the Morgan Stanley Opinion, the
transactions comprising the Strategic Restructuring Plan, taken as a whole, are
fair from a financial point of view to the stockholders of the Company. Morgan
Stanley's written opinion is included as Exhibit 1 to Annex A to this Offer to
Purchase. The opinion sets forth the assumptions made, matters considered and
limitations on the review undertaken by Morgan Stanley. For additional
information about the opinion, see "The Strategic Restructuring Plan--Opinion of
Financial Advisor" in Annex A.
The primary purpose of the Offer is to provide to stockholders an
opportunity to sell a portion of their Shares at a premium to recent market
prices, without the usual transaction costs associated with a market sale.
Further, the purchase of Option Shares will reduce the potential additional
dilution to stockholders of the Company and the Spin-Off Companies after the
Distributions that would otherwise result from the adjustments that are expected
to be made to the terms of the Company's outstanding options as a result of the
Distributions, as well as permitting employees to participate in the Offer
without having to exercise their options in advance of tendering.
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THE OFFER
1. NUMBER OF SHARES; PRORATION; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment and purchase 37,037,037 Shares at the Offer Price. If the
Offer is oversubscribed, Shares tendered prior to the Expiration Date will be
subject to proration, as described below. The term "Expiration Date" means 12:00
Midnight, New York City time, on Monday, June 1, 1998, unless the Company, in
its sole discretion, extends the Offer. If the Company extends the Offer, the
term "Expiration Date" shall mean the date and time to which the Offer is
extended. The Company's right to extend the Offer, and to delay, terminate or
amend the Offer, is described in Section 6.
Subject to the applicable regulations of the Commission, the Company
reserves the right, in its sole discretion, to change the terms of the Offer,
including, but not limited to, purchasing more or less than 37,037,037 Shares in
the Offer. If (i) the Company increases or decreases the Offer Price, increases
the number of Shares being sought and such increase in the number of Shares
being sought exceeds 2% of the outstanding Shares (excluding Option Shares), or
decreases the number of Shares being sought and (ii) the Offer is scheduled to
expire at any time earlier than the expiration of a period ending on the tenth
business day from, and including, the date that notice of such increase or
decrease is first published, sent or given in the manner described herein, the
Offer will be extended until the expiration of such ten business day period. For
purposes of the Offer, a "business day" means any day other than a Saturday,
Sunday or federal holiday and consists of the time period from 12:01 a.m.
through 12:00 Midnight, New York City time.
All Shares purchased in the Offer will be purchased at the Offer Price. All
Shares not purchased in the Offer, including Shares not purchased because of
proration or conditional tenders and Shares tendered and withdrawn, will be
returned to the tendering stockholder at the Company's expense as promptly as
practicable following the Expiration Date or as promptly as practicable
following withdrawal, as the case may be. Shares other than Option Shares not
purchased in the Offer will be eligible to receive shares of the Spin-Off
Companies in the Distributions. See "The Strategic Restructuring Plan--Spin-Off
Distributions" in Annex A.
If the number of Shares properly tendered prior to the Expiration Date (and
not withdrawn in accordance with Section 3) is equal to 37,037,037 Shares (or
such other number of Shares as the Company may elect to purchase in the Offer),
and if the conditions set forth in Section 5 are each satisfied or waived, the
Company will, upon the terms and subject to the conditions of the Offer,
purchase at the Offer Price all Shares so tendered. If any of the conditions is
not satisfied or waived, the Offer will not be completed and the Company will
promptly return all tendered Shares.
If the number of Shares properly tendered prior to the Expiration Date (and
not withdrawn in accordance with Section 3) is less than 37,037,037, the Company
will not be obligated to purchase any Shares. See Section 5.
If more than 37,037,037 Shares (or such greater number of Shares as the
Company elects to purchase) are properly tendered and not withdrawn, the Company
will accept, upon the terms and subject to the conditions of the Offer, Shares
for purchase in the following order of priority:
(a) all Shares properly and unconditionally tendered and not withdrawn,
and all other Shares properly and conditionally tendered and not withdrawn
for which the condition can be satisfied on the basis of the number of
Shares tendered and not withdrawn and the conditions thereto, in each case
before the Expiration Date, on a pro rata basis, if necessary (with
adjustments to avoid purchases of fractional Shares); and
(b) then, if the number of all of the foregoing Shares is less than the
number of Shares the Company will accept for payment and no tenders have
been accepted on a pro rata basis, such additional number of Shares properly
and conditionally tendered before the Expiration Date and not withdrawn as
to which the condition was not satisfied as are necessary to reach the
number of Shares the Company will accept for payment. If such conditional
tenders are accepted, the Company will
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select conditional tenders by lot only from stockholders who tender all
Shares owned by them and will limit its purchase in each case to the
designated minimum number of Shares to be purchased. If the Company
purchases less than all Shares tendered before the Expiration Date and not
withdrawn, any Shares tendered pursuant to a conditional tender for which
the condition was not satisfied shall be deemed withdrawn, subject to
reinstatement if such conditionally tendered Shares are all the Shares held
by the person tendering and the conditionally tendered Shares are
subsequently selected by lot for purchase.
If the Offer is over-subscribed, Pledged Shares, ESPP Shares and Option
Shares will each be separately subject to the same proration as all other
Shares, with the following additional administrative rules:
- For stockholders tendering ESPP Shares, the Company will first purchase
the ESPP Shares that have been held the longest.
- For holders tendering Option Shares, the Company will first purchase
Option Shares that are attributable to vested options before it purchases
any Option Shares from that holder that are attributable to unvested
options. After this rule is applied, the Company will purchase Option
Shares that are attributable to options with the lowest exercise price
first and, within those options, the Company will purchase Option Shares
that are attributable to options that have been vested for the longest
period of time (or that vest first, in the case of unvested options).
If proration of tendered Shares is required, the Company will determine the
final proration factor as promptly as practicable after the Expiration Date.
Although the Company does not expect to be able to announce the final results of
such proration until approximately five business days after the Expiration Date,
it will announce preliminary results of proration by press release as promptly
as practicable after the Expiration Date. Stockholders and option holders may
obtain such preliminary information from the Information Agent and may be able
to obtain such information from their brokers. If all eligible Shares are
validly tendered by stockholders and option holders in the Offer, the proration
percentage (that is, the percentage of validly tendered Shares that would be
purchased in the Offer) would be approximately 22.5%. This percentage assumes
that all 2001 Notes are exchanged for shares of Common Stock in the 2001 Note
Offer, and all such shares are tendered in the Offer, and all 2003 Notes are
tendered and accepted for purchase in the 2003 Note Offer.
As described in Section 12, the number of Shares that the Company will
purchase from a stockholder may affect the U.S. federal income tax consequences
to the stockholder of such purchase and therefore may be relevant to a
stockholder's decision whether to tender Shares. Stockholders may designate the
order in which their Shares shall be purchased in the event less than all of the
Shares tendered are purchased as a result of proration. This designation is not
available, however, with respect to Pledged Shares, ESPP Shares or Option
Shares.
If, as a result of the number of Shares tendered and the conditions thereto,
the number of Shares to be purchased from any stockholder making a conditional
tender is reduced below the minimum number specified by such stockholder, such
tender will automatically be regarded as withdrawn, except as provided above,
and all Shares tendered by such stockholder will be returned as promptly as
practicable after the Expiration Date at the Company's expense.
2. PROCEDURES FOR TENDERING SHARES
GENERAL. This section describes the procedures for tendering Shares in the
Offer. There are additional special procedures that holders of Pledged Shares,
ESPP Shares and Option Shares must follow in order to participate in the Offer.
These are described in the relevant Special Instructions.
PROPER TENDER OF SHARES. To validly tender Shares in the Offer, (i) a
properly completed and duly executed Letter of Transmittal (or manually executed
facsimile thereof) with any required signature guarantees and any other
documents required by the Letter of Transmittal must be received by the
Depositary at one of its addresses set forth on the back cover of this Offer to
Purchase, and either certificates for the Shares to be tendered must be
transmitted to and received by the Depositary at one of
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such addresses or such Shares must be tendered pursuant to the procedures for
book-entry transfer described below (and a confirmation of such tender received
by the Depositary), in each case on or before the Expiration Date, or (ii) the
guaranteed delivery procedure described below must be followed.
Stockholders may tender Shares subject to the condition that all, a
specified minimum number of Shares or none be purchased. Any stockholder
desiring to make such a conditional tender should so indicate in the box
captioned "Conditional Tender" on the Letter of Transmittal and, if applicable,
on the Notice of Guaranteed Delivery. It is the tendering stockholder's
responsibility to determine the minimum number of Shares to be purchased.
STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF
PRORATION OF THE OFFER AND THE ADVISABILITY OF MAKING A CONDITIONAL TENDER. See
Section 12. Stockholders should note that conditional tenders will not be
selected by lot pursuant to paragraph (b) in the description of proration in
Section 1 unless they tender all Shares held by them.
Notwithstanding any other provision hereof, payment for Shares tendered and
accepted for payment pursuant to the Offer will be made only after timely
receipt by the Depositary of (i) certificates for such Shares (or a timely
confirmation of a book-entry transfer of such Shares into the Depositary's
account at one of the Book-Entry Transfer Facilities, as defined below), (ii) a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) with any required signature guarantees and (iii) any other documents
required by the Letter of Transmittal.
BOOK-ENTRY DELIVERY. The Depositary will establish accounts with respect to
the Shares at The Depository Trust Company (the "Book-Entry Transfer Facility")
for purposes of the Offer within two business days after the date of this Offer
to Purchase. Any financial institution that is a participant in any of the Book
Entry Transfer Facility's systems may make book-entry delivery of Shares by
causing the Book-Entry Facility to transfer such Shares into the Depositary's
account in accordance with such Book-Entry Transfer Facility's procedures for
such transfer. However, although delivery of Shares may be effected through
book-entry transfer into the Depositary's account at the Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees, or an Agent's Message
(as defined below), and any other required documents, must, in any case, be
transmitted to, and received by, the Depositary at one of its addresses set
forth on the back cover of this Offer to Purchase prior to the Expiration Date,
or the tendering stockholder must comply with the guaranteed delivery procedures
described below. The confirmation of a book-entry transfer of Shares into the
Depositary's account at the Book-Entry Transfer Facility as described above is
referred to herein as a "Book-Entry Confirmation." Delivery of documents to the
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures does not constitute delivery to the Depositary.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Depositary and forming a part of a
Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has
received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering the Shares, that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against the participant.
SIGNATURE GUARANTEES. No signature guarantee is required on the Letter of
Transmittal if (a) the Letter of Transmittal is signed by the registered holder
of the Shares exactly as the name of the registered holder (which term, for
purposes of this section, includes any participant in the Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of
Shares) appears on the certificate for Shares tendered therewith, and payment is
to be made in the name of such registered holder, or (b) Shares are tendered for
the account of a financial institution that is a member of the Securities
Transfer Agents Medallion Program (STAMP), the Stock Exchange Medallion Program
(SEMP) or the New York Stock Exchange Medallion Signature Program (MSP) (each
such entity, an "Eligible Institution"). In all other cases, all signatures on
the Letter of Transmittal must be guaranteed by an Eligible Institution. See
Instruction 1 of the Letter of Transmittal. If a certificate representing Shares
is registered in the name of a person other than the signer of a Letter of
Transmittal, or if payment is to be made, or Shares not purchased or tendered
are to be issued to a person other than the registered holder, the certificate
must be
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endorsed or accompanied by an appropriate stock power, in either case signed
exactly as the name of the registered holder appears on the certificate with the
signature on the certificate or stock power guaranteed by an Eligible
Institution.
GUARANTEED DELIVERY. If a stockholder desires to tender Shares in the Offer
and cannot deliver certificates for such Shares (or the procedures for
book-entry transfer cannot be completed on a timely basis) or time will not
permit all required documents to reach the Depositary by the Expiration Date,
such Shares may nevertheless be tendered if all of the following conditions are
met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form included with this Offer to Purchase, is
received by the Depositary by the Expiration Date; and
(iii) the certificates for all tendered Shares in proper form for
transfer (or a confirmation of a book-entry transfer of such Shares into the
Depositary's account at the Book-Entry Transfer Facility), together with a
properly completed and duly executed Letter of Transmittal (or manually
executed facsimile thereof) and any other documents required by the Letter
of Transmittal, are received by the Depositary within three Nasdaq trading
days after the date the Depositary received such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
telegram, facsimile transmission or mail to the Depositary and must include a
guarantee by an Eligible Institution in the form set forth in such Notice.
Notwithstanding any other provision hereof, payment for Shares accepted in
the Offer will in all cases be made only after timely receipt by the Depositary
of (a) certificates for (or a timely Book-Entry Confirmation with respect to)
such Shares, (b) a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees, or, in the
case of a book-entry transfer, an Agent's Message, and (c) any other documents
required by the Letter of Transmittal. Accordingly, tendering stockholders may
be paid at different times depending upon when certificates for Shares or
Book-Entry Confirmations with respect to Shares are actually received by the
Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE
OF THE SHARES TO BE PAID BY THE COMPANY, REGARDLESS OF ANY EXTENSION OF THE
OFFER OR ANY DELAY IN MAKING SUCH PAYMENT.
THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY,
IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. SHARES WILL BE DEEMED
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE
OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
U.S. FEDERAL INCOME TAX WITHHOLDING. To prevent U.S. federal income tax
backup withholding equal to 31% of the gross payments made for Shares purchased
in the Offer, each U.S. stockholder (as defined in Section 12) who does not
otherwise establish an exemption from such withholding must notify the
Depositary of such stockholder's correct taxpayer identification number (or
certify that such taxpayer is awaiting a taxpayer identification number) and
provide certain other information by completing the Substitute Form W-9 included
in the Letter of Transmittal. See Instruction 10 of the Letter of Transmittal.
Holders of Option Shares and ESPP Shares who participate in the Offer will be
subject to income and employment tax withholding. See Section 12.
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ANY TENDERING U.S. STOCKHOLDER OR OTHER U.S. PAYEE WHO FAILS TO COMPLETE
FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL OR
SPECIAL INSTRUCTIONS MAY BE SUBJECT TO U.S. FEDERAL INCOME TAX BACKUP
WITHHOLDING EQUAL TO 31% OF THE GROSS PROCEEDS PAID TO SUCH STOCKHOLDER OR OTHER
PAYEE PURSUANT TO THE OFFER.
In the case of a non-U.S. stockholder (as defined in Section 12), the
Depositary will withhold 30% of the gross payments made for such stockholder's
Shares purchased in the Offer in order to satisfy certain federal withholding
requirements unless the Depositary determines that a reduced rate of withholding
is available pursuant to a tax treaty or that an exemption from withholding is
applicable. As a result of such withholding, non-U.S. stockholders will not be
subject to U.S. federal income tax backup withholding. Each stockholder should
consult his or her own tax advisor as to whether the stockholder is subject to
or exempt from federal income tax withholding.
DETERMINATION OF VALIDITY, REJECTION OF SHARES, WAIVER OF DEFECTS, NO
OBLIGATION TO GIVE NOTICE OF DEFECTS. All questions as to the number of Shares
to be accepted, the form of documents and the validity, eligibility (including
time of receipt) and acceptance for payment of any tender of Shares will be
determined by the Company, in its sole discretion, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any or all tenders of Shares determined by it not to be in proper form or
the acceptance for payment of or payment for which may be unlawful. The Company
also reserves the absolute right to waive any of the conditions of the Offer
(subject to the Investment Agreement and applicable law and regulations) or any
defect or irregularity in any tender of Shares, and the Company's interpretation
of the terms of the Offer (including the instructions in the Letter of
Transmittal and the Special Instructions) shall be final and binding. No tender
of Shares will be deemed to be properly made until all defects and
irregularities have been cured or waived. Unless waived, any defects or
irregularities in connection with tenders must be cured within such time as the
Company shall determine. None of the Company, the Dealer Manager, the
Information Agent, the Depositary or any other person will be under any duty to
give notification of any defect or irregularity in tenders or incur any
liability for failure to give any such notice.
TENDER CONSTITUTES AN AGREEMENT. The tender of Shares pursuant to any one
of the procedures described above will constitute a binding agreement between
the tendering stockholder and the Company upon the terms and subject to the
conditions of the Offer.
It is a violation of Rule 14e-4 promulgated under the Exchange Act for a
person, directly or indirectly, to tender shares for his own account unless, at
the time of the tender and at the end of the proration period, the person so
tendering (i) has a net long position equal to or greater than the amount of (x)
shares tendered or (y) other securities immediately convertible into,
exercisable, or exchangeable for the amount of shares tendered and will acquire
such shares for tender by conversion, exercise or exchange of such other
securities and (ii) will cause such shares to be delivered in accordance with
the terms of the Offer. Rule 14e-4 provides a similar restriction applicable to
the tender or guarantee of a tender on behalf of another person. The tender of
Shares pursuant to any one of the procedures described above or pursuant to the
separate procedures for Pledged Shares, ESPP Shares and Option Shares described
below will constitute the tendering holder's acceptance of the terms and
conditions of the Offer as well as the tendering holder's representation and
warranty that (i) such holder has a net long position in the Shares being
tendered within the meaning of Rule 14e-4 and (ii) the tender of such Shares
complies with Rule 14e-4.
SPECIAL PROCEDURES FOR HOLDERS OF PLEDGED SHARES, ESPP SHARES AND OPTION
SHARES.
PLEDGED SHARES. Owners of Pledged Shares who desire to tender their Pledged
Shares in the Offer must separately direct First Chicago to tender the Pledged
Shares on their behalf as described in the materials on purple paper included
herewith. Owners of Pledged Shares will be required to sign a power of attorney
authorizing First Chicago to sign the Letter of Transmittal on their behalf. The
Letter of Transmittal will direct that any Pledged Shares that are not purchased
in the Offer will be returned to the Company and
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the proceeds from the sale of any Pledged Shares will be retained as collateral
security and will be forwarded to an account maintained for the Company's
benefit by American Stock Transfer & Trust Company. The proceeds from the
Pledged Shares received upon tender will be subject to the same terms and
conditions as the Pledged Shares. Holders of Pledged Shares may not use the
Letter of Transmittal to direct the tender of Pledged Shares. Instead, holders
of Pledged Shares must follow the procedures for tender described in the
separate materials on purple paper included herewith.
ESPP SHARES. Participants in the ESPP who wish to have the agent for such
plan tender ESPP Shares attributable to their accounts should notify the ESPP
Agent of such election as provided in the notice sent to such participants and
explained in the materials on gold paper included herewith. As explained in
greater detail in those materials, employees who own ESPP Shares who wish to
participate in the Offer must instruct the ESPP Agent as to the number of their
ESPP Shares they would like to tender in the Offer, and must authorize the ESPP
Agent to tender the ESPP Shares on their behalf. Solely for the purpose of
allowing participants in the ESPP to participate in the Offer, the one-year
restriction on sales of ESPP Shares acquired through the ESPP as of the end of
the January 1998 purchase period has been temporarily waived. Shares purchased
through the ESPP after such date are not eligible for the Offer. Any ESPP Shares
that have not satisfied the one-year sale restriction and are not purchased in
the Offer will be returned to the employee's ESPP account. Such ESPP Shares will
not be eligible for sale until the one-year period has been satisfied. Holders
of ESPP Shares may not use the Letter of Transmittal to direct the tender of
ESPP Shares. Instead, holders of ESPP Shares must follow the procedures for
tender described in the separate materials on gold paper included herewith.
OPTION SHARES. Holders of vested (but unexercised) and unvested options to
purchase Shares granted under the Company's Option Plans, provided such options
have an exercise price less than $27.00 per share, may conditionally exercise
such options as part of the Offer and instruct First Chicago, as their agent, to
tender part or all of the Option Shares resulting from the exercise. This
exercise of options is "conditional" because the option holder is deemed to
exercise the option (and pay the exercise price) only if and to the extent that
the Company actually purchases the Option Shares in the Offer. If the Company
does not purchase an Option Share, the option for the Option Share will not be
deemed exercised and will remain outstanding (subject to adjustment as a result
of the Distributions). The Company will, as an accommodation to option holders
planning to tender Option Shares in the Offer, permit a "cashless" exercise of
such options. In this event, the consideration received by option holders whose
Option Shares are purchased in the Offer will be the difference between the
Offer Price and the exercise price relating to the Option Shares so purchased
(less applicable tax withholding). Option holders may also exercise vested but
unexercised options for cash in accordance with the terms of the Option Plan and
tender the Shares received upon exercise in accordance with the Offer. See
Section 1. Option holders (other than option holders who have exercised their
options for cash and received Shares) may not use the Letter of Transmittal to
direct the tender of the Option Shares. Instead, option holders must follow the
procedures for tender described in the separate materials on green paper
included herewith.
3. WITHDRAWAL RIGHTS
Shares tendered pursuant to the Offer may be withdrawn at any time prior to
the Expiration Date and, unless theretofore accepted for payment by the Company
as provided in this Offer to Purchase, may also be withdrawn after 12:00
Midnight, New York City time, on Tuesday, June 30, 1998.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary 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
Shares to be withdrawn, the number of Shares to be withdrawn and the name of the
registered holder, if different from that of the person who tendered such
Shares. If the certificates have been delivered or otherwise identified to the
Depositary, then, prior to the release of such certificates, the tendering
stockholder must submit the serial numbers shown on the particular certificates
evidencing the Shares to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case
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of Shares tendered by an Eligible Institution. If Shares have been tendered
pursuant to the procedure for book-entry transfer set forth in Section 2, the
notice of withdrawal must specify the name and the number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Shares and
otherwise comply with the procedures of such facility. All questions as to the
form and validity (including time of receipt) of notices of withdrawal will be
determined by the Company, in its sole discretion, which determination shall be
final and binding. None of the Company, the Dealer Manager, the Depositary, the
Information Agent or any other person shall be obligated to give any notice of
any defects or irregularities in any notice of withdrawal and none of them shall
incur any liability for failure to give any such notice. Any Shares properly
withdrawn will thereafter be deemed not tendered for purposes of the Offer.
However, withdrawn Shares may be retendered on or before the Expiration Date by
again following any of the procedures described in Section 2.
If, as a result of proration, the number of Shares to be purchased from any
stockholder making a conditional tender is reduced below the minimum number
specified by such stockholder, such tender will automatically be regarded as
withdrawn, provided that such Shares will be deemed retendered if selected by
lot for purchase in accordance with Section 1.
If the Company extends the Offer, is delayed in its purchase of Shares or is
unable to purchase Shares in the Offer for any reason, then, without prejudice
to the Company's rights under the Offer, the Depositary may, subject to
applicable law, retain on behalf of the Company all tendered Shares, and the
Shares may not be withdrawn except to the extent tendering stockholders are
entitled to withdrawal rights as described in this section.
The withdrawal rights described above also apply to holders who tender
Pledged Shares, ESPP Shares and Option Shares. However, holders of Pledged
Shares, ESPP Shares and Option Shares should refer to the Special Instructions
for such holders for details on how they can exercise their withdrawal rights.
4. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment as soon as practicable after the Expiration Date 37,037,037
Shares (or such other number of Shares as the Company may elect to purchase).
For purposes of the Offer, the Company will be deemed to have accepted for
payment (and thereby purchased), subject to proration, Shares that are tendered
and not withdrawn when, as and if the Company gives oral or written notice to
the Depositary of its acceptance of such Shares for payment in the Offer. The
date and time of such acceptance is referred to as the "Acceptance Date."
The Company will pay for Shares accepted in the Offer by depositing the
aggregate Offer Price for such Shares with the Depositary, which will, in turn,
send such payments to tendering stockholders. Payment for Pledged Shares
accepted in the Offer will be made to American Stock Transfer & Trust Company,
as agent, as described in the enclosed purple materials. Payment for ESPP Shares
accepted in the Offer will be made to the ESPP Agent and forwarded to the ESPP
participants as described in the enclosed gold materials. Payment for Option
Shares accepted in the Offer will be made to First Chicago, as agent for the
option holders, and forwarded to the option holders as described in the enclosed
green materials.
In the event of proration, the Company will determine the proration factor
and pay for those tendered Shares accepted for payment as soon as practicable
after the Expiration Date; however, the Company does not expect to be able to
announce the final results of any such proration until approximately five
business days after the Expiration Date and this determination may take longer.
Accordingly, the Company expects that payment for accepted Shares will not occur
until at least the seventh business day following the Expiration Date. If
determination of the final proration results for the Offer or the closing of the
Equity Investment is delayed, payment for accepted Shares will also be delayed.
The Company will not accept Shares tendered in the Offer unless and until the
conditions specified under Section 5 below have been satisfied. It is possible
that a definitive agreement relating to the Credit Facility or a definitive
agreement relating to the issuance of the Senior Subordinated Notes will not be
executed until after the Expiration
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Date, and this may delay acceptance. The Company will not pay for accepted
Shares until the closing of the Equity Investment. The closing of the Equity
Investment cannot occur until after the record date for the Distributions, and
the Company does not expect the record date for the Distributions to occur until
at least two business days after the final proration results, if any, for the
Offer are announced.
If the Company is delayed in its acceptance for payment of or payment for
Shares or is unable to accept for payment or pay for Shares pursuant to the
Offer for any reason, then, without prejudice to the Company's rights under the
Offer (but subject to compliance with Rule 14e-1(c) under the Exchange Act), the
Depositary may, nevertheless, on behalf of the Company, retain tendered Shares,
and such Shares may not be withdrawn except to the extent tendering holders are
entitled to exercise, and duly exercise, withdrawal rights as described in
Section 3.
Certificates for Shares not purchased, including Shares not purchased due to
proration or conditional tenders, will be returned (or, in the case of Shares
tendered by book-entry transfer, Shares will be credited to the account
maintained within the Book-Entry Transfer Facility by the participant therein
who so delivered such Shares) as soon as practicable after the Expiration Date
or termination of the Offer without expense to the tendering stockholder.
Certificates for Pledged Shares and ESPP Shares not purchased in the Offer will
be returned in the manner described in the Special Instructions. Under no
circumstances will interest be paid by the Company by reason of any delay in
paying for any Shares or otherwise. In addition, if certain events occur, the
Company may not be obligated to purchase Shares pursuant to the Offer. See
Section 5.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Shares purchased pursuant to the Offer, except if (i) payment
of the Offer Price is to be made to, or (ii) (in the circumstances permitted by
the Offer) Shares not tendered or not accepted for purchase are to be registered
in the name of any person other than the registered holder, or tendered
certificates are registered in the name of any person other than the person
signing the Letter of Transmittal. In such circumstances, the amount of all
stock transfer taxes, if any, payable on account of the transfer to such person
(whether imposed on the registered holder or such other person) will be deducted
from the Offer Price unless evidence satisfactory to the Company of the payment
of such taxes or exemption therefrom is submitted. See Instructions 6 and
7 of the Letter of Transmittal.
5. CERTAIN 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 (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 Offer), to pay for, and may
delay the acceptance for payment of or, subject to the restriction referred to
above, the payment for, any tendered Shares, and may amend the Offer consistent
with the terms of the Investment Agreement or terminate the 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) have not been satisfied.
The Minimum Condition will be satisfied if, at the Acceptance Date, a
minimum of 37,037,037 Shares have been validly tendered pursuant to the terms of
the 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 Offer Price for 37,037,037 Shares and
related costs and expenses of the 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 Offer and the
Distributions. See "The Strategic Restructuring Plan--Financing Transactions" in
Annex A.
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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 set forth in the Investment Agreement relating to consummation of
the Distributions and to consummation of the Offer. See "The Strategic
Restructuring Plan--Equity Investment" in Annex A.
The Distribution Condition shall 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 the consummation of the Offer) 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.
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 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 consummation of the 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 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 Offer, the Equity Investment
or the Distributions, or otherwise result in the consummation of the 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 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;
(v) (a) 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
(b) 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
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(c) 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 Shares 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 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.
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, except that (notwithstanding the
Company's ability to waive the Financing Condition) the Offer cannot be
completed if certain consents from lenders are not obtained. 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 5
shall be final and binding upon all persons.
6. EXTENSION OF THE OFFER; TERMINATION; AMENDMENTS
Upon the terms of the Offer, the Company will accept for exchange all Shares
validly tendered and not withdrawn prior to 12:00 Midnight, New York City time,
on Monday, June 1, 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 notice to the Depositary and by making a public
announcement by press release (which shall include disclosure of the approximate
number of Shares tendered) 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 Shares
previously tendered and not withdrawn will remain subject to the Offer.
The Company also expressly reserves the right, in its sole discretion, (i)
to delay payment for any Shares not theretofore paid for, or to terminate the
Offer and not to accept for payment any Shares not theretofore accepted for
payment, upon the occurrence of any of the conditions specified in Section 5 or
(ii) at any time or from time to time to amend the Offer in any respect (subject
to the provisions of the Investment Agreement), including increasing or
decreasing the number of Shares the Company may purchase or the price per Share
it may pay in the Offer.
Any such extension, delay, termination or amendment will be followed as
promptly as practicable by a public announcement thereof. Without limiting the
manner in which the Company may choose to make any public announcement, except
as provided by applicable law (including under Rule 13e-4(e) (2) under the
Exchange Act), the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service.
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If the Company makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, the Company will extend the Offer to the extent required by Rules
13e-4(d) (2) and 13e-4(e) (2) under the Exchange Act, which require that the
minimum period during which an offer must remain open following material changes
in the terms of the offer or information concerning the offer (other than a
change in price or a change in percentage of securities sought) will depend upon
the facts and circumstances, including the relative materiality of such terms or
information.
The Company confirms that its reservation of the right to delay payment for
Shares which it has accepted for payment is limited by Rule 13e-4(f) (5) under
the Exchange Act, which requires that an issuer pay consideration offered or
return the tendered securities promptly after the termination or withdrawal of a
tender offer. If (i) the Company increases or decreases the price to be paid for
Shares, or the Company increases the number of Shares being sought and such
increase in the number of Shares being sought exceeds 2% of the outstanding
Shares (excluding Option Shares), or the Company decreases the number of Shares
being sought and (ii) the Offer is scheduled to expire at any time earlier than
the expiration of a period ending on the tenth business day from, and including,
the date that notice of such increase or decrease, as the case may be, is first
published, sent or given, the Offer will be extended until the expiration of
such period of ten business days.
7. CERTAIN EFFECTS OF THE OFFER
Shares the Company acquires in the Offer will initially be held in the
Company's treasury or retired (or a combination thereof) and will be available
for the Company to issue without further stockholder action (except as required
by applicable law or the rules of the securities exchanges on which the Shares
are listed) for such purposes as, among others, the acquisition of other
businesses, the raising of additional capital for use in the Company's business,
the satisfaction of conversion requirements under securities issued by the
Company, the distribution of stock dividends and the implementation of, or the
satisfaction of obligations under, employee benefit plans. Except for the Equity
Investment and the issuance of Shares upon exercise of outstanding options or
upon conversion of outstanding notes, the Company has no present plans to use
any authorized but unissued or treasury Shares for any other purpose. See "The
Strategic Restructuring Plan" in Annex A. After the Distributions, the Company
may consider the acquisition of assets or businesses and, to the extent
available, treasury Shares may be used to make such an acquisition.
Shares other than Option Shares that are not tendered or not purchased in
the Offer will remain outstanding and will be eligible to receive the
Distributions, as described in "The Strategic Restructuring Plan--Spin-Off
Distributions" in Annex A. In addition, in connection with the Strategic
Restructuring Plan, after the Offer, the Company plans to complete a
one-for-four reverse stock split of its Shares (subject to stockholder
approval). Also, as a result of the Distributions, the Company will make
adjustments to options that are outstanding after the completion of the
Strategic Restructuring Plan. See "The Strategic Restructuring Plan--Adjustment
to Employee Stock Options" in Annex A.
The Company has no plans to acquire additional Shares. The Company may in
the future acquire Shares (in addition to those purchased in the Offer) on the
open market, in privately negotiated transactions, through tender offers,
mergers or otherwise, in such amounts, at such prices and at such times as the
Company may determine. Rule 13e-4 under the Exchange Act generally prohibits the
Company and its affiliates from purchasing any Shares, other than in the Offer,
until at least ten business days after the Expiration Date. The Company will not
purchase any additional Shares until at least ten business days after the
Expiration Date. Any possible future purchases by the Company will depend on
many factors, including the market price of the Shares, the Company's business
and financial position, alternative investment opportunities available to the
Company and general economic and market conditions. Any of these possible
purchases may be on the same terms as, or on terms more or less favorable than,
those of the Offer.
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In connection with the Strategic Restructuring Plan, the Company is offering
to purchase any and all of its 2003 Notes for cash and to exchange its 2001
Notes for Common Stock at a temporarily reduced conversion price. Shares issued
upon conversion of the 2001 Notes will be eligible to be tendered in the Offer
and, unless accepted by the Company for purchase in the Offer, to receive shares
of the Spin-Off Companies.
Directors and executive officers of the Company currently own beneficially
and of record in the aggregate approximately 5.1% of the outstanding Shares
(excluding Shares that can be acquired upon exercise of options). Directors and
executive officers of the Company currently hold options exercisable for
approximately 6.3 million Shares, of which options with respect to approximately
2.3 million Shares are currently exercisable or are exercisable within 60 days
of the date of this Offer to Purchase.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
ANY HOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY OR ALL OF SUCH
HOLDER'S SHARES AND NEITHER HAS AUTHORIZED ANY PERSON TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS ARE URGED TO EVALUATE CAREFULLY ALL INFORMATION IN THE
OFFER, CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS AND MAKE THEIR OWN
DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE
COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR
THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES IN THE
OFFER.
The Company's purchase of Shares in the Offer will reduce the number of
Shares that might otherwise trade publicly. Nonetheless, it is expected that
there will still be a sufficient number of Shares outstanding and publicly
traded following the consummation of the Offer to ensure a continued trading
market in the Shares. Based on the published guidelines of Nasdaq, the Company
believes that the purchase by the Company of Shares in the Offer will not cause
its remaining Shares to be ineligible for quotation on Nasdaq.
The Shares are currently "margin securities" under the rules of the Federal
Reserve Board. This has the effect, among other things, of allowing brokers to
extend credit on the collateral of the Shares. The Company expects that,
following the repurchase of Shares in the Offer, the Shares will continue to be
"margin securities" for purposes of the Federal Reserve Board's margin
regulations. Eligibility for treatment as margin securities will, however,
continue to depend on maintenance of minimum daily trading volume.
The Shares are registered under the Exchange Act which requires, among other
things, that the Company furnish certain information to its stockholders and to
the Commission and comply with the Commission's proxy rules in connection with
meetings of the Company's stockholders. The purchase by the Company of Shares in
the Offer will not result in the Shares becoming eligible for deregistration
under the Exchange Act.
8. PRICE RANGE OF SHARES; DIVIDENDS
The Shares are qualified for inclusion on Nasdaq. The following table sets
forth for the periods indicated the high ask and low bid prices per Share as
reported on Nasdaq as compiled from published
17
<PAGE>
financial sources. On November 6, 1997, the Company effected a three-for-two
split of the Shares. 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 $ 16.38
FISCAL YEAR ENDING APRIL 24, 1999
First Fiscal Quarter (through May 1, 1998)................................. $ 18.50 $ 16.19
</TABLE>
On January 12, 1998, the last full trading day prior to the announcement of
the Offer, the closing price as reported on Nasdaq was $17 3/4 per share. On May
1, 1998, the last full trading day prior to the commencement of the Offer, the
closing price was $17 15/16 per share. HOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE SHARES.
The Company has not declared or paid any cash dividends on the Shares to
date and presently has no plans to declare or pay any cash dividends.
9. SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by the Company to purchase 37,037,037
Shares in the Offer is estimated to be approximately $930 million (assuming 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 Offer). The Company
intends to obtain such funds as shown in the table below.
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<PAGE>
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. For a description of the
Financing Transactions see "The Strategic Restructuring Plan--Financing
Transactions" in Annex A.
<TABLE>
<CAPTION>
(IN
MILLIONS)
------------
<S> <C>
Sources of Funds:
Senior Subordinated Notes......................................................................... $ 400.0
Revolving Credit Facility......................................................................... --
Tranche A Term Loan Facility...................................................................... 72.4
Tranche B Term Loan Facility...................................................................... 675.0
Equity Investment................................................................................. 270.0
Debt Repayments by Spin-Off Companies(1).......................................................... 115.0
Available Cash.................................................................................... 22.6
------------
Total............................................................................................... $ 1,555.0
------------
------------
Uses of Funds:
Offer(2).......................................................................................... $ 930.0
Repayment of Existing Credit Facility............................................................. 332.6
2003 Note Offer(3)................................................................................ 217.4
Estimated Fees and Expenses(4).................................................................... 75.0
------------
Total............................................................................................... $ 1,555.0
------------
------------
</TABLE>
- ------------------------
(1) 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.
(2) 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
Offer. Total consideration paid in the Offer will depend on the number of
Option Shares tendered and the exercise prices of the options underlying
such Option Shares.
(3) Assumes that all outstanding 2003 Notes are repurchased in the 2003 Note
Offer at 94.5% of the principal amount of such Notes.
(4) 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 2001 Notes are exchanged for shares of its
Common Stock in the 2001 Note Offer and all 2003 Notes are accepted for purchase
in the 2003 Note Offer. Any 2001 Notes and 2003 Notes that remain outstanding
will increase the amount of outstanding debt.
For a description of the risks arising from the Company's increased 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.
19
<PAGE>
10. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE SHARES
Except as described herein, neither the Company, nor any executive officer
or director of the Company, any person controlling the Company, any executive
officer or director of any person controlling the Company or any associate or
subsidiary of any such person (including any executive officer or director of
any such subsidiary), has engaged in any transaction involving Shares during the
forty business days prior to the date hereof. On April 22, 1998, Michael
Dooling, a director of the Company, exercised options for 26,980 Shares with an
exercise price of $6.12 per Share.
Except as described in this Offer to Purchase (including Annex A hereto),
neither the Company nor, to the Company's knowledge, any of its executive
officers, directors or affiliates, is a party to any contract, arrangement,
understanding or relationship relating, directly or indirectly, to the Offer
with any other person with respect to Shares. Except as disclosed herein, none
of the Company or its executive officers or directors has current plans or
proposals which relate to or would result in any extraordinary corporate
transaction involving the Company, such as a merger, reorganization, sale or
transfer of a material amount of its assets or the assets of any of its
subsidiaries, any change in its present Board of Directors or management, any
material change in its present dividend policy or indebtedness or
capitalization, any other material change in its business or corporate
structure, any material change in its Certificate of Incorporation or Bylaws, or
any actions causing a class of its equity securities to become eligible for
termination of registration pursuant to Section 12(g) (4) of the Exchange Act,
or the suspension of the Company's obligation to file reports pursuant to
Section 15 (d) of the Exchange Act, or any actions similar to any of the
foregoing.
The Company has been advised that its directors and executive officers,
except for its Chief Executive Officer, Thomas Morgan, intend to tender Shares
in the Offer.
11. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS
The Company is not aware of any license or regulatory permit that it
believes is material to the Company's business that might be adversely affected
by the Company's acquisition of Shares as contemplated herein or of any approval
or other action by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, that would be required for the
acquisition or ownership of Shares by the Company as contemplated herein. Should
any such approval or other action be required, the Company will make a good
faith effort to obtain such approval or other action. The Company is unable to
predict whether it will be required to delay the acceptance for payment of, or
payment for, Shares tendered pursuant to the Offer pending the outcome of any
such matter. There can be no assurance that any such approval or other action,
if needed, would be obtained or would be obtained without substantial
consideration or that the failure to obtain any such approval or other action
might not result in adverse consequences to the Company's business. The
Company's obligations under the Offer to accept for payment and pay for Shares
are subject to certain conditions. See Section 5.
On April 14, 1998, a stockholder purporting to represent a class composed of
all stockholders of the Company filed an action in the Delaware Chancery Court.
The action claims that the directors breached their fiduciary duty to the
stockholders of the Company by changing the terms of the Offer to include Option
Shares. The complaint seeks injunctive relief, damages, and attorneys fees. The
Company believes that this lawsuit is without merit and intends to vigorously
contest it.
12. U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary is a general discussion of the material U.S. federal
income tax consequences of the Offer. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, rulings, and
judicial decisions as of the date hereof, all of which may be repealed, revoked,
or modified so as to result in U.S. federal income tax consequences different
from those described below. Such changes could be applied retroactively in a
manner that could adversely affect a stockholder. In
20
<PAGE>
addition, the authorities on which the summary are based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the Offer differs from the treatment described below. No ruling as
to any of the matters discussed in this summary has been requested or received
from the IRS.
EACH HOLDER IS URGED TO CONSULT AND RELY ON THE HOLDER'S OWN TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES TO THE HOLDER OF TENDERING SHARES PURSUANT
TO THE OFFER.
IN GENERAL. A U.S. stockholder's exchange of Shares for cash pursuant to
the Offer will be a taxable transaction for U.S. federal income tax purposes,
and may also be a taxable transaction under applicable state, local, or foreign
tax laws. This summary does not discuss any aspects of state, local or foreign
tax laws. Except as provided under the heading "Non-U.S. Stockholders" this
summary applies only to U.S. stockholders who hold their Shares as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code. For this purpose, a U.S. Stockholder is (i) a citizen or
resident of the United States (including certain former citizens and former
residents), (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof
(other than any partnership treated as foreign under Treasury regulations),
(iii) any estate the income of which is subject to United States federal income
taxation regardless of the source of such income, or (iv) a trust with respect
to the administration of which a court within the United States is able to
exercise primary supervision and which has one or more United States persons,
who have the authority to control all substantial decisions of the trust.
Certain stockholders (including dealers in securities or currencies, financial
institutions, insurance companies, persons holding Shares as part of a hedging
or conversion transaction or a straddle, and persons whose "functional currency"
is not the U.S. dollar) may be subject to special rules not discussed below.
Certain U.S. federal income tax consequences to holders of Pledged Shares, ESPP
Shares and Option Shares are described separately below. In addition, a
stockholder that purchased Shares through the ESPP that no longer holds the
Shares in an ESPP account should review the discussion of tax consequences for
holders of ESPP Shares below.
TREATMENT AS A SALE OR EXCHANGE. Under Section 302 of the Code, a tendering
stockholder's sale of Shares to the Company pursuant to the Offer will, as a
general rule, be treated as a "sale or exchange" of the Shares by the
stockholder if the receipt of cash upon the sale (i) is "substantially
disproportionate" with respect to the stockholder, (ii) results in a "complete
termination" of the stockholder's interest in the Company or (iii) is "not
essentially equivalent to a dividend" with respect to the stockholder. These
tests (the "Section 302 Tests") are explained more fully below. No assurances
can be given that any of the Section 302 Tests will be satisfied as to any
particular stockholders.
If a tendering stockholder's sale of Shares to the Company pursuant to the
Offer is treated as a sale or exchange, the stockholder will recognize capital
gain or loss equal to the difference between the amount of cash received by the
stockholder pursuant to the Offer and the stockholder's adjusted tax basis in
the Shares sold pursuant to the Offer. While a stockholder will recognize
long-term capital gain or loss if, at the time of such disposition, the
stockholder's holding period for the Shares is more than one year, the lowest
capital gain rates will apply to an individual stockholder only if such
stockholder's holding period for the Shares is more than eighteen months at the
time of disposition.
Gain or loss must be determined separately for each block of Shares (i.e.
Shares acquired at the same cost in a single transaction) that a stockholder
tenders pursuant to the Offer. Each stockholder is permitted to designate which
blocks of Shares are tendered pursuant to the Offer if less than all of such
stockholders' Shares are tendered, and the order in which different blocks would
be exchanged for cash in the event of proration pursuant to the Offer. Such
designation must be made on the Letter of Transmittal. Stockholders should
consult their tax advisors concerning the mechanics and desirability of such a
designation.
21
<PAGE>
TREATMENT AS A DIVIDEND. If none of the Section 302 Tests is satisfied,
cash received by a tendering stockholder pursuant to the Offer will be treated
as a dividend distribution, taxable as ordinary income to the extent of the
Company's current and accumulated earnings and profits, as determined for
federal income tax purposes. Any distribution in excess of current and
accumulated earnings and profits will be treated first as a nontaxable return of
capital reducing the stockholder's adjusted tax basis in his or her remaining
Shares. Any distribution in excess of the stockholder's basis in his or her
remaining Shares will be treated as gain from the sale or exchange of the
Shares.
THE SECTION 302 TESTS. A tendering stockholder must satisfy one of the
Section 302 Tests in order for the stockholder's sale of Shares pursuant to the
Offer to be treated as a sale or exchange as described above under the heading
"Treatment as a Sale or Exchange" rather than as a distribution taxable under
the rules summarized above under the caption "Treatment as a Dividend." In
determining whether any of the Section 302 Tests are satisfied, a stockholder
must take into account not only Shares actually owned by the stockholder, but
also Shares that are treated as owned by the stockholder under the constructive
ownership rules. Pursuant to the constructive ownership rules, a stockholder may
constructively own Shares that are actually owned, and in some cases that are
constructively owned, by certain related individuals and certain related
entities, as well as any Shares that the stockholder has a right to acquire by
exercise of an option or by the conversion or exchange of a security. It is
unclear whether Shares constructively owned by a stockholder by reason of such
stockholder's right to acquire the Shares from the Company are to be considered
outstanding for purposes of applying the Section 302 Tests to other
stockholders.
A. SUBSTANTIALLY DISPROPORTIONATE TEST. The "substantially
disproportionate" test is satisfied, with respect to a stockholder, if the
percentage of the outstanding Shares actually and constructively owned by
the stockholder immediately following the sale of Shares pursuant to the
Offer (treating Shares sold pursuant to the Offer as not outstanding) is
less than 80% of the percentage of the outstanding Shares actually and
constructively owned by the stockholder immediately before the sale
(treating Shares sold pursuant to the Offer as outstanding).
B. COMPLETE TERMINATION TEST. The "complete termination" test is
satisfied, with respect to a stockholder, if all of the Shares actually and
constructively owned by the stockholder are sold pursuant to the Offer. In
determining whether a stockholder's interest in the Company is completely
terminated, a stockholder may be eligible to waive certain constructive
ownership rules.
C. NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND TEST. The "not essentially
equivalent to a dividend" test is satisfied, with respect to a stockholder,
if the stockholder's sale of Shares pursuant to the Offer results in a
"meaningful reduction" of the stockholder's proportionate interest in the
Company. Whether the sale of Shares by a stockholder will result in a
meaningful reduction of the stockholder's proportionate interest will depend
on the stockholder's particular facts and circumstances. However, in the
case of a small minority stockholder, even a small reduction may satisfy
this test. The IRS has indicated in a published ruling that, in the case of
a small minority stockholder of a publicly-held corporation who exercises no
meaningful control over corporate affairs, a reduction in the stockholder's
proportionate interest in the corporation from .0001118% to .0001081% (which
represented a 3.3% reduction in the stockholder's percentage ownership of
outstanding shares for purposes of the substantially disproportionate test)
would constitute a meaningful reduction.
Stockholders should be aware that, because proration may occur as to Shares
tendered pursuant to the Offer, fewer than all of the tendered Shares may be
purchased in the Offer. This must be taken into account in determining whether a
stockholder is able to satisfy one of the Section 302 Tests. Stockholders should
consult their tax advisors concerning the application of the Section 302 Tests
to their particular circumstances. SEE SECTION 2 FOR INFORMATION REGARDING EACH
STOCKHOLDER'S OPTION TO MAKE A CONDITIONAL TENDER OF A MINIMUM NUMBER OF SHARES.
A STOCKHOLDER WHO DECIDES TO MAKE A CONDITIONAL TENDER IS URGED TO CALCULATE THE
MINIMUM NUMBER OF SHARES THAT THE STOCKHOLDER MUST TENDER TO ASSURE THAT ONE OF
THE SECTION 302 TESTS IS SATISFIED IN CONSULTATION WITH HIS TAX ADVISOR.
22
<PAGE>
Under certain circumstances, it may be possible for a tendering stockholder
to satisfy one of the Section 302 Tests by contemporaneously selling or
otherwise disposing of all or some of the Shares that are actually or
constructively owned by the stockholder but that are not exchanged pursuant to
the Offer. Correspondingly, a stockholder may not be able to satisfy any of the
Section 302 Tests because of contemporaneous acquisitions of Shares by the
stockholder or by a related party whose Shares are constructively owned by the
stockholder or because the stockholder also holds options to purchase common
stock of the Company. Stockholders should consult their tax advisors regarding
the consequences of such sales or acquisitions, and the effect of holding
options, in their particular circumstances.
SPECIAL RULES FOR CORPORATE STOCKHOLDERS. If the sale of Shares by a
corporate stockholder does not satisfy any of the Section 302 Tests and is
treated as a dividend, the stockholder may be entitled to a dividends-received
deduction equal to 70% of the payment for the Shares. There are a number of
limitations on the availability of the dividends-received deduction, however.
Section 246(c) of the Code disallows the dividends-received deduction with
respect to stock (i) that is held for 45 days or less during the 90-day period
beginning 45 days before the ex-dividend date, or (ii) if the stockholder is
under an obligation to make related payments with respect to positions in
substantially similar or related property. For this purpose, a stockholder's
holding period is suspended during any period in which the stockholder has an
option to sell, is under a contractual obligation to sell, has made (and not
closed) a short sale of, or has granted an option to buy, substantially
identical stock or securities or holds one or more positions with respect to
substantially similar or related property that diminish the risk of loss from
holding the Shares. Finally, because the Company's payments of cash pursuant to
the Offer will probably not be pro rata with respect to all of the outstanding
Shares, any amount that is received by a corporate stockholder that is treated
as a dividend will probably constitute an "extraordinary dividend" under Section
1059 of the Code. As a result, a corporate stockholder will be required to
reduce its tax basis in its Shares (but not below zero) by the nontaxed portion
of the dividend (that is, the portion of the dividend equal to the dividends-
received deduction). If the non-taxed portion of the dividend exceeds the
corporate stockholder's tax basis in its Shares, the excess must be treated as
gain from the sale of the Shares for the taxable year in which the dividend is
received. However, if a redemption of Shares from a corporate stockholder
pursuant to the Offer is treated as a dividend as a result of the stockholder's
constructive ownership of other Shares that it has an option or other right to
acquire, the nontaxed portion of the extraordinary dividend will reduce the
stockholder's tax basis only in its Shares sold pursuant to the Offer, and any
excess of such nontaxed portion over such basis would be taxable as gain on the
sale of such Shares in the taxable year in which the dividend is received.
BACKUP WITHHOLDING. Payments in connection with the Offer will be subject
to "backup withholding" at a 31% rate unless the stockholder is (a) an entity
that is exempt from withholding (including corporations, foreign stockholders,
tax-exempt organizations and certain qualified nominees) or (b) provides the
Depositary with its taxpayer identification number ("TIN"), certifies that the
TIN provided is correct and provides certain other information by completing the
Substitute Form W-9 included in the Letter of Transmittal. A stockholder who
does not provide the Depositary with his or her correct TIN may be subject to
interest and penalties. To prevent backup withholding, each stockholder should
complete the Substitute Form W-9 included in the Letter of Transmittal.
Stockholders should consult their tax advisors regarding their qualification for
exemption from backup withholding.
NON-U.S. STOCKHOLDERS. The Company will assume that a sale pursuant to the
Offer is a dividend as to non-U.S. stockholders (as defined below) and the
Depositary will therefore withhold federal income tax at a rate equal to 30% of
the gross proceeds paid to a non-U.S. stockholder or his agent pursuant to the
Offer, unless the Depositary determines that a reduced rate of withholding is
available pursuant to a tax treaty or that an exemption from withholding is
applicable because the gross proceeds are effectively connected with the conduct
of a trade or business by the foreign stockholder within the United States. For
this purpose, a foreign stockholder is any stockholder that is not (i) a citizen
or resident of the United States (including certain former citizens and former
residents), (ii) a corporation, partnership or other
23
<PAGE>
entity created or organized in or under the laws of the United States or any
political subdivision thereof (other than any partnership treated as foreign
under Treasury regulations), (iii) any estate the income of which is subject to
United States federal income taxation regardless of the source of such income,
or (iv) a trust with respect to the administration of which a court within the
United States is able to exercise primary supervision and which has one or more
United States persons, who have the authority to control all substantial
decisions of the trust.
Under current Treasury regulations, dividends paid to an address outside the
United States are presumed to be paid to a resident of such country for purposes
of withholding. Therefore, the Depositary will determine the applicable rate of
withholding by reference to a stockholder's address and any IRS Form 1001
submitted to the Depositary, unless the facts and circumstances indicate that
such reliance is not warranted or if applicable law (such as an applicable
treaty or regulations thereunder) requires some other method for determining a
stockholder's residence.
To claim an exemption from withholding on the grounds that gross proceeds
paid pursuant to the Offer are effectively connected with the conduct of a trade
or business within the United States, the non-U.S. stockholder must deliver to
the Depositary a properly executed statement on IRS Form 4224 claiming such
exemption. If the gross amounts are effectively connected with the conduct of a
trade or business by the non-U.S. stockholder within the United States, the
gross amounts (as adjusted by any applicable deductions) would be subject to
United States federal income tax at regular graduated rates and would be exempt
from the 30% withholding tax described above. In addition, if such non-U.S.
stockholder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% (or such lower rate provided by applicable treaty) of its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments.
A non-U.S. stockholder with respect to whom tax has been withheld will not
be subject to U.S. federal income tax backup withholding, and may be eligible to
obtain a refund of all or a portion of the withheld tax if the stockholder
satisfies one of the Section 302 Tests for capital gain treatment or is
otherwise able to establish that no tax or a reduced amount of tax was due.
Non-U.S. stockholders are urged to consult their own tax advisers regarding the
application of United States federal income tax withholding, including
eligibility for a withholding tax reduction or exemption and the refund
procedure.
TAX CONSIDERATIONS FOR STOCKHOLDERS WHO DO NOT TENDER SHARES
Stockholders (including owners of Pledged Shares, ESPP Shares and options)
who do not tender any Shares or Option Shares will not incur any tax liability
as a result of the Offer.
TAX CONSIDERATIONS FOR HOLDERS OF PLEDGED SHARES, ESPP SHARES AND OPTION
SHARES
PLEDGED SHARES. Stockholders who own Pledged Shares will have the same tax
consequences as otherwise similarly situated stockholders, as described above.
If any of the Section 302 Tests are satisfied, the U.S. federal income tax
consequences to an owner of Pledged Shares will be as described under the
heading "Treatment as a Sale or Exchange." If none of the Section 302 Tests is
satisfied, the tax consequences to an owner of Pledged Shares will be as
described under the heading "Treatment as a Dividend." However, the cash
received in the Offer by owners of Pledged Shares will be held in an account by
American Stock Transfer & Trust Company on behalf of the Company. As a result,
stockholders whose Pledged Shares are exchanged in the Offer will not be able to
use the cash received to pay any resulting tax liability.
ESPP SHARES. All ESPP Shares were purchased at 85% of the then-current
trading price of the Company's Shares. This 15% discount will be referred to as
the "Bargain Amount." The difference between the amount received in the Offer
and the purchase price of the ESPP Shares (including the Bargain Amount) will be
referred to as the "Gain Amount." If the ESPP Shares exchanged in the Offer were
purchased in or before the Company's fiscal quarter that ended on July 27, 1996,
a holder of ESPP
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<PAGE>
Shares will be treated as having received compensation income in an amount equal
to the lesser of the Bargain Amount or the Gain Amount. Such income will be
taxed to the stockholder at ordinary income rates and will be subject to
withholding for U.S. federal income and employment taxes by the Company. If the
Gain Amount exceeds the Bargain Amount, the excess will be taxed to the holders
of ESPP Shares as described under the heading "Treatment as a Sale or Exchange"
if any of the Section 302 Tests are satisfied and as described under the heading
"Treatment as a Dividend" if none of the Section 302 Tests is satisfied.
If the ESPP Shares tendered and accepted in the Offer were purchased in a
fiscal quarter of the Company that began after July 27, 1996, the full Gain
Amount will be treated as compensation income to the stockholder. Such income
will be taxed to the stockholder at ordinary income rates and will be subject to
withholding for U.S. federal income and employment taxes by the Company.
OPTION SHARES. An option holder who receives cash in the Offer in exchange
for Option Shares from either unvested or vested options (including any
incentive stock options under the Mail Boxes Etc. option plans) will be treated
as receiving compensation income per Share sold equal to the excess of the Offer
Price over the exercise price per Share of the options from which the Option
Shares are sold in the Offer. Such income will be taxed to the option holder at
ordinary income rates and, for current and former employees, will be subject to
withholding for income and employment taxes.
In addition, incentive stock options under the Mail Boxes Etc. option plans
that have an exercise price that is lower than the trading price of the Company
Common Stock on the Expiration Date may no longer qualify as incentive stock
options if they are tendered and not accepted due to proration. (As noted above,
all Option Shares actually accepted will be treated the same without regard to
whether the options were incentive stock options.) The IRS may also take the
position that all incentive stock options that have an exercise price that is
lower than the trading price of the Company Common Stock on the Expiration Date,
even if not tendered in the Offer, will no longer qualify as incentive stock
options as a result of the Offer, because they could have been tendered.
Generally, an option holder is not taxed on the exercise of an incentive stock
option if the holder satisfies certain holding period requirements (these
holding period requirements will not be satisfied if an option holder receives
cash in the offer). However, if an option holder's incentive stock option no
longer qualifies as an incentive stock option, the option holder will have
compensation income at the time the option is exercised in an amount equal to
the difference between the fair market value of the stock on the date of
exercise and the exercise price. Furthermore, special tax rules may apply to
stockholders who receive cash in the Offer in exchange for Shares that were
acquired through the prior exercise of incentive stock options. Holders of
incentive stock options or Shares that were acquired through the exercise of
incentive stock options should consult their tax advisors with respect to the
tax consequences of the Offer.
13. FEES AND EXPENSES
Morgan Stanley has been retained by the Company to act as Dealer Manager in
connection with the Offer. Morgan Stanley has served as financial advisor to the
Board of Directors of the Company in connection with the Board of Directors'
consideration of the Strategic Restructuring Plan and the Company has agreed to
pay Morgan Stanley a transaction fee upon consummation of the transactions
comprising the Strategic Restructuring Plan. See "The Strategic Restructuring
Plan--Opinion of Financial Advisor" in Annex A. Morgan Stanley will receive no
additional fee for its services as Dealer Manager. The Company has agreed to
reimburse Morgan Stanley for certain reasonable out-of-pocket expenses incurred
in connection with the Offer, including fees and disbursements of counsel, and
to indemnify Morgan Stanley against certain liabilities, including certain
liabilities arising under the federal securities laws. Morgan Stanley is also
serving as a placement agent in the Subordinated Debt Offering and as a co-
manager for the equity offering by Workflow Management, Inc. See "The Strategic
Restructuring Plan-- Spin-Off Distributions" in Annex A.
25
<PAGE>
The Company has retained MacKenzie Partners, Inc. to act as Information
Agent and First Chicago to act as Depositary in connection with the Offer. The
Information Agent may contact holders of Shares by mail, telephone, telex,
telegraph and personal interviews and may request brokers, dealers and other
nominee stockholders to forward materials relating to the Offer to beneficial
owners. The Company also has retained First Chicago to act as agent for holders
tendering Option Shares and Pledged Shares in the Offer and American Stock
Transfer & Trust Company to act as agent for holders tendering ESPP Shares in
the Offer. The Information Agent, First Chicago and American Stock Transfer &
Trust Company will each receive reasonable and customary compensation for their
respective services, will be reimbursed for certain reasonable out-of-pocket
expenses and will be indemnified against certain liabilities and expenses in
connection with the Offer, including certain liabilities arising under the
federal securities laws. None of the Dealer Manager, First Chicago, the
Information Agent or American Stock Transfer & Trust Company has been retained,
or is authorized, to make recommendations in connection with the Offer.
The Company will not pay any fees or commissions to any broker or dealer or
any other person (other than the Dealer Manager, the Information Agent, First
Chicago and American Stock Transfer & Trust Company) for soliciting tenders of
Shares pursuant to the Offer. Brokers, dealers, commercial banks and trust
companies will, upon request, be reimbursed by the Company for reasonable and
necessary costs and expenses incurred by them in forwarding materials to their
customers.
14. MISCELLANEOUS
The Company is not aware of any jurisdiction in which the making of the
Offer or the acceptance for payment of Shares in connection therewith would not
be in compliance with the laws of such jurisdiction. If the Company becomes
aware of any jurisdiction where the making of the Offer would not be in
compliance with such laws, the Company will make a good faith effort to comply
with 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 laws, the
Offer will not be made to, nor will tenders be accepted from or on behalf of,
holders of Shares in any such jurisdictions.
U.S. OFFICE PRODUCTS COMPANY
May 4, 1998
26
<PAGE>
ANNEX A
CERTAIN INFORMATION CONCERNING
THE STRATEGIC RESTRUCTURING PLAN, THE COMPANY AND INVESTOR
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THE STRATEGIC RESTRUCTURING PLAN........................................................................... 1
Equity Self-Tender..................................................................................... 1
Spin-Off Distributions................................................................................. 1
Equity Investment...................................................................................... 3
Background of and Reasons for the Equity Investment.................................................... 6
Reverse Stock Split.................................................................................... 8
Financing Transactions................................................................................. 8
Agreements with Jonathan Ledecky....................................................................... 9
Adjustment to Employee Stock Options................................................................... 11
Opinion of Financial Advisor........................................................................... 12
Information About the Board of Directors After the Equity Investment................................... 16
U.S. Federal Income Tax Consequences of the Distributions.............................................. 20
RISK FACTORS............................................................................................... 23
THE BUSINESS OF U.S. OFFICE PRODUCTS AFTER THE RESTRUCTURING............................................... 30
Company Overview....................................................................................... 30
Market Overview........................................................................................ 31
Business Strategies.................................................................................... 32
North American Office Products Group................................................................... 33
Operations Outside of North America.................................................................... 36
Mail Boxes Etc. ....................................................................................... 38
Competition............................................................................................ 39
Employees.............................................................................................. 40
Properties............................................................................................. 40
EXHIBIT 1--OPINION OF MORGAN STANLEY & CO. INCORPORATED.................................................... A-1
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
------------------------
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
Subordinate 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.
<PAGE>
THE STRATEGIC RESTRUCTURING PLAN
EQUITY SELF-TENDER
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 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.
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. 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 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.
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.
1
<PAGE>
- 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 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
2
<PAGE>
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 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
3
<PAGE>
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).
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
4
<PAGE>
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 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.
Investor is a newly-formed Delaware limited liability company organized in
connection with the transactions contemplated by the Investment Agreement. The
sole member of Investor is Clayton, Dubilier & Rice Fund V Limited Partnership
("CDR Fund V"). CDR Fund V, a Cayman Islands exempted limited partnership, is a
private investment fund managed by CD&R. Amounts contributed to CDR Fund V by
its limited partners are invested at the discretion of the general partner in
equity or equity-related securities of entities formed to effect leveraged
acquisition transactions and in the equity of corporations where the infusion of
capital, coupled with the provision of managerial assistance by CD&R, can be
expected to generate returns on investments comparable to returns historically
achieved in leveraged acquisition transactions. The principal executive offices
of Investor and CDR Fund V are 1403 Foulk Road, Suite 106, Wilmington, Delaware
19803.
Set forth below is certain historical financial information of CDR Fund V,
the parent of Investor, for the years ended December 31, 1996 and 1997 and as at
December 31, 1997. The information was derived from the audited financial
statements of CDR Fund V which have been audited by Richard A. Eisner & Company,
LLP. The information set forth below should be read together with such audited
financial statements and related notes included in the Tender Offer Statement on
Schedule 14D-1 filed with the Securities and Exchange Commision in connection
with the Equity Self-Tender. See "Available Information" in the Offer to
Purchase.
5
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Interest income........................................................... $ 105,305 $ 519,600
-------------- --------------
Net investment loss....................................................... (12,742,325) (12,888,446)
Net unrealized appreciation (depreciation) on investments................. 70,222,058 (33,750,000)
-------------- --------------
Net income (loss)......................................................... $ 57,479,733 $ (46,638,446)
-------------- --------------
-------------- --------------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Investment in leveraged buyouts, at fair value............................. $ 480,643,790
Cash and cash equivalents.................................................. 1,303,270
Total assets............................................................... 486,628,721
Partners' capital.......................................................... 482,140,192
</TABLE>
BACKGROUND OF AND REASONS FOR THE EQUITY INVESTMENT
U.S. Office Products' Board of Directors and management have from time to
time considered strategic alternatives to improve U.S. Office Products'
operational performance and enhance stockholder value. In September 1997, CD&R
outlined to management the general terms of a possible transaction involving the
sale of common stock and warrants, a repurchase of common stock, and the
spin-off of certain businesses. The Board of Directors decided at a special
meeting on October 1, 1997 not to pursue the CD&R proposal. Management advised
CD&R of the Board's decision, and discussions ceased.
In December 1997, CD&R advised U.S. Office Products' management that it
remained interested in investing in U.S. Office Products. On December 17, 1997,
the Board of Directors authorized management to undertake discussions with CD&R
to determine whether a transaction could be structured on acceptable terms. Two
significant developments contributed to the Board's decision in December 1997 to
pursue CD&R's proposal after deciding not to pursue the transaction on October
1, 1997. First, in November 1997 Jonathan Ledecky advised the Board that he
intended to step down as Chief Executive Officer of U.S. Officer Products. The
Board of Directors decided to name Thomas Morgan as the new Chief Executive
Officer. With the change in leadership, it became apparent to the Board that
U.S. Office Products would begin more quickly to transition toward a new stage
of development, less reliant on acquisitions and more focused on operational
efficiencies and organic growth. The Board felt that CD&R's operational
expertise could help with this transition. Second, the price of U.S. Office
Products' common stock declined steadily from the mid-twenties in the beginning
of October, to the mid-teens by the middle of December. This happened despite
the fact that U.S. Office Products, in early December, announced record earnings
and its eleventh consecutive quarter of exceeding market estimates on its
performance. As a result, management and the directors considered whether U.S.
Office Products needed to simplify operations so that investors could more
readily value U.S. Office Products' common stock. Moreover, the Board took into
account that CD&R did not change the pricing of its proposal in December,
despite the drop in the price of U.S. Office Products' common stock.
Thereafter, U.S. Office Products, with the assistance of its financial
adviser, Morgan Stanley, negotiated with CD&R on the terms of the Equity
Investment. They also discussed with CD&R the other elements of the Strategic
Restructuring Plan. As a result of this process, the Board of Directors approved
the Strategic Restructuring Plan and the Investment Agreement on January 12,
1998.
Following announcement of the Strategic Restructuring Plan, management, in
consultation with CD&R, regularly reviewed the progress of the Strategic
Restructuring Plan and issues related to the Strategic Restructuring Plan. In
February, the Board authorized management to implement certain modifications to
the Strategic Restructuring Plan, including underwritten public offerings by the
Spin-Off Companies. Based on additional financial analysis, management also
recommended that U.S. Office
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<PAGE>
Products make the 2001 Note Exchange Offer and the 2003 Note Tender. The Board
subsequently decided to make the 2001 Note Exchange Offer and the 2003 Note
Tender in order to reduce the potential dilution created by the 2001 Notes and
2003 Notes and to reduce the need to refinance this debt before maturity of U.S.
Office Products' new debt.
In addition, management, together with CD&R, subsequently recommended that
U.S. Office Products modify the terms of the Equity Self-Tender to include
shares underlying stock options. The Board, after receiving oral confirmation
from Morgan Stanley that this change would not affect their January 12, 1998
written opinion as to the fairness from a financial point of view of the
transactions comprising the Strategic Restructuring Plan (see "--Opinion of
Financial Advisor"), decided to include shares underlying both vested and
unvested options in the Equity Self-Tender in order to reduce the substantial
potential dilution and future claims on the equity value of U.S. Office Products
and the Spin-Off Companies represented by the employee stock options. The Board
concluded that U.S. Office Products could decline to adjust the options for the
effect of the Equity Self-Tender if the options were included in the Equity
Self-Tender, further reducing potential dilution. The Board also considered
CD&R's willingness to agree with U.S. Office Products' proposal on the
allocation of transaction expenses and certain other matters between U.S. Office
Products and the Spin-Off Companies if vested and unvested options were included
in the Equity Self-Tender. Two directors abstained with respect to including
shares underlying options in the Equity Self-Tender. For information regarding
the Board's reasons for the Equity Self-Tender, see "-- Equity Self-Tender."
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.
The Board approved the Equity Investment as part of the Strategic
Restructuring Plan. In considering the Strategic Restructuring Plan, the Board
took into account a number of considerations, including the opinion of Morgan
Stanley (see "--Opinion of Financial Advisor"); the Board's determination that
there were operational advantages to separating the businesses of the Spin-Off
Companies from U.S. Office Products' core businesses; that the recent trading
prices of U.S. Office Products' common stock did not, in the Board's view,
adequately reflect the underlying values of U.S. Office Products' businesses;
and that U.S. Office Products' remaining operations would benefit from the
assistance and support of CD&R.
The Board concluded that the Equity Investment would benefit U.S. Office
Products. The Board recognized that U.S. Office Products was moving into a new
stage of development, less reliant on acquisitions and more focused on growth
through improvements in and expansion of existing operations. The Board
concluded that the Equity Investment in U.S. Office Products, and CD&R's support
of the management of U.S. Office Products, would contribute to U.S. Office
Products' development. CD&R has substantial experience in providing companies in
which its affiliates invest with financial and managerial advisory services
aimed at building value and improving operational, marketing and financial
performance. CD&R also has substantial experience in advising and assisting
companies in managing high levels of debt.
The Board also considered the terms of the Equity Investment. It concluded,
based on an analysis by Morgan Stanley, that the proposed consideration of
$270.0 million was fair. The Board noted that the common stock warrants could,
if U.S. Office Products' stock were to appreciate sufficiently, provide
additional value to Investor. In that event, however, all other stockholders of
U.S. Office Products would also benefit from the appreciation. It also
considered the rights granted to Investor with respect to corporate governance.
While Investor will have certain rights to nominate directors to the Board, and
certain decisions will require a "super-majority" of the Board, Investor will
not have the power to control Board decisions. Investor will, however, have
substantial influence over the affairs of U.S. Office Products, and the fact
that certain decisions require a "super-majority" vote means that Investor may
be able to
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<PAGE>
prevent some transactions from taking place. Finally, the Board considered the
limitations in the Investment Agreement on transactions by Investor in U.S.
Office Products' stock. These limitations will preclude Investor from
transferring shares in a block to a party seeking to acquire control of U.S.
Office Products, unless the Board approves.
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.
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 U.S. Office Products also plans to enter into the
following transactions related to the 2001 Notes and the 2003 Notes:
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<PAGE>
- U.S. Office Products will make an offer to purchase any and all of the
2003 Notes for a purchase price of 94.5% of the principal amount, plus
accrued interest. U.S. Office Products will not complete the 2003 Note
Tender unless it (i) obtains satisfactory financing for the 2003 Note
Tender and the Equity Self-Tender, (ii) obtains any necessary lender
consents, and (iii) satisfies relevant conditions to the Equity Investment
and the Distributions. The 2003 Note Tender will also be subject to other
conditions that are customary in such offers.
- 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 61.483
shares per $1,000 principal amount, which effectively reduces the
conversion price on the 2001 Notes from $19.00 to $16.17 while the offer
is open. Holders of the 2001 Notes who accept the offer will also receive
accrued interest through the expiration of the 2001 Note 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).
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<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
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<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
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<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.
OPINION OF FINANCIAL ADVISOR
The Board retained Morgan Stanley to act as its financial adviser in
connection with the transactions comprising the Strategic Restructuring Plan
(the "Transactions") based upon Morgan Stanley's qualifications, expertise and
reputation. On January 12, 1998, Morgan Stanley delivered its opinion (the
"Morgan Stanley Opinion") to the Board that, as of such date and subject to
certain considerations identified in the written opinion of Morgan Stanley, the
Transactions, taken as a whole, are fair from a financial point of view to the
Company's stockholders.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS EXHIBIT 1 TO THIS ANNEX A. STOCKHOLDERS ARE URGED TO, AND SHOULD,
READ THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY. THE MORGAN
STANLEY OPINION IS DIRECTED TO THE BOARD AND RELATES TO THE FAIRNESS OF THE
TRANSACTIONS, FROM A FINANCIAL POINT OF VIEW, TO THE COMPANY'S STOCKHOLDERS, AND
IT DOES NOT CONSTITUTE A RECOMMENDATION TO STOCKHOLDERS AS TO WHETHER TO TENDER
OR REFRAIN FROM TENDERING SHARES. THE SUMMARY OF THE MORGAN STANLEY OPINION SET
FORTH IN THIS ANNEX A IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION.
In arriving at its opinion, Morgan Stanley (i) reviewed certain publicly
available financial statements and other business and financial information of
the Company; (ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company and each Spin-Off Company
prepared by the management of the Company; (iii) analyzed certain financial
forecasts for the Company and each Spin-Off Company prepared by the management
of the Company; (iv) discussed the past and current operations and financial
condition and the prospects of the Company and each Spin-Off Company with senior
executives of the Company; (v) reviewed the pro forma impact of the Transactions
on the Company; and each Spin-Off Company's earnings per share, cash flow,
consolidated capitalization and financial ratios; (vi) reviewed the reported
prices and trading activity of the Company's Common Stock; (vii) compared the
financial performance of each Spin-Off Company with that of certain other
companies that are comparable to each Spin-Off Company and have publicly-traded
securities; (viii) compared the financial performance of the Company (excluding
the Spin-Off Companies) with that of certain other comparable companies with
publicly-traded securities; (ix) reviewed the financial terms, to the extent
publicly available, of certain transactions involving minority investments in
publicly traded companies; (x) reviewed and discussed with the Board certain
expertise of CD&R and the strategic, financial and operational benefits
anticipated from the Transactions; (xi) participated in discussions and
negotiations among representatives of the Company and CD&R and their respective
legal advisers; and (xii) performed such other analyses and considered such
other factors as Morgan Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon without
independent verification the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of the Morgan Stanley Opinion. With
respect to the financial forecasts, including information relating to certain
strategic, financial and operational benefits anticipated from the Transactions,
Morgan Stanley assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and each Spin-Off Company. Morgan Stanley
did not make any independent valuation or appraisal of the assets or liabilities
of the Company or any Spin-Off Company nor was Morgan Stanley furnished with any
such appraisal. The Morgan Stanley Opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to Morgan Stanley as of, the date of the Morgan Stanley Opinion.
Morgan Stanley further assumed that no spin-off will be a taxable transaction to
the Company, any Spin-Off
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<PAGE>
Company or the Company's stockholders under U.S. federal income tax laws (except
to the extent of any cash distributed in lieu of fractional shares of the
Spin-Off Companies). In rendering its opinion, Morgan Stanley, with the Board's
consent, did not consider the effect of any terms of any commercial, allocation
or other arrangements between the Company and any Spin-Off Company.
Morgan Stanley noted that trading in Shares of the Company's Common Stock
commencing with the public announcement of the Transactions and continuing for a
period of time following completion of the Distributions may involve a
redistribution of shares of the Company's Common Stock and the shares of the
Spin-Off Companies' common stock among the Company's shareholders and other
investors. Accordingly, during such period, the Company's Common Stock and the
Spin-Off Companies' common stock may trade at prices below those at which they
would trade on a fully distributed basis after the Distributions. In rendering
its opinion, Morgan Stanley did not opine as to the price at which the Company's
Common Stock or any Spin-Off Company's common stock will trade after the
Transactions are effected.
The following is a brief summary of the analyses performed by Morgan Stanley
and reviewed with the Board that were material to the preparation of the Morgan
Stanley Opinion and to its presentation to the Board:
EQUITY MARKET PERFORMANCE. Morgan Stanley presented the Board an analysis
of the Company's Common Stock performance as background material to a discussion
of the Transactions. This analysis consisted of a historical analysis of:
closing prices and trading volumes from February 16, 1995, the date of the
Company's initial public offering ("IPO"), to January 9, 1998; the Company's
indexed price performance from January 9, 1996 to January 9, 1998 relative to
Corporate Express, Incorporated ("Corporate Express"), BT Office Products
International, Incorporated ("BT Office"), Boise Cascade Office Products
Corporation ("Boise") and Standard & Poor's industrial average of 400 stocks
(the "S&P 400"); and the Company's next twelve-month price-to-earnings ("P/E")
multiple from January 5, 1996, to January 9, 1998, relative to Corporate
Express, BT Office, Boise and the S&P 400. Morgan Stanley observed that the high
price and the low price for the Company's Common Stock from the time of the IPO
to January 9, 1998, were $29.92 per share and $6.67 per share, respectively.
From January 9, 1996 to January 9, 1998, Morgan Stanley noted that the S&P 400
increased by 51%, while the P/E multiples for the Company increased by 7%, Boise
decreased by 27%, Corporate Express decreased by 34% and BT Office decreased by
46%. Morgan Stanley also observed that the next twelve-month P/E multiples for
the Company, Corporate Express, BT Office and Boise generally declined from
January 5, 1996 to January 9, 1998, while the next twelve-month P/E multiple for
the S&P 400 generally increased.
COMPARABLE COMPANY ANALYSIS. Comparable company analysis examines a
company's trading performance relative to a group of publicly traded peers.
Morgan Stanley analyzed the trading performance of certain companies that may be
considered comparable to the Company after the Transactions and each Spin-Off
Company. No company utilized in the comparable company analysis as a comparison
is identical to either the Company after the Transactions or the Spin-Off
Companies. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters. Mathematical analysis (such
as determining the average or median) is not in itself a meaningful method of
using comparable company data.
The Company after the Transactions was compared to Corporate Express, BT
Office and Boise, which had estimates for the calendar year 1999 P/E multiple
ranging from 10x to 12x, as of January 9, 1998. Due to the limited universe of
publicly-traded companies in its specific sector, the spin-off of the school
specialty business was compared to a group of industrial consolidators including
the Company, White Cap Industries, Incorporated, Industrial Distribution Group,
Incorporated and U.S.A. Floral Products, Incorporated, which had estimates for
the calendar year 1999 P/E multiple ranging from 10x to 19x, as of January 9,
1998. The spin-off of the corporate travel services business was compared to
Travel Services International, Incorporated, the most significant publicly
traded company in its sector, which had an estimate for the calendar year 1999
P/E multiple of 18x, as of January 9, 1998. The spin-off of the print management
business was compared to American Business Products, Incorporated, Ennis
Business Forms,
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<PAGE>
Incorporated, John H. Harland Company, Moore Corporation Limited, New England
Business Service, Incorporated, The Standard Register Company and Wallace
Computer Services, Incorporated, which had estimates for the calendar year 1999
P/E multiple ranging from 10x to 15x, as of January 9, 1998. The spin-off of the
technology solutions business was compared to Cambridge Technology Partners,
Incorporated, Claremont Technology Group, Incorporated, International Network
Services, Sapient Corporation, System Software Associates, Incorporated,
Technology Solutions Company, Whittman-Hart, Incorporated and XLConnect
Solutions, Incorporated, which had estimates for the calendar year 1999 P/E
multiple ranging from 9x to 38x, as of January 9, 1998. Morgan Stanley indicated
to the Board that the Company after the Transactions and the spin-off of the
print management business could trade at multiples of P/E and earnings before
interest, taxes, depreciation and amortization ("EBITDA") slightly above the
Company's current multiples. Morgan Stanley further indicated to the Board that
the spin-offs of the school specialty business, corporate travel services
business and technology solutions business could trade at multiples of P/E and
EBITDA above the Company's current multiples. The Company had an estimate for
the calendar year 1999 P/E multiple of 10x, as of January 9, 1998.
PRO FORMA ANALYSIS OF THE TRANSACTIONS. Morgan Stanley prepared an analysis
of the pro forma financial impact of the Transactions to the Company's
stockholders. Based on financial information and projections provided to Morgan
Stanley by the management of the Company, Morgan Stanley analyzed pro forma
projected earnings per share ("EPS"), cash flow, consolidated capitalization and
financial ratios of the Company after the Transactions and of each of the
Spin-Off Companies. By applying the multiple ranges identified through the
comparable company analysis to the pro forma projected EPS statistics for the
Company after the Transactions and each of the Spin-Off Companies, Morgan
Stanley was able to calculate a range of equity values based on the assumptions
in its analysis for the Company after the Transactions and for each of the
Spin-Off Companies on a fully-distributed basis. Morgan Stanley indicated to the
Board that the value that the Company's stockholder would receive in the
Transactions would be composed of equity interests in each of the Company after
the Transactions and the four Spin-Off Companies and cash received in the Equity
Self-Tender. Assuming each Share of the Company's Common Stock outstanding after
giving effect to the Equity Self-Tender receives one share of each Spin-Off
Company and assuming that holders of the Company's Common Stock participate pro
rata in the Offer, subject to the qualifications and limitations described in
the next paragraph, Morgan Stanley indicated to the Board that the weighted
value of cash and equity interests in the Company after the Transactions and in
each Spin-Off Company which a holder of a share of the Company's Common Stock
would receive on a fully-distributed basis could range from $19.78 to $23.21.
Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Furthermore, Morgan Stanley noted
that trading in Shares of the Company's Common Stock commencing with the public
announcement of the Transactions and continuing for a period of time following
completion of the Distributions may involve a redistribution of Shares of the
Company's Common Stock and the shares of the Spin-Off Companies' common stock
among the Company's stockholders and other investors and accordingly, during
such period, Shares of the Company's Common Stock and the shares of the Spin-Off
Companies' common stock may trade at prices below those at which they would
trade on a fully distributed basis after the Distributions. In rendering its
opinion, Morgan Stanley did not opine as to the price at which Shares of the
Company's Common Stock or shares of each Spin-Off Company's common stock will
trade after the Transactions are effected.
ANALYSIS OF OTHER STRATEGIC ALTERNATIVES. At the Board's request, utilizing
the methodology described in Pro Forma Analysis of the Transactions, Morgan
Stanley also prepared an analysis of two alternatives to the Transactions: (i)
spin-offs without additional leverage (borrowings) or an investment by Investor
("Spin-Offs/No Leverage") and (ii) spin-offs with additional leverage but
without an investment by Investor ("Spin-Offs/Leverage/No Investor"). Morgan
Stanley assumed the Company would use the additional leverage to finance a
tender offer to purchase a portion of its Shares. Assuming each Share
outstanding after giving effect to any tender offer receives one Share of each
Spin-Off Company and
14
<PAGE>
assuming that the Company's stockholders participate pro rata in any tender
offer, Morgan Stanley indicated to the Board that the weighted value of cash and
equity interests in the Company after the Transactions and in each Spin-Off
Company which a holder of a Share of the Company's Common Stock would receive on
a fully-distributed basis could range from $17.08 to $21.71 for the Spin-Offs/No
Leverage alternative and from $19.12 to $22.86 for the Spin-Offs/Leverage/No
Investor alternative compared to a range of $19.78 to $23.21 for the
Transactions.
ANALYSIS OF EQUITY INVESTMENT. Morgan Stanley analyzed the value of the
equity securities Investor would acquire in "New USOP," that is, in the Company
after it increased debt and used it to repurchase shares in the Tender Office
and after it made the Distributions. Because the Transactions result in "New
USOP" being a smaller, more highly leveraged company than it was before, the
price Investor is paying for 24.9% of the Company cannot be compared to the
consideration being paid by the Company to repurchase a portion of its
outstanding shares in the Tender Offer.
Morgan Stanley started with the $270.0 million Investor was paying for the
equity securities. It subtracted from that amount an estimated value for the
warrants, which it determined by first calculating the theoretical option value
using the Black-Scholes model (a standard methodology for valuing warrants) and
then adjusting the theoretical Black-Scholes value downward to reflect the
likely illiquidity of the warrants in trading markets. Morgan Stanley then
estimated the per share price being paid by Investor by dividing the difference
by the number of "New USOP" shares it estimated Investor would buy. Finally,
Morgan Stanley compared this estimated per share value being paid by Investor to
possible equity values for "New USOP" common stock. As discussed above in Pro
Forma Analysis of the Transactions, Morgan Stanley developed a range of equity
values for "New USOP." It multiplied pro forma projected EPS by possible trading
multiples for "New USOP" developed in the comparable company analysis. Subject
to the qualifications and limitations described above in Pro Forma Analysis of
the Transactions, Morgan Stanley concluded that this range was lower than the
estimated per share price being paid by Investor. Accordingly, Morgan Stanley
indicated to the Board its view that Investor would be paying a mean premium of
23% for its shares of "New USOP" stock.
The preparation of a fairness opinion is a complex process and is not
susceptible to a partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute any particular weight to any particular analysis or factor
considered by it. Furthermore, a selection of any portions of Morgan Stanley's
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion. In addition, Morgan Stanley may have deemed
various assumptions more or less probable than other assumptions, so that the
ranges of valuations resulting for any particular analysis should not be taken
to be Morgan Stanley's view of the actual value.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company or Investor.
As noted above, the analyses performed by Morgan Stanley are not necessarily
indicative of actual values, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as a part of
Morgan Stanley's analysis of the fairness of the consideration from a financial
point of view to the Company's stockholders and were provided to the Board in
connection with the delivery of Morgan Stanley's written opinion of January 12,
1998. The analyses do not purport to be appraisals or reflect the prices at
which the Company might actually be sold. Because such estimates are inherently
subject to uncertainty, none of the Company, Investor, Morgan Stanley or any
other person assumes responsibility for their accuracy. In addition, Morgan
Stanley's opinion and presentation to the Board was one of many factors taken
into consideration by the Board in making its determination to approve the
Transactions.
The Board retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and advisory
firm. Morgan Stanley, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed
15
<PAGE>
and unlisted securities, private placements and valuations for corporate and
other purposes. Morgan Stanley is a full-service securities firm engaged in
securities trading and brokerage activities, as well as providing investment
banking and financial advisory services. In the ordinary course of its trading
and brokerage activities, Morgan Stanley or its affiliates may at any time hold
long or short positions, and may trade or otherwise effect transactions, for its
own account or the accounts of customers, in debt or equity securities of the
Company. In the past, Morgan Stanley and its affiliates have provided financial
advisory and financing services to the Company and have received customary fees
for the rendering of these services.
Pursuant to a letter agreement, dated December 18, 1997, between the Company
and Morgan Stanley, the Company has agreed to pay Morgan Stanley a transaction
fee, payable upon consummation of the Transactions. At the time of the execution
of the Investment Agreement, the transaction fee payable to Morgan Stanley was
estimated at approximately $9.0 million. The Company has also agreed to
reimburse Morgan Stanley for its expenses related to the engagement and to
indemnify and hold harmless Morgan Stanley and its affiliates, their respective
directors, officers, agents and employees and each person, if any, controlling
Morgan Stanley or any of its affiliates, against certain liabilities and
expenses, including liabilities under U.S. federal securities laws, incurred in
connection with its services. All fees will be paid by the Company to Morgan
Stanley only after consummation of the Transactions.
Morgan Stanley has also been retained by the Company to act as Dealer
Manager in connection with the Equity Self-Tender. See Section 13 of the Offer
to Purchase. In addition, Morgan Stanley is serving as a placement agent in the
Subordinated Debt Offering and as a co-manager for the equity offering by
Workflow Management, Inc. See "The Strategic Restructuring Plan--Spin-Off
Distributions" in this Annex A.
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
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
investment. Mr. Conway is a graduate of Amherst College,
Columbia University School of Business and Columbia Law
School.
<S> <C> <C> <C>
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 director of
Digital Equipment Corporation, Paine Webber Group, Roadway
Express and Educational Testing Service.
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
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
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.
<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
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE AGE BUSINESS EXPERIENCE
- -------------------------- ------------------ --- -----------------------------------------------------------
where he was most recently Executive Vice President of S.P.
Richards Company.
<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
19
<PAGE>
the Board of Directors to as many as 12 persons, but the number of persons
Investor can nominate will increase at least proportionally. For example, if
there are 12 members, Investor could nominate four directors (assuming it still
held all of its shares). Investor also will be entitled to at least
proportionate representation on all Board committees, unless it is precluded
from such membership by law or stock exchange rules.
All of Investor's corporate governance rights will expire on the earlier of
the fifth anniversary of closing or if Investor ever acquires more than 50% of
the voting power represented by 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.
20
<PAGE>
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 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
21
<PAGE>
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 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.
22
<PAGE>
RISK FACTORS
HOLDERS OF COMMON STOCK WHO ARE CONSIDERING TENDERING THEIR SHARES OF COMMON
STOCK IN THE EQUITY SELF-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.
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
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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. 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
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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.
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.
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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.
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.
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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 Equity
Self 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.
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.
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.
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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 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
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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.
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
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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
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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,
40
<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.
41
<PAGE>
EXHIBIT 1--OPINION OF MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
January 12, 1998
Board of Directors
U.S. Office Products Company
1025 Thomas Jefferson Street, NW
Suite 600 East
Washington, DC 20007
Members of the Board:
We understand that U.S. Office Products Company (the "Company"), proposes to
engage in a series of transactions (collectively, the "Transactions") in which
the Company will:
(i) distribute 100% of the common stock of each of the newly formed
subsidiaries of the Company (each distribution, a "Spin-Off") which will
hold, respectively, the Company's education, travel, technology and
printing divisions (each, a "Spin-Off Company") to the holders of shares
of common stock, par value $.001 per share (the "Shares"), of the
Company, on a pro rata basis;
(ii) offer to purchase up to 37.0 million of the currently outstanding
Shares at a price of $27 per Share (the "Tender Offer"); and
(iii) sell to Clayton, Dubilier & Rice Inc. (the "Investor"), upon the terms
and subject to the conditions set forth in the Agreement dated January
12, 1998 between the Investor and the Company, (a) newly issued Shares
representing 24.9% of the outstanding Shares immediately following
consummation of the Transactions (the "Originally Issued Shares") and
warrants to purchase a number of Shares equal to the difference between
(i) the Originally Issued Shares and (ii) 24.9% of the Shares
outstanding immediately following consummation of the Transactions
(assuming conversion of all of the Company's 5 1/2% Convertible
Subordinated Notes due 2001) (the "Special Warrant Issued Shares") and
(b) warrants to purchase that number of Shares equal to the number of
Originally Issued Shares and Special Warrant Issued Shares.
You have asked for our opinion as to whether the proposed Transactions, taken as
a whole, are fair, from a financial point of view, to the holders of the Shares.
A-1
<PAGE>
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
business and financial information of the Company;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company and each Spin-Off Company
prepared by the management of the Company;
(iii) analyzed certain financial forecasts for the Company and each Spin-Off
Company prepared by the management of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company and each Spin-Off Company with senior
executives of the Company;
(v) reviewed the pro forma impact of the Transactions on the Company's and
each of the Spin-Off Company's earnings per share, cash flow,
consolidated capitalization and financial ratios;
(vi) reviewed the reported prices and trading activity for the Shares;
(vii) compared the financial performance of each Spin-Off Company with that
of certain other companies that are comparable to each Spin-Off Company
and have publicly-traded securities;
(viii) compared the financial performance of the Company (excluding the
Spin-Off Companies) with that of certain other comparable companies
with publicly-traded securities;
(ix) reviewed the financial terms, to the extent publicly available, of
certain transactions involving minority investments in publicly traded
companies;
(x) reviewed and discussed with the Board of Directors certain expertise of
the Investor and the strategic, financial and operational benefits
anticipated from the Transactions;
(xi) participated in discussions and negotiations among representatives of
the Company and the Investor and their respective legal advisors; and
(xii) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial forecasts, including information relating
to certain strategic, financial and operational benefits anticipated from the
Transactions, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and each Spin-Off Company. We have not made
any independent valuation or appraisal of the assets or liabilities of the
Company or each Spin-Off Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. We have further assumed that no Spin-Off will be a taxable
transaction to the Company, any Spin-Off Company or the holders of the Shares
under federal income tax laws (except to the extent of any cash distributed in
lieu of fractional shares of each Spin-Off Company). In rendering our opinion,
we have, with your consent, not considered the effect of any terms of any
commercial, allocation or other arrangements between the Company and any
Spin-Off Company.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition, business
combination or other extraordinary transaction, involving the Company, nor did
we negotiate with any party, other than the Investor, with respect to any such
transaction.
We note that trading in Shares commencing with the public announcement of the
Transactions and continuing for a period of time following completion of the
Spin-Offs may involve a redistribution of the Shares and the shares of the
Spin-Off Companies among the Company's stockholders and other investors
A-2
<PAGE>
and, accordingly, during such period, the Shares and the shares of the Spin-Off
Companies may trade at prices below those at which they would trade on a fully
distributed basis after the Spin-Offs. In rendering our opinion, we are not
opining as to the price at which the common stock of the Company or each Spin-
Off Company will trade after the Transactions are effected.
We have acted as financial advisor to the Board of Directors of the Company in
connection with this transaction and will receive a fee for our services,
including a fee contingent upon the completion of the Transactions. In the past,
Morgan Stanley & Co. Incorporated and its affiliates have provided financial
advisory and financing services for the Company and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Transactions. In addition, we express no opinion and make no
recommendation as to how the holders of the Shares should vote at the
stockholders' meeting held in connection with the Transactions.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the proposed Transactions, taken as a whole, are fair from a
financial point of view to the holders of the Shares.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ R. Bradford Evans
R. Bradford Evans
Managing Director
A-3
<PAGE>
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
Proxy Statement. The historical Statement of Income Data for the years ended
April 30, 1993 and 1994 and the Balance Sheet Data at April 30, 1993, 1994, and
1995 have been derived from unaudited consolidated financial statements which
are not included elsewhere in this Proxy Statement. The Selected Financial Data
for the nine months ended January 25, 1997 and January 24, 1998 (except pro
forma amounts) have been derived from unaudited consolidated financial
statements that appear elsewhere in this Proxy Statement. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the financial position and results of operations for the
periods presented. The financial data have been restated from prior
presentations as a result of the Company's adoption of the Strategic
Restructuring Plan.
The pro forma financial data gives effect, as applicable, to the Strategic
Restructuring Plan, the offer to exchange the 2001 Notes for common stock at a
reduced conversion price (the "2001 Note Offer"), the tender offer for the 2003
Notes (the "2003 Note Tender"), the offering of senior subordinated notes ("Note
Offering") and borrowings under the new senior secured credit facilities (the
"Credit Facility"; borrowings under the Note Offering and the Credit Facility
are referred to as the "New Borrowings") and the acquisitions completed by the
Company after May 1, 1996 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 Proxy Statement.
F-2
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------------ -----------
PRO FORMA
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25,
1993 1994 1995 1996 1997 1997 (2) 1997
----------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $ 486,763 $ 523,755 $ 658,494 $1,061,528 $2,115,954 $2,794,009 $1,498,320
Cost of revenues.................. 350,647 377,494 485,955 789,436 1,518,287 1,988,315 1,077,408
----------- ----------- ----------- --------- --------- ----------- -----------
Gross profit.................. 136,116 146,261 172,539 272,092 597,667 805,694 420,912
Selling, general and
administrative expenses......... 124,065 132,320 152,176 231,569 488,215 646,867 344,474
Amortization expense.............. 601 733 801 2,711 12,416 25,138 8,072
Non-recurring acquisition costs... 8,057 8,001 8,001 7,316
Restructuring costs............... 682 4,201 4,201
----------- ----------- ----------- --------- --------- ----------- -----------
Operating income.............. 11,450 13,208 19,562 29,073 84,834 121,487 61,050
Interest expense.................. 2,914 2,519 3,401 8,132 36,047 103,996 27,540
Interest income................... (327) (411) (675) (3,506) (6,857) (6,048)
Other income...................... (1,463) (1,315) (1,456) (684) (4,233) (7,150) (4,073)
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 10,326 12,415 18,292 25,131 59,877 24,641 43,631
Provision for income taxes........ 1,594 1,727 2,800 6,032 27,939 18,481 18,238
----------- ----------- ----------- --------- --------- ----------- -----------
Income from continuing operations
before extraordinary items...... 8,732 10,688 15,492 19,099 31,938 $ 6,160 25,393
-----------
-----------
Income from discontinued
operations, net of income taxes
(3)............................. 2,824 10,953 15,675 15,778 26,800 20,411
----------- ----------- ----------- --------- --------- -----------
Income before extraordinary
items........................... 11,556 21,641 31,167 34,877 58,738 45,804
Extraordinary items, net of income
taxes (4)....................... 701 1,450 612
----------- ----------- ----------- --------- --------- -----------
Net income........................ $ 11,556 $ 21,641 $ 31,167 $ 34,176 $ 57,288 $ 45,192
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
outstanding
Basic......................... 44,260 44,260 45,562 67,545 90,026 146,331(5) 85,978
Diluted....................... 44,260 44,260 45,704 68,374 91,761 148,066(5) 87,824
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.30
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.24 0.31 0.24
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.51 $ 0.64 $ 0.53
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.20 $ 0.24 $ 0.34 $ 0.28 $ 0.35 $ 0.04 $ 0.29
-----------
-----------
Income from discontinued
operations.................. 0.06 0.25 0.34 0.23 0.29 0.23
Extraordinary items........... (0.01) (0.02) (0.01)
----------- ----------- ----------- --------- --------- -----------
Net income.................... $ 0.26 $ 0.49 $ 0.68 $ 0.50 $ 0.62 $ 0.51
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Ratio of earnings to fixed charges
(6)............................. 2.1x 2.3x 2.5x 1.9x 2.0x 1.2x 2.0x
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 24, JANUARY 25, JANUARY 24,
1998 1997 (2) 1998 (2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.......................... $1,930,113 $2,087,861 $2,070,655
Cost of revenues.................. 1,390,855 1,487,711 1,481,421
----------- ----------- -----------
Gross profit.................. 539,258 600,150 589,234
Selling, general and
administrative expenses......... 436,037 483,908 467,356
Amortization expense.............. 13,830 18,415 18,433
Non-recurring acquisition costs... 7,316
Restructuring costs...............
----------- ----------- -----------
Operating income.............. 89,391 90,511 103,445
Interest expense.................. 27,534 77,997 77,997
Interest income................... (1,545)
Other income...................... (6,369) (6,730) (6,711)
----------- ----------- -----------
Income from continuing operations
before provision for income
taxes and extraordinary items... 69,771 19,244 32,159
Provision for income taxes........ 32,535 14,433 20,903
----------- ----------- -----------
Income from continuing operations
before extraordinary items...... 37,236 $ 4,811 $ 11,256
----------- -----------
----------- -----------
Income from discontinued
operations, net of income taxes
(3)............................. 25,464
-----------
Income before extraordinary
items........................... 62,700
Extraordinary items, net of income
taxes (4).......................
-----------
Net income........................ $ 62,700
-----------
-----------
Weighted average common shares
outstanding
Basic......................... 114,758 146,331(5) 146,331(5)
Diluted....................... 117,185 148,177(5) 148,757(5)
Per share amounts:
Basic:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.23
Extraordinary items...........
-----------
Net income.................... $ 0.55
-----------
-----------
Diluted:
Income from continuing
operations before
extraordinary items......... $ 0.32 $ 0.03 $ 0.08
----------- -----------
----------- -----------
Income from discontinued
operations.................. 0.22
Extraordinary items...........
-----------
Net income.................... $ 0.54
-----------
-----------
Ratio of earnings to fixed charges
(6)............................. 2.5x 1.2x 1.4x
</TABLE>
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 24, 1998
------------------------------------------ APRIL 26, ---------
1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 13,609 $ 51,344 $ 70,153 $ 274,124 $ 233,986 $ 107,120
Net assets of discontinued operations........................ 19,199 26,879 33,514 33,674 171,122 461,042
Total assets................................................. 130,666 172,656 259,904 805,978 1,706,991 2,469,442
Long-term debt, less current portion......................... 2,414 15,112 18,841 176,230 380,209 381,844
Stockholders' equity......................................... 27,986 77,735 128,512 394,746 921,148 1,472,922
<CAPTION>
PRO FORMA (7)
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 396,609
Net assets of discontinued operations........................
Total assets................................................. 2,006,085
Long-term debt, less current portion......................... 1,155,509
Stockholders' equity......................................... 590,792
</TABLE>
F-3
<PAGE>
- ------------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") have been included from the dates of
their respective acquisitions. The pro forma financial data reflect purchase
acquisitions completed by the Company through March 20, 1998.
(2) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company since May 1, 1996 as if such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of the Company's future operating results.
(3) The results of the companies included in the Distributions are reflected as
discontinued operations for all periods presented in the Company's
consolidated statement of income.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities, net of the related income tax benefits.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 25,
1997 and January 24, 1998, see Notes to Pro Forma Combined Financial
Statements included elsewhere in this Proxy Statement.
(6) In computing the ratio of earnings to fixed charges: (i) earnings are based
on income from continuing operations before provision for income taxes and
extraordinary items and fixed charges; and (ii) fixed charges consist of
interest expense from continuing and discontinued operations, amortization
of deferred financing costs and the estimated interest component of rent
expense.
(7) Gives effect to the Strategic Restructuring Plan, the 2001 Note Offer, the
2003 Note Tender, the New Borrowings and the purchase acquisitions completed
by the Company subsequent to January 24, 1998 as if such transactions had
been made on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of the Company's future financial position.
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. WHEN USED IN THIS PROXY STATEMENT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW UNDER THE HEADINGS "EFFECTS OF THE
PROPOSED SALE OF EQUITY SECURITIES AND THE STRATEGIC RESTRUCTURING PLAN" WITHIN
THE BODY OF THE PROXY STATEMENT, AND "FACTORS AFFECTING THE COMPANY'S BUSINESS"
BELOW.
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
historical financial statements and the pro forma combined financial statements
of the Company, including the related notes to each thereto, appearing elsewhere
in this Proxy Statement. The discussion of the Company's pro forma results of
operations is based on the assumptions and conditions described in the Pro Forma
Combined Financial Statements and the Notes thereto. The Company's audited
consolidated financial statements have been restated to reflect (i) the results
of the businesses to be spun off to shareholders in the Company's recently
announced Strategic Restructuring Plan as discontinued operations; and (ii) the
change in accounting treatment of the 22 business combinations completed during
the nine months ended January 24, 1998, from the pooling-of-interests method to
the purchase method.
In January 1998, the Company's Board of Directors approved the Strategic
Restructuring Plan. The principal elements of the Strategic Restructuring Plan
are (1) the Tender Offer and the incurrence of debt to pay a portion of the
purchase price in the Tender Offer; (2) after acceptance of shares in the Tender
Offer, the Distributions; and (3) the Equity Investment by Investor following
acceptance of shares in the Tender Offer and the record date for the
Distributions. In conjunction with the Strategic Restructuring Plan, the Company
plans to undertake the 2001 Note Offer, the 2003 Note Tender and the New
Borrowings. (Capitalized terms not defined herein shall have the meaning given
such term in the text of the Proxy Statement.)
As a result of the Strategic Restructuring Plan, the Company's consolidated
financial statements reflect the results of those companies to be owned by the
Spin-Off Companies (and thus included in the Distributions) as discontinued
operations. Assuming completion of the transactions contemplated by the
Strategic Restructuring Plan, the Company's continuing operations will consist
of its North American Office Products Group (which includes office supply,
office furniture, and coffee, beverage, and vending service businesses), its
Mail Boxes Etc. subsidiary (acquired in late November 1997), its operations in
New Zealand and Australia, and its 49% interest in Dudley Stationery Limited, a
U.K. contract stationer ("Dudley"). The Company's North American Office Products
Group operates primarily in the United States; it also includes three coffee and
beverage businesses located in Canada.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations, assuming completion of the transactions contemplated by the
Strategic Restructuring Plan. For additional information about the results of
discontinued operations, see Note 4 of the Company's Notes to Consolidated
Financial Statements.
The Company's continuing operations derived revenues primarily from the sale
of a wide variety of office supplies, office furniture, and other office
products (including coffee, beverage, and vending products and services) to
corporate, commercial and industrial customers. Cost of revenues represents the
purchase price for office supplies, office furniture and other office products
and includes occupancy and delivery costs and is reduced by rebates and
discounts on purchases.
F-5
<PAGE>
The Company's financial condition and results of operations have changed
dramatically from the Company's inception in October 1994 to January 24, 1998 as
a result of the Company's aggressive acquisition program. The Company completed
165 business combinations (144 related to continuing operations and 21 related
to discontinued operations) from its inception through the end of fiscal 1997,
54 of which were accounted for under the pooling-of-interests method (39 related
to continuing operations and 15 related to discontinued operations). During the
nine months ended January 24, 1998, the Company completed an additional 60
business combinations (40 related to continuing operations and 20 related to
discontinued operations). As a result of the Board's adoption of the Strategic
Restructuring Plan, all 60 business combinations completed during the nine
months ended January 24, 1998 are accounted for under the purchase method. Prior
to the adoption of the Strategic Restructuring Plan, 22 of these 60 business
combinations were accounted for under the pooling-of-interests method (12
related to continuing operations and 10 related to discontinued operations).
Following adoption of the Strategic Restructuring Plan, the Company restated its
historical consolidated financial statements to account for these 22 business
combinations under the purchase method (including the Company's acquisition of
Mail Boxes Etc.) The Company's consolidated financial statements give
retroactive effect to the business combinations accounted for under the
pooling-of-interests method during the fiscal year ended April 26, 1997 and
include the results of companies acquired in business combinations accounted for
under the purchase method from their respective acquisition dates.
Due to the Company's growth through acquisitions, year-to-year comparisons
of the historical results of the Company's operations have been affected
primarily by the addition of acquired companies. In most instances, these dollar
increases in the various revenues and expense components of the Company's
results are due primarily to growth from acquisitions. Neither the magnitude nor
the source of such year-to-year changes is necessarily indicative of changes
that will occur in the future. As a result of the Strategic Restructuring Plan,
the Company expects to focus more on improving and expanding existing
operations, and less on acquisitions as a means of growth. In any event, the
Company expects that the impact of acquisitions on the future results of the
Company's continuing operations will decrease because the size of companies that
it expects to be available for acquisition will be smaller than in prior periods
and the Company's existing operations are larger than in prior years.
F-6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 30, 1995 and 1996 and April 26, 1997 and for the
nine months ended January 25, 1997 and January 24, 1998, as well as for the
fiscal year ended April 26, 1997 and for the nine months ended January 25, 1997
and January 24, 1998 on a pro forma basis reflecting the Strategic Restructuring
Plan, the 2001 Note Offer, the 2003 Note Tender, the New Borrowings and the
results of the companies acquired between May 1, 1996 and March 20, 1998 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
APRIL 30, APRIL 30, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24, JANUARY 25,
1995 1996 1997 1997 1997 1998 1997
----------- ----------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 73.8 74.4 71.8 71.2 71.9 72.1 71.2
----- ----- ----- ----- ----- ----- -----
Gross profit 26.2 25.6 28.2 28.8 28.1 27.9 28.8
Selling, general and
administrative expenses.... 23.1 21.8 23.1 23.2 23.0 22.6 23.2
Amortization expense 0.1 0.3 0.6 0.9 0.5 0.7 0.9
Non-recurring acquisition
costs...................... 0.7 0.4 0.3 0.5 0.3
Restructuring charges........ 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Operating income........... 3.0 2.7 4.0 4.3 4.1 4.6 4.4
Interest expense, net........ 0.4 0.4 1.4 3.7 1.5 1.3 3.8
Other income (loss).......... (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) (0.3)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 2.8 2.4 2.8 0.9 2.9 3.6 0.9
Provision for income taxes... 0.4 0.6 1.3 0.7 1.2 1.7 0.7
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations before
extraordinary items........ 2.4 1.8 1.5 0.2% 1.7 1.9 0.2%
----- -----
----- -----
Discontinued operations, net
of income taxes............ 2.3 1.5 1.3 1.4 1.3
----- ----- ----- ----- -----
Income before extraordinary
items...................... 4.7 3.3 2.8 3.1 3.2
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes............... 0.1 0.1 0.1
----- ----- ----- ----- -----
Net income................... 4.7% 3.2% 2.7% 3.0% 3.2%
----- ----- ----- -----
----- ----- ----- ----- -----
-----
<CAPTION>
PRO FORMA
JANUARY 24,
1998
-------------
<S> <C>
Revenues..................... 100.0%
Cost of revenues............. 71.5
-----
Gross profit 28.5
Selling, general and
administrative expenses.... 22.6
Amortization expense 0.9
Non-recurring acquisition
costs......................
Restructuring charges........
-----
Operating income........... 5.0
Interest expense, net........ 3.8
Other income (loss).......... (0.3)
-----
Income from continuing
operations before provision
for income taxes and
extraordinary items........ 1.5
Provision for income taxes... 1.0
-----
Income from continuing
operations before
extraordinary items........ 0.5%
-----
-----
Discontinued operations, net
of income taxes............
Income before extraordinary
items......................
Extraordinary items - losses
on early terminations of
credit facilities, net of
income taxes...............
Net income...................
</TABLE>
PRO FORMA RESULTS OF OPERATIONS
The Company's pro forma results of operations for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and January 24, 1998
reflect significant decreases in net income and net income per share from the
amounts reported in the Company's historical consolidated financial statements.
The significant decreases can be attributed primarily to (i) substantially
higher amortization expenses as compared to prior periods (as a result of
reclassifying 12 business combinations as purchase acquisitions (including the
Company's acquisition of Mail Boxes Etc.), rather than under the pooling-of-
interests method, as the Company had expected when it completed those
acquisitions); (ii) substantially higher interest expense, as a result of
increased borrowing that the Company expects to incur to help finance the cost
of the Tender Offer; and (iii) higher effective income tax rates, due to
increased non-deductible goodwill expense. The pro forma results do not purport
to represent the results the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or of the future results of the Company.
F-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 28.8%, from $1,498.3 million for the nine
months ended January 25, 1997, to $1,930.1 million for the nine months ended
January 24, 1998. This increase was primarily due to acquisitions. Revenues for
the nine months ended January 24, 1998 include revenues from 111 companies
acquired in business combinations accounted for under the purchase method after
the beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for the nine months ended January 25, 1997 include revenues from 54 of
the Fiscal 1997 and 1998 Purchased Companies for a portion of such period. This
increase was partially offset by the effect on international revenues of the
devaluation of the New Zealand and Australian dollars versus the USD. Because
revenues generated in New Zealand and Australia contributed approximately
one-third of the Company's consolidated revenues during the nine months ended
January 24, 1998, management estimates that currency devaluation had the effect
of reducing the Company's reported consolidated revenues (in U.S. dollar terms)
by approximately 3.8%.
International revenues increased 36.5%, from $488.8 million, or 32.6% of
consolidated revenues, for the nine months ended January 25, 1997, to $667.4
million, or 34.6% of consolidated revenues, for the nine months ended January
24, 1998. The increase in international revenues was primarily due to the
inclusion, in the revenues for the nine months ended January 24, 1998, of
revenues from 31 companies that were acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1997, the most
significant of which was Whitcoulls Group Limited, which the Company's
wholly-owned subsidiary Blue Star Group Limited acquired in July 1996. Revenues
from 14 of such companies were included in international revenues for a portion
of the nine months ended January 25, 1997. The growth in international revenues
was partially reduced by a decline in the exchange rates of the New Zealand and
Australian dollars against the USD. The following table details the declines in
the average exchange rates of the New Zealand and Australian dollars versus the
USD for the nine months ended January 24, 1998 and January 25, 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES FOR
THE NINE MONTHS ENDED
----------------------------
JANUARY 24, JANUARY 25,
1998 1997 DECLINE
------------- ------------- -----------
<S> <C> <C> <C>
New Zealand dollar............................................................. $ .64 $ .70 $ (.06)
Australian dollar.............................................................. $ .72 $ .79 $ (.07)
</TABLE>
International revenues in New Zealand and Australia, calculated in their
local currencies, increased 49.4% for the nine months ended January 24, 1998, as
compared to the nine months ended January 25, 1997. This increase was due
primarily to the inclusion, in the revenues for the nine months ended January
24, 1998, of revenues from the acquired companies discussed above.
Gross profit increased 28.1%, from $420.9 million for the nine months ended
January 25, 1997, to $539.3 million for the nine months ended January 24, 1998.
Gross profit as a percentage of revenues decreased from 28.1% for the nine
months ended January 25, 1997 to 27.9% for the nine months ended January 24,
1998. The slight decrease in gross profit as a percentage of revenues was due
primarily to a shift in revenue mix, primarily as a result of acquisitions, to
revenues from traditionally lower margin products and services, partially offset
by improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 26.6%, from $344.5
million for the nine months ended January 25, 1997, to $436.0 million for the
nine months ended January 24, 1998 primarily due to the inclusion of the results
of the Fiscal 1997 and 1998 Purchased Companies. Selling, general and
administrative expenses as a percentage of revenues decreased from 23.0% for the
nine months ended January 25, 1997 to 22.6% for the nine months ended January
24, 1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due to several factors, including (i) a shift in
F-8
<PAGE>
revenue mix, primarily as a result of acquisitions, to revenues from products
and services traditionally having lower selling, general and administrative
expenses; (ii) reductions in selling, general and administrative expenses by the
Company through the consolidation of certain redundant facilities and job
functions; and (iii) reductions in the costs of many general and administrative
expenses incurred by the Company through the negotiation of national or other
large-scale contracts with the providers of certain services affecting these
general and administrative expenses.
Amortization expense increased 71.3%, from $8.1 million for the nine months
ended January 25, 1997, to $13.8 million for the nine months ended January 24,
1998. This increase is due exclusively to the increase in the number of purchase
acquisitions, including the 12 acquisitions that were originally planned to be
accounted for under the pooling-of-interests method but were restated as
purchase acquisitions as a result of the Strategic Restructuring Plan, included
in the results for the nine months ended January 24, 1998 versus the nine months
ended January 25, 1997.
The Company incurred non-recurring acquisition costs of approximately $7.3
million during the nine months ended January 25, 1997, in conjunction with
business combinations that were accounted for under the pooling-of-interests
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method. In accordance with
generally accepted accounting principles, the Company will be unable to utilize
the pooling-of-interests method to account for acquisitions for a period of up
to 6-9 months following the completion of the Strategic Restructuring Plan.
During this period, the Company will not reflect any non-recurring acquisition
costs in its results of operations, as all costs incurred of this nature would
be related to acquisitions accounted for under the purchase method and would,
therefore, be capitalized as a portion of the purchase consideration.
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
expects to undertake cost reduction measures including the elimination of
duplicative facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures may involve the incurrence by the Company of certain
restructuring costs. However, at the present time, no formal plans to implement
any restructuring have been developed. Once developed, any such plans will
necessarily require review by the Company's senior management and the
implementation of such plans would not be initiated prior to the receipt of
proper authorization of the Company's Board of Directors. Based on the
additional time and resources expected to be involved in the development, review
and approval of any such restructuring plans, the Company cannot presently
predict if a restructuring charge will be incurred and, if incurred, the timing
or overall magnitude of such a charge.
Interest expense, net of interest income, increased 20.9% from $21.5 million
for the nine months ended January 25, 1997, to $26.0 million for the nine months
ended January 24, 1998. This was due primarily to a reduction in interest income
during the nine months ended January 24, 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
convertible subordinated notes in May and June of 1996 (the first quarter of
fiscal 1997). These proceeds were subsequently used to fund a portion of the
cash consideration used in business combinations. Interest expense has remained
relatively consistent, as steadily increasing borrowings and a declining cash
position have been offset by the repayment of debt from the proceeds of a stock
offering in January 1997 and declining interest rates.
Other income increased 56.4%, from $4.1 million for the nine months ended
January 25, 1997, to $6.4 million for the nine months ended January 24, 1998.
Other income for the nine months ended January 24, 1998 of $6.4 million
consisted primarily of a $4.7 million marketing fee, a gain on the sale of an
investment and the Company's 49% share of the net income of the Company's 49%
equity investment in Dudley. The Company acquired its 49% interest in Dudley in
November 1996. Other income for the nine months ended January 25, 1997 of $4.1
million consisted primarily of a foreign currency gain of $3.4 million. Although
management is pursuing additional opportunities to generate other income from
arrangements with third parties that desire access to the Company's distribution
network and customer base, management can not predict whether or when such
opportunities will be realized, or what amount of other income might be
available to the Company.
F-9
<PAGE>
YEAR ENDED APRIL 26, 1997 COMPARED TO THE YEAR ENDED APRIL 30, 1996
Consolidated revenues increased 99.3%, from $1,061.5 million in fiscal 1996,
to $2,116.0 million in fiscal 1997. This increase was primarily due to the
inclusion in fiscal 1997 revenues of revenues from the 91 companies related to
continuing operations that were acquired in business combinations accounted for
under the purchase method during fiscal 1997 (the "Fiscal 1997 Purchased
Companies") from their respective dates of acquisition and revenues from the 31
companies related to continuing operations that were acquired in business
combinations accounted for under the purchase method during fiscal 1996 (the
"Fiscal 1996 Purchased Companies") for the entire year. Revenues in fiscal 1996
include revenues from the Fiscal 1996 Purchased Companies from their respective
dates of acquisition.
International revenues increased from $84.8 million, or 8.0% of consolidated
revenues, in fiscal 1996, to $708.4 million, or 33.5% of consolidated revenues
in fiscal 1997. International revenues consisted primarily of revenues from New
Zealand and Australia, with the balance from Canada. The increase in
international revenues was primarily due to the inclusion, in the revenues for
fiscal 1997, of revenues from 15 companies that were acquired in business
combinations accounted for under the purchase method during fiscal 1997. Fiscal
1996 international revenues include the results of two companies for the entire
year and the results of two companies acquired in fiscal 1996 in business
combinations accounted for under the purchase method.
Gross profit increased 119.7%, from $272.1 million, or 25.6% of revenues, in
fiscal 1996, to $597.7 million, or 28.2% of revenues, in fiscal 1997. The
increase in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix resulting in a higher proportion of revenues in
traditionally higher margin products and services, primarily as a result of the
increase in products sold in New Zealand and Australia and as a result of
improved purchasing and rebate programs negotiated with vendors. The Company
expects to continue to negotiate favorable purchasing and rebate programs with
vendors. However, the Company does not believe that it will be able to continue
to improve these programs at the same rates as in the past, as significant
progress has already been made with vendors.
Selling, general and administrative expenses increased 110.8%, from $231.6
million, or 21.8% of revenues, in fiscal 1996, to $488.2 million, or 23.1% of
revenues, in fiscal 1997. The increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue mix
resulting in a higher proportion of revenues from products and services with
traditionally higher selling, general and administrative expenses, such as
products sold in New Zealand and Australia.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $12.6 million or 39.6%. The
Company believes that the adjustments to the employee stock options as a result
of the Strategic Restructuring Plan will result in a significant increase in the
number of stock options outstanding which may limit the number of stock options
available for grant to employees in the future. The Company believes that it
offers its employees market competitive compensation packages and does not
expect that a reduction in the number of stock options available to employees in
the future will have a material impact on the Company's ability to retain and
attract qualified employees.
Amortization expense increased from $2.7 million in fiscal 1996 to $12.4
million in fiscal 1997. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1997 versus
fiscal 1996.
The Company incurred non-recurring acquisition costs of $8.1 million and
$8.0 million during fiscal 1996 and 1997, respectively, in conjunction with
business combinations accounted for under the pooling-of-interests method. The
non-recurring acquisition costs reflect the completion of 14 and 25 business
combinations accounted for under the pooling-of-interests method during fiscal
1996 and fiscal 1997, respectively. The non-recurring acquisition costs in
fiscal 1996 included a charge of approximately $4.7
F-10
<PAGE>
million related to one business combination which included the payment of
significant transaction-related compensation obligations.
The Company also incurred restructuring costs of approximately $682,000 and
$4.2 million during fiscal 1996 and 1997, respectively. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans. The Company expects to incur similar
costs in the future as the Company continues to review its operations. On a
regional level, the Company is implementing regional consolidation and
integration plans for its office supply, office coffee and beverage services and
office furniture divisions through which the Company has established and expects
to continue to establish district fulfillment centers ("DFCs"). The DFCs are
intended to enable certain operational activities, such as inventory management,
purchasing, accounting and human resources, to be shared among hubs and spokes
located within the same geographic area. This regional approach is intended to
permit the elimination of duplicative facilities and costs and promote
integration of the operations within each region.
Interest expense, net of interest income, increased 531.0%, from $4.6
million in fiscal 1996, to $29.2 million in fiscal 1997. This increase was due
primarily to the increase in the Company's borrowings through the issuance of an
aggregate of $373.75 million of 5 1/2% Convertible Subordinated Notes (the
"Notes") during the fourth quarter of fiscal 1996 and the first quarter of
fiscal 1997 and an increase in the outstanding balance under the Company's
credit facility. The proceeds from the issuance of the Notes and the additional
borrowings under the credit facility were used primarily to fund the cash
portion of the consideration in certain business combinations accounted for
under the purchase method and to refinance indebtedness assumed in business
combinations.
Other income increased 518.9%, from $684,000 in fiscal 1996, to $4.2 million
in fiscal 1997. Fiscal 1997 other income consists primarily of foreign currency
gains and equity in the net income of the Company's 49% investment in Dudley,
the largest independent office products dealer in the United Kingdom. The
Company anticipates that the income from its equity investment will increase as
the fiscal 1997 amount represented earnings from November 14, 1996, the date of
the Company's investment, through April 26, 1997.
Provision for income taxes increased from $6.0 million in fiscal 1996 to
$27.9 million in fiscal 1997, reflecting effective income tax rates of 24.0% and
46.7%, respectively. The low effective income tax rate in fiscal 1996, compared
to the federal statutory rate of 35.0%, was primarily due to the fact that
several of the companies included in the results for such year, which were
acquired in business combinations accounted for under the pooling-of-interests
method, were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company. In fiscal 1997, this effect was offset by the increase in
nondeductible expenses, including amortization of goodwill and non-recurring
acquisition costs.
Income from discontinued operations increased 69.9% from $15.8 million in
fiscal 1996 to $26.8 million in fiscal 1997. See Note 4 of the Company's Notes
to Consolidated Financial Statements.
During fiscal 1997, the Company incurred extraordinary items totaling $1.5
million, which represent the aggregate expenses, net of the expected tax
benefit, associated with the early termination of the Company's $50 million
credit facility with First Bank National Association and the early termination
of credit facilities at two companies acquired in transactions accounted for
under the pooling-of-interests method during fiscal 1997.
YEAR ENDED APRIL 30, 1996 COMPARED TO THE YEAR ENDED APRIL 30, 1995
Consolidated revenues increased 61.2%, from $658.5 million in fiscal 1995,
to $1,061.5 million in fiscal 1996. This increase was primarily due to the
inclusion in the revenues for fiscal 1996 of revenues from the Fiscal 1996
Purchased Companies from their respective dates of acquisition and revenues from
five companies that were acquired in business combinations accounted for under
the purchase method during fiscal 1995 (the "Fiscal 1995 Purchased Companies")
for the entire year. Revenues in fiscal 1995 include revenues from the Fiscal
1995 Purchased Companies from their respective dates of acquisition.
F-11
<PAGE>
International revenues increased from $35.7 million, or 5.4% of consolidated
revenues, in fiscal 1995, to $84.8 million, or 8.0% of consolidated revenues, in
fiscal 1996. This increase was primarily due to the inclusion in the revenues
for fiscal 1996 of revenues from two companies for the entire year and two
companies that were acquired in business combinations accounted for under the
purchase method during fiscal 1996.
Gross profit increased 57.7%, from $172.5 million, or 26.2% of revenues, in
fiscal 1995, to $272.1 million, or 25.6% of revenues, in fiscal 1996. The
decrease in gross profit as a percentage of revenues was due primarily to a
shift in revenue mix, primarily resulting from acquisitions, to revenues in
traditionally lower gross margin products and services.
Selling, general and administrative expenses increased 52.2%, from $152.2
million, or 23.1% of revenues, in fiscal 1995, to $231.6 million, or 21.8% of
revenues, in fiscal 1996. The decrease in selling, general and administrative
expenses as a percentage of revenues was due primarily to a shift in revenue
mix, primarily resulting from acquisitions, to revenues in products and services
traditionally lower in selling, general and administrative expenses.
Amortization expense increased 238.5%, from $801,000 in fiscal 1995 to $2.7
million in fiscal 1996. This increase is due exclusively to the increase in the
number of purchase acquisitions included in the results for fiscal 1996 versus
fiscal 1995.
The Company incurred non-recurring acquisition costs of approximately $8.1
million in fiscal 1996, in conjunction with 14 business combinations accounted
for under the pooling-of-interests method. The non-recurring acquisition costs
in fiscal 1996 included a charge of approximately $4.7 million related to one
business combination which included the payment of significant
transaction-related compensation obligations. During fiscal 1996, the Company
also recorded restructuring charges of $682,000 related to the discontinuation
of the printing division at one subsidiary.
Interest expense, net of interest income, increased 69.7% from $2.7 million,
in fiscal 1995, to $4.6 million in fiscal 1996. This increase was due primarily
to the increase in the Company's borrowings through the issuance of $143.75
million of Notes during the fourth quarter of fiscal 1996 and an increase in the
outstanding balance on the Company's credit facility. The proceeds from the
issuance of the Notes and the additional borrowings from the credit facility
were used to fund the cash portion of the consideration in business combinations
and to refinance indebtedness assumed in such business combinations.
Provision for income taxes increased from $2.8 million in fiscal 1995 to
$6.0 million in fiscal 1996 reflecting effective income tax rates of 15.3% and
24.0%, respectively. The low effective income tax rates in fiscal 1995 and 1996,
compared to the federal statutory rate of 35.0%, are primarily due to the fact
that several companies included in the results for fiscal 1995 and 1996, which
were acquired in business combinations accounted for under the
pooling-of-interests method, were not subject to federal income taxes on a
corporate level as they had elected to be treated as subchapter S corporations
prior to being acquired by the Company.
Income from discontinued operations increased from $15.7 million in fiscal
1995 to $15.8 million in fiscal 1996.
During fiscal 1996, the Company incurred an extraordinary item of $701,000,
which represented the aggregate expenses, net of the expected tax benefit,
associated with the early termination of a credit facility at a company acquired
in a business combination accounted for under the pooling-of-interests method.
Basic and diluted income from continuing operations per share decreased $.06
from fiscal 1995 to fiscal 1996. These decreases are primarily the result of the
fact that U.S. Office Products began operations in February 1995 and the
majority of the results included prior to that date represented the results of
companies acquired in business combinations accounted for under the
pooling-of-interests method, many of which were subchapter S corporations. This
resulted in an effective income tax rate of 15.3% in fiscal 1995 versus 24.0% in
fiscal 1996. In addition, the Company incurred $8.1 million in non-recurring
acquisition costs and $682,000 in restructuring costs during fiscal 1996
compared to no such costs in fiscal 1995.
F-12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma as adjusted basis, at January 24, 1998, the Company had
working capital of $396.6 million, long-term debt of $1,155.5 million and
capitalization of $1.7 billion. Such pro forma amounts give effect to the
Strategic Restructuring Plan, the 2001 Note Offer, the 2003 Note Tender and the
New Borrowings to be undertaken in conjunction with the Strategic Restructing
Plan and purchase acquisitions completed subsequent to January 24, 1998, and
through March 20, 1998, as if such transactions had occurred on January 24,
1998.
The Company anticipates that after the Strategic Restructuring Plan is
completed, its cash on hand, cash flow from operations and borrowings available
from its expected refinancing of its existing bank credit facility will be
sufficient to meet its liquidity requirements for its operations and capital
expenditures and for its additional debt service obligations for the remainder
of the calendar year. The Company does not currently anticipate that any
possible restructuring costs related to the Company's planned cost reduction
measures, coupled with the effects of such cost reduction measures, would have a
significant adverse effect on the Company's financial position, liquidity or
cash flows. The Company anticipates capital expenditures of approximately $40.0
million in both fiscal 1999 and fiscal 2000.
The existing credit facility provides the Company with a $500 million line
of credit, bearing interest, at the Company's option, at the bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. At March 20, 1998, the Company had
approximately $362.0 million outstanding under the Credit Facility, at an annual
interest rate of approximately 6.5%, and $138.0 million available under the
Credit Facility for acquisition and working capital purposes. Because certain
elements of the Strategic Restructuring Plan would violate covenants in the
Credit Facility, that facility will either have to be modified with the lenders'
consent or refinanced. The Company currently expects to finance the aggregate
cost of purchasing shares in the Tender Offer with the proceeds of the Equity
Investment, additional senior secured bank debt, and the net proceeds from the
issuance of subordinated debt securities. In connection with the completion of
the Strategic Restructuring Plan, the Company expects to incur approximately
$500 million of additional indebtedness. The Company also expects to incur
significant transaction (including financing) costs and expenses.
U.S. Office Products has agreed to and accepted a commitment letter from The
Chase Manhattan Bank, Bankers Trust Company, and Merrill Lynch Capital
Corporation, as agents, and Chase Securities Inc., BT Alex. Brown Incorporated
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers, for a
new bank loan facility that will provide for an aggregate principal amount of
$1,225.0 million, consisting of (i) seven-year term loan facilities totaling up
to $300.0 million, (ii) an eight-year term loan in the principal amount of
$675.0 million, and (iii) a revolving credit facility in the principal amount of
$250.0 million. U.S. Office Products and the banks may agree to alter the
allocated principal amount of two or more of the loan facilities before signing
definitive documents depending on market conditions. The loan facilities will be
guaranteed by U.S. Office Products' material domestic subsidiaries and secured
by substantially all of the assets of U.S. Office Products and its material
domestic subsidiaries. U.S. Office Products will be required to enter into
arrangements to insure that the effective interest rate paid by U.S. Office
Products on at least 50% of its outstanding bank and subordinated debt will not
go above a certain rate. The loan documents will likely include financial and
other covenants. These will include, among others, restrictions on U.S. Office
Products' ability to incur additional indebtedness, sell assets, pay dividends
or engage in certain other transactions, and requirements that U.S. Office
Products maintain certain financial ratios, and other provisions customary for
loans to highly leveraged companies, including representations by U.S. Office
Products, conditions to funding, cost and yield protections, restricted payment
provisions, transfer provisions, amendment provisions and indemnification
provisions. The loan facilities will be subject to mandatory prepayment in a
variety of circumstances, including upon certain asset sales and financing
transactions. The commitment will terminate unless definitive loan documents are
entered into, and the Strategic Restructuring Plan and Financing Transactions
are completed, by June 30, 1998. As a result of the Company's increased
indebtedness, a portion of the cash flows from the Company's international
operations, will be required to service debt and interest payments. The Company
expects that it will incur additional costs with respect to accessing cash flows
from international operations including
F-13
<PAGE>
such items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs. In addition, the results of operations could be further
impacted by fluctuations in the New Zealand and Australian exchange rates as a
result of the structure of certain financing alternatives being evaluated by the
Company. The Company also expects to issue $400.0 million principal amount
senior subordinated notes in a private placement but has not received any
commitment with respect to such issuance.
The Company expects that the indenture governing the senior subordinated
notes will also place restrictions on the Company's ability to incur
indebtedness, to make certain payments, investments, loans and guarantees and to
sell or otherwise dispose of a substantial portion of its assets to, or merge or
consolidate with, another entity.
On a historical basis, the Company's working capital was $286.0 million at
April 26, 1997 and $134.0 million at January 24, 1998. Long-term debt was $380.2
million and $381.8 million at April 26, 1997 and January 24, 1998, respectively.
The decline in working capital was due primarily to an increase in the Company's
borrowings under its Credit Facility from $140.1 million at April 26, 1997 to
$330.0 million at January 24, 1998. The increase in the borrowings under the
Credit Facility was primarily to fund the purchase price of acquisitions and to
repay higher-cost debt assumed in acquisitions. Long-term debt increased during
the fiscal year ended April 26, 1997 as a result of the sales, in an offshore
offering and in a concurrent private placement in the United States, of the 2003
Notes in the principal amount of $230.0 million. The net proceeds were used for
working capital and acquisition purposes. In addition, the Company completed the
public sale, at a gross price of $22.00 per share, of approximately 13.0 million
shares of common stock. The net proceeds to the Company were approximately
$275.7 million and were used to repay a portion of the balance outstanding under
the Company's Credit Facility.
During the nine months ended January 24, 1998, the New Zealand and
Australian dollars weakened against the USD. The New Zealand exchange rate
declined from $0.69 USD at April 27, 1997 to $0.58 USD at January 24, 1998. The
Australian exchange rate declined from $0.78 USD at April 27, 1997 to $0.66 USD
at January 24, 1998. This resulted in a reduction in stockholders' equity,
through a cumulative translation adjustment, of approximately $105.5 million,
reflecting the impact of the declining exchange rate on the Company's
investments in its New Zealand and Australian subsidiaries. In addition, the
devaluation has adversely affected the return on the Company's investment in its
New Zealand and Australian operations. If the exchange rates stabilize at
current rates or continue to decline, the Company's return on assets and equity
from its New Zealand and Australian operations will continue to be depressed.
Subsequent to April 26, 1997 and through March 20, 1998, the Company
completed 67 business combinations (45 related to continuing operations and 22
related to discontinued operations) for an aggregate purchase price of $774.7
million, consisting of approximately $190.8 million of cash and 27.8 million
shares of the Company's common stock with an aggregate market value on the dates
of acquisition of approximately $583.9 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $34.9 million. Net cash used in investing activities
was $97.6 million, including $33.6 million used for acquisitions, $28.2 million
used for additions to property and equipment and $40.8 million paid to Dudley to
satisfy the remaining commitment related to the Company's 49% equity investment
in Dudley. Net borrowings increased $62.6 million during the nine months ended
January 24, 1998, primarily to fund the purchase prices of acquisitions, to
repay higher-cost debt assumed in acquisitions and to fund the remaining equity
investment in Dudley. Discontinued operations used $3.8 million of cash during
the nine months ended January 24, 1998.
During the nine months ended January 25, 1997, net cash used in operating
activities was $9.2 million which resulted primarily from a decrease in accounts
payable due to the Company's aggressive policy of taking negotiated cash
discounts. Net cash used in investing activities was $390.5 million, including
$323.8 million used for acquisitions, $15.9 million used for additions to
property and equipment and $41.3 million paid to Dudley as the initial payment
related to the Company's 49% equity investment in Dudley. Net borrowings
increased $244.7 million during the nine months ended January 25, 1997,
primarily to fund the purchase prices of acquisitions, to repay higher-cost debt
assumed in acquisitions and to fund the initial equity investment in Dudley. The
Company also received $41.9 million in cash as a result of the sale of common
stock during the period. Discontinued operations used $3.2 million of cash
during the nine months ended January 25, 1997.
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<PAGE>
During fiscal 1997, net cash provided by operating activities was $15.8
million. Net cash provided by operating activities was impacted by the Company's
aggressive cash payment policies related to bringing current the accounts
payable balances at all acquired companies and earning all available cash
discounts offered by vendors for paying balances on reduced payment terms. Net
cash used in investing activities was $424.0 million, including $345.3 million
for acquisitions, $34.0 million for additions to property and equipment and
$41.3 million to make an equity investment in Dudley. Net cash provided by
financing activities was $277.4 million. The Company received net proceeds from
the sale of shares of its common stock of $318.9 million and approximately
$225.4 million from the issuance of the Notes. These net proceeds were used
primarily to fund acquisitions and repay higher interest rate debt assumed in
acquisitions. Net cash used in discontinued operations was $8.2 million.
During fiscal 1996, net cash provided by operating activities was $19.2
million. Net cash used in investing activities was $120.1 million, including
$89.2 million used for acquisitions and $17.9 million used for additions to
property and equipment. Net cash provided by financing activities was $257.8
million. The Company received net proceeds from the sale of shares of its common
stock of $180.2 million and net proceeds from the issuance of the Notes of
approximately $139.0 million. These net proceeds were used primarily to fund
acquisitions, including the repayment of higher interest rate debt assumed in
business combinations. Net cash provided by discontinud operations was $1.7
million.
During fiscal 1995, net cash provided by operating activities was $7.7
million. Net cash used in investing activities was $26.2 million, including
$16.0 million used for acquisitions and $11.0 million used for additions to
property and equipment. Net cash provided by financing activities was $22.3
million, representing net proceeds from the initial public offering, partially
offset by the payment of $11.3 million to the stockholders of four of the
companies acquired simultaneously with the completion of the Company's initial
public offering and the payment of dividends to certain of the companies
acquired in business combinations accounted for under the pooling-of-interests
method of $7.7 million. Net cash provided by discontinued operations was $3.5
million.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
seasonality of the core office products business, however, is expected to be
impacted by the seasonality of the Company's other operations, which have
expanded through acquisitions. For example, the revenues and profitability of
the Company's operations in New Zealand and Australia have generally been higher
in the Company's third quarter. As the Company's mix of businesses evolves
through future acquisitions, these seasonal fluctuations may continue to change.
Therefore, results for any quarter are not necessarily indicative of the results
that the Company may achieve for any subsequent fiscal quarter or for a full
fiscal year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold, general economic conditions and the retroactive restatement in
accordance with generally accepted accounting principles of the Company's
consolidated financial statements for acquisitions accounted for under the
pooling-of-interests method. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 30, 1996 and April 26, 1997 and
the fiscal year ending April 25, 1998 (in thousands, except for per share
amounts). The information has been derived from unaudited consolidated financial
F-15
<PAGE>
statements that in the opinion of management reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit....................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................... 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items.............................. 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations......... 3,387 5,550 7,727 (886) 15,778
Net income......................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.24
Net income..................................... 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued operations..... 0.06 0.08 0.11 (0.01) 0.23
Net income..................................... 0.08 0.15 0.20 0.07 0.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
Gross profit....................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................... 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items.............................. 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations................ 9,475 8,933 2,003 6,389 26,800
Net income......................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.31
Net income..................................... 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations............ 0.12 0.10 0.02 0.06 0.29
Net income..................................... 0.20 0.20 0.12 0.12 0.62
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS (UNAUDITED)
------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 1,930,113
Gross profit....................................... 170,782 179,256 189,220 539,258
Operating income................................... 23,802 28,300 37,289 89,391
Income from continuing operations before
extraordinary items.............................. 9,035 12,770 15,431 37,236
Income from discontinued operations................ 10,951 11,428 3,085 25,464
Net income......................................... 19,986 24,198 18,516 62,700
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items.......................... 0.09 0.12 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.03 0.23
Net income..................................... 0.19 0.22 0.15 0.55
Diluted:
Income from continuing operations before
extraordinary items.......................... 0.08 0.11 0.12 0.32
Income from discontinued operations............ 0.10 0.10 0.02 0.22
Net income..................................... 0.18 0.21 0.14 0.54
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1995, 1996 or 1997 or during the nine months
ended January 24, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. The Company has adopted SFAS No. 128 during the nine
months ended January 24, 1998 and has restated all prior period EPS data.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company intends to adopt SFAS
No. 130 in the fiscal year ending April 24, 1999.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results. Where indicated, the following discussion
addresses factors that management believes will be applicable to the Company's
business upon completion of the Strategic Restructuring Plan.
Historically, U.S. Office Products has grown substantially through
acquisitions. U.S. Office Products' aggressive acquisition program has produced
a significant increase in sales, employees, facilities and
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<PAGE>
distribution systems. While the Company's decentralized management strategy,
together with operating efficiencies resulting from the elimination of
duplicative functions and economies of scale, may present opportunities to
reduce costs, such strategies may initially require additional costs and
expenditures to expand operational and financial systems and corporate
management administration. Because of the various costs and possible
cost-savings strategies, historical operating results may not be indicative of
future performance. There also can be no assurance that the pace of the
Company's acquisitions will not adversely affect efforts to implement
cost-savings and integration strategies and to manage operations and
acquisitions profitably. Additionally, attempts to achieve economies of scale
through cost cutting and lay-offs of existing personnel may, at least in the
short term, have an adverse impact upon U.S. Office Products. Delays in
implementing planned integration and consolidation strategies, or the failure of
such strategies to achieve anticipated cost savings, also could adversely affect
the Company's results. In addition, there can be no assurance that U.S. Office
Products' management and financial controls, personnel, computer systems and
other corporate support systems will be adequate to manage the continuing
increase in the size and scope of the Company's operations and acquisition
activity.
U.S. Office Products intends to pursue future acquisition opportunities;
however, no assurance can be given that U.S. Office Products will identify,
finance and complete additional suitable acquisitions on acceptable terms, or
that future acquisitions, if completed, will be successful. U.S. Office Products
will likely incur additional debt to finance any additional acquisitions. In
addition, acquired companies may not achieve future sales and profitability
levels that justify the prices that U.S. Office Products paid to acquire them.
Acquisitions also may involve a number of special risks that could have a
material adverse effect on future operations and financial performance,
including diversion of management's attention; unanticipated declines in
revenues or profitability following acquisitions; difficulties with the
retention, hiring and training of key personnel; risks associated with
unanticipated business problems or legal liabilities; and the amortization of
acquired intangible assets, such as goodwill. Tax considerations may also
restrict the amount of stock that U.S. Office Products can use for acquisitions.
See "Effect of the Proposed Sale of Equity Securities and the Strategic
Restructuring Plan--We may be Unable to Issue Additional Stock in Some
Circumstances."
As a result of the Tender Offer and the Distributions, U.S. Office Products
will be precluded from completing business combinations under the
pooling-of-interests accounting method for a period up to 6-9 months. Any
business combinations that U.S. Office Products completes during this period
will have to be accounted for under the purchase method. Under the purchase
method of accounting, U.S. Office Products will have to record goodwill for each
such acquisition, in an amount equal to any excess of the purchase price paid
for the acquired company over the fair market value of the acquired company's
net assets. Under the pooling-of-interests method, no goodwill is recorded in
connection with the acquisition of a pooled company, and there is no
corresponding expense associated with the amortization of such goodwill.
Approximately $917.0 million, or 45.7% of the Company's pro forma total
assets as of January 24, 1998, represents intangible assets, the substantial
majority of which is goodwill. This amount will increase to the extent that U.S.
Office Products acquires additional companies under the purchase method of
accounting. The Company amortizes goodwill on a straight-line method over a
period of up to 40 years. The amount amortized in a particular fiscal period is
a non-cash expense that reduces the Company's net income. As a result of the
accounting for the acquisition of Mail Boxes Etc. ("MBE") under the purchase
method (rather than the pooling-of-interests method that had been intended at
the time of the acquisition), the Company's amortization charge will increase by
approximately $6.5 million annually. The substantial majority of goodwill also
is not a deductible expense for U.S. federal income tax purposes. The Company
expects that its effective tax rate will be higher than the federal statutory
rate, because its net earnings will be reduced by a significant amount of
non-deductible goodwill charges.
The Company is currently reviewing the year 2000 compliance of software that
it uses in its business. The Company's Trinity system, which it is currently
installing throughout its North American Office Products Group operations as the
core operations system, is year 2000 compliant. However, the Company's
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<PAGE>
operating subsidiaries are, in some cases, using billing or other software that
is not year 2000 compliant. Based upon information that the Company has
collected from its operating subsidiaries, it expects to be able to achieve year
2000 compliance in 1999 and does not expect that the cost of making necessary
adaptations will be material to the Company. If the Company cannot make the
necessary adaptations on a timely basis, or if the costs are greater than
expected, the Company's business could be adversely affected.
Management intends to continue to focus significant attention and resources
on international operations and expects foreign sales to continue to represent a
significant portion of U.S. Office Products' total sales. The factors described
in this section that apply to U.S. Office Products' domestic operations also may
affect U.S. Office Products' foreign operations. In addition, U.S. Office
Products' foreign operations are subject to a number of other risks, including
currency exchange rates; new and different legal and regulatory requirements in
local jurisdictions; tariffs and trade barriers; potential difficulties in
staffing and managing local operations; credit risk of local customers and
distributors; potential difficulties in protecting intellectual property,
potential imposition of restrictions on investments; potentially adverse tax
consequences, including imposition or increase of withholding and other taxes on
remittances and other payments by subsidiaries; and local economic, political
and social conditions, including the possibility of hyper-inflationary
conditions, in certain countries. There can be no assurance that one or a
combination of these factors will not have a material adverse impact on U.S.
Office Products' ability to maintain or increase its foreign sales or on its
business, financial condition or results of operations. See "Managements'
Discussion and Analysis of Financial Position and Results of
Operations--Liquidity and Capital Resources."
U.S. Office Products expects to incur substantial additional borrowings in
connection with the Tender Offer. See Note 1 of the Company's Notes to
Consolidated Financial Statements and "--Liquidity and Capital Resources." This
substantial increase in U.S. Office Products' leverage could have material
consequences to U.S. Office Products and the holders of common stock, including,
but not limited to, the following: (i) U.S. Office Products' ability to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures, and general corporate or other purposes may be impaired, (ii) a
substantial portion of U.S. Office Products' cash flow will be required for debt
service and, as a result, will not be available for other purposes; and (iii)
U.S. Office Products' level of indebtedness could make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions. In addition, it is expected that the Company's financing agreements
will contain covenants that may restrict its ability to take certain actions
(such as buying or selling assets, paying dividends, making capital
expenditures, or engaging in other transactions). If U.S. Office Products is
unable to service its indebtedness, it will be forced to pursue one or more
alternative strategies, such as selling assets, restructuring or refinancing its
indebtedness, or seeking additional equity capital. The Company's management
does not have experience operating a business with a substantial amount of
leverage.
U.S. Office Products operates in a highly competitive environment. It
generally competes with a large number of smaller, independent companies, many
of which are well-established in their markets. In addition, in North America,
the North American Office Products Group competes with five large office
products companies, each of which has significant financial resources. No
assurances can be give that competition will not have an adverse effect on the
Company's business.
U.S. Office Products acquired MBE in November 1997. Various factors may
affect MBE's business, including recent changes in MBE's senior management, the
reliance of MBE franchisees on United Parcel Service for ground shipping
services, the limited control that MBE has over its franchisees, the impact of
government regulation of MBE as a franchisor, the historically litigious nature
of franchise relationships and the growing competition from the United States
Postal Service.
As part of the Strategic Restructuring Plan, it is expected that Investor
will acquire shares of U.S. Office Products common stock representing 24.9% of
the outstanding shares of the Company's common stock after giving effect to the
issuance of such shares. Investor also will purchase various warrants that
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<PAGE>
give it the right to acquire additional shares of common stock in the future.
Under the Investment Agreement that Investor and the Company signed on January
12, 1998 (the "Investment Agreement"), Investor will have, among other things,
the right (subject to certain conditions) to nominate three of the nine members
of the U.S. Office Products Board of Directors, including the Chairman of the
Board, and certain Board decisions will be subject to super-majority voting
provisions that, in certain circumstances, may require the concurrence of at
least one director nominated by Investor. Matters subject to super-majority
Board approval include (i) the issuance of new shares in excess of certain
amounts specified in the Investment Agreement, (ii) certain business
combinations, (iii) a disposition by the Company of all or substantially all of
its assets, (iv) a major recapitalization, dissolution, or liquidation of the
Company, or (v) an amendment of the Company's charter or by-laws that is
inconsistent with the terms of the Investment Agreement. Investor's significant
ownership of U.S. Office Products common stock may permit Investor to influence
significantly matters requiring the approval of the Company's stockholders. The
super-majority Board voting requirements may give Investor the ability to block
the approval of certain actions requiring the super-majority vote of the Board.
Together, this ownership position and the Board voting requirements may have the
effect of discouraging (or possibly preventing) a future change in control of
U.S. Office Products. In addition, the super-majority Board voting requirement
may have the effect of limiting the Company's future use of equity to acquire
businesses, raise capital, or provide employees with long-term incentives.
TAX CONSEQUENCES OF THE DISTRIBUTIONS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes the Distributions will qualify as tax-free spin-offs under Section 355
of the Code and will not be taxable under Section 355(e) of the Code. The
Company will not complete the Distributions unless it receives the Tax Opinion.
The Tax Opinion will be based on the accuracy as of the time of the
Distributions of factual representations made by the Company, the Spin-Off
Companies and Investor, and certain other data, documentation and other
materials that Wilmer, Cutler & Pickering has deemed necessary. See "Tax
Consequences of the Distributions" in the Proxy Statement.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
the Company or the Company's stockholders (except with respect to cash received
in lieu of fractional shares) as a result of the Distributions.
If a Distribution fails to qualify as a tax-free spin-off under Section 355,
the Company will recognize gain equal to the difference between the fair market
value of the common stock of the Spin-Off Company and the Company's adjusted tax
basis in the common stock of the Spin-Off Company. In addition, holders of U.S.
Office Products common stock will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value of the common
stock of the Spin-Off Company that you receive in the Distribution. If the
Company were to recognize gain on one or more Distributions, such gain would
likely be substantial.
If any Distribution is taxable under Section 355(e), but otherwise qualifies
as a tax-free spin-off, the Company will recognize gain equal to the difference
between the fair market value of the common stock of the Spin-Off Company and
the Company's adjusted tax basis in the common stock of the Spin-Off Company.
However, no gain or loss will be attributable to holders of U.S. Office
Products' common stock as the result of a Distribution being taxable under
Section 355(e). If the Company were to recognize gain on one or more
Distributions, such gain would likely be substantial.
Certain limitations under Section 355 may restrict the Company's ability to
issue capital stock after the Distributions. These limitations will generally
prevent the Company from issuing capital stock to the extent the issuance is
part of a plan, which includes a Distribution, pursuant to which one or more
people or organizations acquire capital stock of the Company that represents 50%
or more of the voting power or 50% or more of the value of the Company's capital
stock. These limitations may restrict the Company's ability to undertake
transactions involving issuances of capital stock of the Company that management
otherwise believes would be beneficial.
F-20
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to (i) the Equity
Self-Tender, (ii) the Distributions, and (iii) the Equity Investment
contemplated by the Strategic Restructuring Plan, (iv) the 2001 Note Offer, (v)
the 2003 Note Tender, (vi) the New Borrowings to be undertaken in conjunction
with the Strategic Restructuring Plan and (vii) all acquisitions completed
through March 20, 1998. The unaudited pro forma combined financial statements do
not give effect to the allocation of corporate overhead to the Spin-Off
Companies.
The pro forma combined balance sheet gives effect to (i) the Equity
Self-Tender, (ii) the Distributions, (iii) the Equity Investment, (iv) the 2001
Note Offer, (v) the 2003 Note Tender, (vi) the New Borrowings and (vii) the
businesses acquired by the Company after January 24, 1998 in business
combinations accounted for under the purchase method (the "Post January 24, 1998
Purchase Acquisitions"), as if all such transactions had occurred as of the
Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; and (vii) the business combinations accounted for under
the purchase method during fiscal 1998 (the "Fiscal 1998 Purchase
Acquisitions"), as if all such transactions had occurred on April 27, 1997. The
pro forma combined statement of income for the nine months ended January 24,
1998 is comprised of (i) the unaudited financial information of the Company for
the nine months ended January 24, 1998; and (ii) the unaudited financial
information of the Fiscal 1998 Purchase Acquisitions for the period from April
27, 1997 through their respective acquisition dates, except for the financial
information of the Post January 24, 1998 Purchase Acquisitions which is included
through January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions;
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the business combinations accounted for under the
purchase method during fiscal 1997 (the "Fiscal 1997 Purchase Acquisitions");
and (viii) the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on May 1, 1996. The pro forma combined statement of income for the
nine months ended January 25, 1997 is comprised of (i) the unaudited financial
information of the Company for the nine months ended January 25, 1997; (ii) the
unaudited financial information of the Fiscal 1997 Purchase Acquisitions for the
period from May 1, 1996 through the earlier of January 25, 1997 or their
respective dates of acquisition; and (iii) the unaudited financial information
of the Fiscal 1998 Purchase Acquisitions for the period from May 1, 1996 through
January 25, 1997.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the Equity Self-Tender; (ii) the Distributions,
(iii) the Equity Investment; (iv) the 2001 Note Offer; (v) the 2003 Note Tender;
(vi) the New Borrowings; (vii) the Fiscal 1997 Purchase Acquisition; and (viii)
the Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred
on May 1, 1996. The pro forma combined statement of income for the year ended
April 26, 1997 is comprised of (i) the audited financial information of the
Company for the fiscal year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the 25 companies (related to continuing operations) acquired
by the Company during the fiscal year ended
F-21
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
INTRODUCTION TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
April 26, 1997 which were acquired in business combinations accounted for under
the pooling-of-interests method of accounting. The results of the companies
included in the Spin-Off Companies have been reflected as discontinued
operations in the Company's historical statement of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company. The pro
forma combined financial statements should be read in conjunction with the
Company's audited consolidated financial statements.
F-22
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
U.S. JANUARY 24, PRO FORMA ADJUSTMENTS
OFFICE 1998 ---------------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
---------- ------------- ----------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 45,258 $ 108 $(22,754)(a) $ 907,388(b) $
70,000(b)
(1,000,000)(b)
Accounts receivable,
net.................. 324,976 5,077
Inventory, net......... 239,043 2,035
Prepaid and other
current assets....... 103,624 94 (1,447)(b)
---------- ------------- ----------- ------------- -------------
Total current
assets........... 712,901 7,314 (22,754) (24,059)
Property and equipment,
net.................... 217,228 6,144
Intangible assets, net... 903,722 13,255(a)
Other assets............. 174,549 317 (3,739)(b)
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........ 114,959 (114,959)(c)
All other net assets... 346,083 (346,083)(d)
---------- ------------- ----------- ------------- -------------
Total assets....... $2,469,442 $13,775 $ (9,499) $ (27,798) $(461,042)
---------- ------------- ----------- ------------- -------------
---------- ------------- ----------- ------------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
----------- ----------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 270,000(e) $ $ 217,350(h) $
(270,000)(e) (217,350)(h)
Accounts receivable,
net.................. 330,053
Inventory, net......... 241,078
Prepaid and other
current assets....... 102,271
----------- ----------- ----------- ----------
Total current
assets........... 673,402
Property and equipment,
net.................... 223,372
Intangible assets, net... 916,977
Other assets............. 30,000(f) (3,275) (g) (5,518)(h) 192,334
Net assets of
discontinued
operations:
Amounts to become
receivable upon the
Distributions........
All other net assets...
----------- ----------- ----------- ----------
Total assets....... $ 30,000 $ (3,275) $ (5,518) $2,006,085
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST PRO FORMA ADJUSTMENTS
U.S. OFFICE JANUARY 24, 1998 -----------------------------------------------
PRODUCTS PURCHASE PURCHASE EQUITY
COMPANY ACQUISITIONS ACCOUNTING SELF-TENDER DISTRIBUTIONS
----------- ---------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $ 332,636 $ 640 $ (640)(a) $ $(114,959)(c)
Accounts payable............ 164,229 2,438
Accrued compensation........ 41,262
Other accrued liabilities... 67,654 1,742 (2,074 )(b)
(26,000 )(b)
----------- -------- ---------- ----------- -------------
Total current
liabilities........... 605,781 4,820 (640) (28,074 ) (114,959)
Long-term debt................ 381,844 3,817 (3,817)(a) 907,388 (b)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,050 96
----------- -------- ---------- ----------- -------------
Total liabilities....... 996,520 8,733 (4,457) 879,314 (114,959)
Stockholders' equity:
Common stock................ 133 (37 )(b)
5 (b)
Paid-in capital............. 1,463,523 69,995 (b) (314,514)(d)
(999,963 )(b)
65,000 (b)
Cumulative translation
adjustment................ (113,022)
Retained earnings
(deficit)................. 122,288 (3,112 )(b) (31,569)(d)
(39,000 )(b)
Equity of purchased
companies................. 5,042 (5,042)(a)
----------- -------- ---------- ----------- -------------
Total stockholders'
equity................ 1,472,922 5,042 (5,042) (907,112 ) (346,083)
----------- -------- ---------- ----------- -------------
Total liabilities and
stockholders'
equity................ $2,469,442 $ 13,775 $ (9,499) $ (27,798 ) $(461,042)
----------- -------- ---------- ----------- -------------
----------- -------- ---------- ----------- -------------
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------
EQUITY 2001 NOTE 2003 NOTE PRO FORMA
INVESTMENT OFFER TENDER COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt............. $(217,677)(e) $ $ $
Accounts payable............ 166,667
Accrued compensation........ 41,262
Other accrued liabilities... (1,311)(g) 2,853(h) 42,864
---------- ---------- ---------- ----------
Total current
liabilities........... (217,677) (1,311) 2,853 250,793
Long-term debt................ (52,323)(e) (143,750)(g) (230,000)(h) 1,155,509
75,000(f) 217,350(h)
Deferred income taxes......... 2,845
Other long-term liabilities
and minority interests...... 6,146
---------- ---------- ---------- ----------
Total liabilities....... (195,000) (145,061) (9,797) 1,415,293
Stockholders' equity:
Common stock................ 33(e) 12(g) 146
Paid-in capital............. 269,967(e) 168,897(g) 707,905
(15,000)(f)
Cumulative translation
adjustment................ (113,022 )
Retained earnings
(deficit)................. (30,000)(f) (25,159)(g) 7,590(h) (4,237 )
(1,964)(g) (3,311)(h)
Equity of purchased
companies.................
---------- ---------- ---------- ----------
Total stockholders'
equity................ 225,000 141,786 4,279 590,792
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
equity................ $ 30,000 $ (3,275) $ (5,518) $2,006,085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-24
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1998
PRODUCTS PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,930,113 $ 140,542 $ $ 2,070,655
Cost of revenues.................................. 1,390,855 90,566 1,481,421
------------ ----------- ------------- ------------
Gross profit.................................... 539,258 49,976 589,234
Selling, general and administrative expenses...... 436,037 33,676 (2,357 (i) 467,356
Amortization expense.............................. 13,830 4,603(j) 18,433
------------ ----------- ------------- ------------
Operating income................................ 89,391 16,300 (2,246) 103,445
Other (income) expense:
Interest expense................................ 27,534 506 49,957(k) 77,997
Interest income................................. (1,545) (169) 1,714(k)
Other........................................... (6,369) (342) (6,711)
------------ ----------- ------------- ------------
Income from continuing operations before provision
for income taxes................................ 69,771 16,305 (53,917) 32,159
Provision for income taxes........................ 32,535 2,161 (13,793 (l) 20,903
------------ ----------- ------------- ------------
Income from continuing operations................. $ 37,236 $ 14,144 $ (40,124) $ 11,256
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
Weighted average shares outstanding:
Basic........................................... 114,758 146,331(m)
Diluted......................................... 117,185 148,757(m)
Income per share from continuing operations:
Basic........................................... $ 0.32 $ 0.08
Diluted......................................... $ 0.32 $ 0.08
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-25
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................................... $ 1,498,320 $ 363,229 $ 226,312 $ $ 2,087,861
Cost of revenues........................................... 1,077,408 259,958 150,345 1,487,711
------------ ----------- ----------- ----------- ------------
Gross profit........................................... 420,912 103,271 75,967 600,150
Selling, general and administrative expenses............... 344,474 93,201 53,931 (7,698)(i) 483,908
Amortization expense....................................... 8,072 10,343(j) 18,415
Non-recurring acquisition costs............................ 7,316 7,316
------------ ----------- ----------- ----------- ------------
Operating income....................................... 61,050 10,070 22,036 (2,645) 90,511
Other (income) expense:
Interest expense......................................... 27,540 3,109 1,855 45,493(k) 77,997
Interest income.......................................... (6,048) (186) (1,017) 7,251(k)
Other.................................................... (4,073) (2,156) (501) (6,730)
------------ ----------- ----------- ----------- ------------
Income from continuing operations before provision for
income taxes and extraordinary items..................... 43,631 9,303 21,699 (55,389) 19,244
Provision for income taxes................................. 18,238 3,007 7,341 (14,153)(l) 14,433
------------ ----------- ----------- ----------- ------------
Income from continuing operations before extraordinary
items.................................................... $ 25,393 $ 6,296 $ 14,358 $ (41,236) $ 4,811
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Weighted average shares outstanding:
Basic.................................................... 85,978 146,331(m)
Diluted.................................................. 87,824 148,177(m)
Income per share from continuing operations before
extraordinary items:
Basic.................................................... $ 0.30 $ 0.03
Diluted.................................................. $ 0.29 $ 0.03
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-26
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. OFFICE FISCAL 1997 FISCAL 1998
PRODUCTS PURCHASE PURCHASE PRO FORMA PRO FORMA
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 2,115,954 $ 374,886 $ 303,169 $ $ 2,794,009
Cost of revenues....................................... 1,518,287 268,618 201,410 1,988,315
------------ ------------ ------------ ------------ ------------
Gross profit....................................... 597,667 106,268 101,759 805,694
Selling, general and administrative expenses........... 488,215 95,913 70,996 (8,257)(i) 646,867
Amortization expense................................... 12,416 12,722(j) 25,138
Non-recurring acquisition costs........................ 8,001 8,001
Restructuring costs.................................... 4,201 4,201
------------ ------------ ------------ ------------ ------------
Operating income................................... 84,834 10,355 30,763 (4,465) 121,487
Other (income) expense:
Interest expense..................................... 36,047 3,170 2,552 62,227(k) 103,996
Interest income...................................... (6,857) (212) (1,448) 8,517(k)
Other................................................ (4,233) (2,164) (753) (7,150)
------------ ------------ ------------ ------------ ------------
Income from continuing operations before provision for
income taxes and extraordinary items................. 59,877 9,561 30,412 (75,209) 24,641
Provision for income taxes............................. 27,939 3,056 9,933 (22,447)(l) 18,481
------------ ------------ ------------ ------------ ------------
Income from continuing operations before extraordinary
items................................................ $ 31,938 $ 6,505 $ 20,479 $ (52,762) $ 6,160
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
------------
Weighted average shares outstanding:
Basic................................................ 90,026 146,331(m)
Diluted.............................................. 91,761 148,066(m)
Income per share from continuing operations before
extraordinary items:
Basic................................................ $ 0.35 $ 0.04
Diluted.............................................. $ 0.35 $ 0.04
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-27
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments and repayment of
certain short-term and long-term debt associated with the Post January
24, 1998 Purchase Acquisitions. The portion of the consideration assigned
to goodwill ($13,255) in transactions accounted for under the purchase
method represents the excess of the cost over the fair market value of
the net assets acquired. The Company amortizes goodwill over a period of
40 years. The recoverability of the unamortized goodwill will be assessed
on an ongoing basis by comparing anticipated undiscounted future cash
flows from operations to net book value.
(b) Adjustment to reflect the Equity Self-Tender, including the repurchase
of 37,037 shares of common stock (including shares underlying employee
stock options) by the Company for $1,000,000 and reduced by the proceeds
from the exercise of employee stock options related to shares
participating in the Equity Self-Tender of $70,000. The funds to finance
the net $930,000 cost of the Equity Self-Tender are expected to be
obtained from New Borrowings of $907,388 and cash on hand of $22,612. As
a result of the New Borrowings, the adjustment also reflects the
write-off of $5,186 in short-term and long-term capitalized debt issue
costs related to the Company's current credit facility. The Company
estimates that the proceeds from the exercise of employee stock options
will be approximately $70,000 based upon 5,000 employee stock options
exercised at an average exercise price of $14.00 per share. As a result
of the Company allowing for the conditional exercise of employee stock
options tendered pursuant to the Equity Self-Tender, such tendered stock
options take on the characteristics of a combination plan during the
Equity Self-Tender period (the "Deemed Combination Plan"). Combination
plans are those that provide stock appreciation rights ("SARs") in
combination with typical stock options. To the extent that the
optionholder exercises the SAR provisions, the companion stock options
are canceled. Compensation expense is recorded for cash payments made
upon exercise of the deemed SARs. Upon completion of the Equity
Self-Tender, stock options not accepted pursuant to the Equity
Self-Tender revert to fixed option awards with terms identical to those
prior to commencement of the Equity Self-Tender. The terms of the Equity
Self-Tender, including the number of shares to be repurchased in relation
to the total number of shares and options outstanding and the stated
tender price in relation to the current market price of the Company's
common stock, provide persuasive evidence that only a portion of the
Deemed Combination Plan awards will be extinguished via payment under the
deemed SAR provisions. The Company estimates that the compensation
expense related to the option shares purchased in the Equity Self-Tender
will range from $65,000 to $72,000, assuming management's estimate of the
likely range of acceptance rates for the Equity Self-Tender of 22.5% to
25.0% of the total number of shares (including shares underlying options)
tendered. For purposes of the pro forma combined balance sheet, the
Company has reflected the after-tax compensation expense of $39,000
($65,000 before benefit from income taxes) as a reduction to retained
earnings. Additionally, other accrued liabilities has been decreased by
$26,000 to reflect the expected income tax benefit and additional paid-in
capital has been increased by $65,000. The Company has not included this
compensation expense in the unaudited pro forma combined statements of
income because it is of a non-recurring nature and is directly related to
the restructuring transaction.
(c) Adjustment to reflect the collection of $114,959 of receivables from the
Spin-Off Companies at the date of the Distributions.
F-28
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(d) Adjustment to remove the remaining net assets of the Spin-Off Companies.
(e) Adjustment to reflect the issuance of 33,489 shares of common stock in
conjunction with the Equity Investment of $270,000. The Company has made
certain preliminary calculations in relation to the allocation of the
proceeds to be received from Investor to the related common stock, the
Warrants and the Special Warrants. These calculations cannot be finalized
until the trading value of the Company's common stock immediately
following the Distributions is available. The Company intends to reflect
any amounts allocated to the Warrants and the Special Warrants in
additional paid-in capital. The preliminary assessment of the fair value
of the Warrants at the future grant date was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
WARRANTS
-----------
<S> <C>
Expected life...................................................................... 9 years
Risk free interest rate............................................................ 5.6%
Expected volatility of Company common stock........................................ 40%
Dividend rate...................................................................... 0%
</TABLE>
With respect to the Special Warrants, the Company's calculations assumed
that all holders of the 2001 Notes accept the 2001 Note Offer. The
Company does not anticipate assigning a value to the Special Warrants at
the time of the Equity Investment by Investor because (i) the 2001 Note
Offer is expected to have been completed prior to such Equity Investment;
and (ii) the other potential events which could give rise to the exercise
of the Special Warrants are considered by the Company to be contingent in
nature.
Based on the above assumptions, the Company's preliminary calculations
indicate that approximately $203,700 of the proceeds from the Equity
Investment will be allocated to the shares of Company common stock issued
to Investor, $66,300 will be allocated to the Warrants and no value will
be allocated to the Special Warrants. In arriving at these values, no
discount was applied to the value of the Warrants to reflect the
illiquidity of the Warrants pursuant to SFAS No. 123 issued by FASB.
(f) Adjustment to reflect the estimated transaction fees and expenses
(including financing costs) associated with the Equity Self-Tender, the
Distributions, the Equity Investment and the New Borrowings of $75,000.
Of this amount, $30,000 of debt issue costs will be capitalized. These
fees and expenses have not been reflected in the unaudited pro forma
combined statements of income because they are either capitalizable or
are of a non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(g) Adjustment to reflect the issuance of 11,837 shares of common stock in
conjunction with the 2001 Note Offer, consisting of 8,890 shares of
common stock issued in exchange for 2001 Notes and 2,947 shares of common
stock to Investor in accordance with the provisions of the Special
Warrants. As a result of the 2001 Note Offer, the Company will issue
1,324 shares of common stock over the contractual amount with a market
value of $25,159 to induce conversion of the 2001 Notes. The $25,159 has
been reflected as a reduction in retained earnings as the market value of
the inducement is required to be recorded as an expense. In addition, the
adjustment
F-29
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
reflects the write-off of $3,275 in capitalized debt issue costs related
to the 2001 Notes. These expenses have not been reflected in the
unaudited pro forma combined statements of income because they are of a
non-recurring nature and are directly related to the Strategic
Restructuring Plan.
(h) Adjustment to reflect the early extinguishment of the 2003 Notes,
$230,000 principal amount, in exchange for $217,350 in cash in the 2003
Note Tender. The Company believes that it will be able to retire the 2003
Notes at a price of 94.5% of par value, or $217,350, resulting in an
extraordinary gain of $7,590, net of income taxes of $5,060, which has
been reflected as an increase to retained earnings. In addition, the
adjustment reflects the write-off of $5,518 in capitalized debt issue
costs related to the 2003 Notes. The gain and write-off have not been
reflected in the unaudited pro forma combined statements of income
because they are extraordinary items and are directly related to the
Strategic Restructuring Plan.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(i) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations
of executive compensation agreements resulting from certain acquisitions.
The Company believes that these reductions are expected to remain in
place for the forseeable future and are not reasonably likely to affect
operating performance.
(j) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997
Purchase Acquisitions and the Fiscal 1998 Purchase Acquisitions for the
periods prior to the respective dates of acquisition. The Company has
recorded goodwill amortization in the historical financial statements
from the respective dates of acquisition forward. The goodwill is being
amortized over an estimated life of 40 years.
(k) Adjustment to reflect the increase in interest expense, at a weighted
average rate of 9.0%, resulting from the increase in debt outstanding to
$1,155,509 as a result of the Equity Self-Tender, partially offset by the
proceeds from the Equity Investment, and the effects of the 2001 Note
Offer and the 2003 Note Tender assuming full exchange and tender,
respectively. The weighted average interest rate of 9.0% was determined
based upon $755,509 outstanding under the terms of the new bank loan
facility at annual interest rates of LIBOR plus margins ranging from
2.25% to 2.5% (approximately 7.9% to 8.15%) and the issuance of $400,000
of senior subordinated notes at an annual interest rate of approximately
9.0%, plus commitment fees on unused balances and amortization of the
related debt issue costs. Pro forma interest expense will fluctuate
$5,778 on an annual basis for each 0.5% change in interest rates.
Depending on market conditions at the time the senior subordinated notes
are offered and when funds are borrowed under the new bank loan facility,
the interest rates may vary from those indicated herein.
(l) Adjustment to calculate the provision for income taxes on the combined
pro forma results at effective income tax rates of approximately 75%, 65%
and 75% for the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 and January 25, 1997, respectively. The difference
between the effective tax rates and the statutory tax rate of 35% relates
primarily to state income taxes and non-deductible goodwill amortization
expense. This adjustment assumes
F-30
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
that all companies were taxed at the effective tax rates regardless of
how they were taxed prior to being acquired by the Company, including
those companies that previously paid no taxes under Subchapter S.
(m) Basic pro forma earnings per share is calculated based upon 146,331
weighted average shares of common stock outstanding for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997. The amounts are comprised of 133,042 shares outstanding for each of
the periods, 37,037 shares repurchased as a result of the Equity
Self-Tender, the issuance of 36,436 shares as a result of the Equity
Investment, the issuance of 5,000 shares related to employee stock
options participating in the Equity Self-Tender and the issuance of 8,890
shares as a result of the 2001 Note Offer, assuming full conversion. The
weighted average shares outstanding used to calculate diluted pro forma
earnings per share is based upon the basic weighted average shares
outstanding plus 1,735, 2,426 and 1,846 common stock equivalents
considered to be outstanding related to stock options for the year ended
April 26, 1997 and the nine months ended January 24, 1998 and January 25,
1997, respectively.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
U.S. Office Products Company
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of U.S. Office Products Company and
its subsidiaries at April 26, 1997 and April 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain wholly-owned subsidiaries, which statements reflect net income of $7.4
million and $10.4 million included in the Company's income from discontinued
operations, net of income taxes, for fiscal years ended April 30, 1996 and 1995,
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for those wholly-owned subsidiaries, is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 4, as a result of the Strategic Restructuring Plan, the
Company has restated its financial statements to account for certain business
combinations as purchase transactions.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 6, 1997, except as to the second paragraph
of the Common Stock section of Note 15, which
is as of November 6, 1997 and Note 4, which is
as of January 13, 1998
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the balance sheets of School Specialty, Inc. (formerly known
as EDA Corporation) (the Company) as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' deficit and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for three years ended December 31, 1995,
1994, and 1993 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for three years ended December 31, 1995, 1994, and 1993 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Atlanta, Georgia
February 8, 1996
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity,
and cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SFI Corp. and Hano Document Printers, Inc.:
We have audited the combined balance sheet of SFI Corp. and Hano Document
Printers, Inc. (collectively referred to as the "Companies") as of December 31,
1994, and the related statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1994, which are
not included herein. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of SFI Corp. and Hano
Document Printers, Inc. as of December 31, 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Fortran Corp.
Newington, Virginia
We have audited the accompanying balance sheet of Fortran Corp. as of March
31, 1996, and 1995 and the related statements of earnings, changes in
stockholders' equity, and cash flows for the years ended March 31, 1996, 1995,
and 1994 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to and above present
fairly, in all material respects, the financial position of Fortran Corp. as of
March 31, 1996, and 1995 and the results of its operations and its cash flows
for three years ended March 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles.
As described in Note 9 to the financial statements, on August 21, 1996, the
Company entered into a letter of intent to exchange all of its issued and
outstanding shares of common stock for shares of U.S. Office Products Company
common stock.
RUBIN, KOEHMSTEDT AND NADLER
Springfield, Virginia
June 7, 1996, except for Note 9,
as to which the date is
October 24, 1996
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
MTA, Inc.
Seattle, Washington
We have audited the consolidated balance sheet of MTA, Inc. (the Company) as
of December 31, 1995 and the related statements of income and retained earnings
and of cash flows for the period from January 25, 1995 (date of incorporation)
to December 31, 1995 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MTA, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the period from January 25, 1995 (date of incorporation) to December 31, 1995,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
September 23, 1996
F-38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Huxley Envelope Corporation
We have audited the balance sheets of Huxley Envelope Corporation as of
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 4, 1996
F-40
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 183,483 $ 44,026 $ 45,258
Accounts receivable, less allowance for doubtful accounts of $3,586,
$7,337 and $9,110, respectively....................................... 159,448 283,751 324,976
Inventory............................................................... 103,768 225,998 239,043
Prepaid expenses and other current assets............................... 47,994 74,580 103,624
---------- ------------ ------------
Total current assets................................................ 494,693 628,355 712,901
Property and equipment, net............................................... 77,529 182,633 217,228
Intangible assets, net.................................................... 135,140 611,474 903,722
Other assets.............................................................. 64,942 113,407 174,549
Net assets of discontinued operations:
Amounts to become receivable upon the Distributions..................... 87,700 114,959
All other net assets.................................................... 33,674 83,422 346,083
---------- ------------ ------------
Total assets........................................................ $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................................... $ 94,174 $ 144,125 $ 332,636
Accounts payable........................................................ 87,546 153,915 164,229
Accrued compensation.................................................... 16,775 32,515 41,262
Other accrued liabilities............................................... 22,074 63,814 67,654
---------- ------------ ------------
Total current liabilities........................................... 220,569 394,369 605,781
Long-term debt............................................................ 176,230 380,209 381,844
Deferred income taxes..................................................... 6,186 2,458 2,845
Other long-term liabilities and minority interests........................ 8,247 8,807 6,050
---------- ------------ ------------
Total liabilities................................................... 411,232 785,843 996,520
---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, none
outstanding
Common stock, $.001 par value, 500,000,000 shares authorized,
79,464,423, 104,479,004 and 133,041,979 shares issued and outstanding,
respectively.......................................................... 79 104 133
Additional paid-in capital.............................................. 319,906 867,039 1,463,523
Cumulative translation adjustment....................................... 770 (5,583) (113,022)
Retained earnings....................................................... 73,991 59,588 122,288
---------- ------------ ------------
Total stockholders' equity.......................................... 394,746 921,148 1,472,922
---------- ------------ ------------
Total liabilities and stockholders' equity.......................... $ 805,978 $ 1,706,991 $ 2,469,442
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 658,494 $1,061,528 $2,115,954 $1,498,320 $1,930,113
Cost of revenues..................................... 485,955 789,436 1,518,287 1,077,408 1,390,855
----------- --------- --------- ----------- -----------
Gross profit..................................... 172,539 272,092 597,667 420,912 539,258
Selling, general and administrative expenses......... 152,176 231,569 488,215 344,474 436,037
Amortization expense................................. 801 2,711 12,416 8,072 13,830
Non-recurring acquisition costs...................... 8,057 8,001 7,316
Restructuring costs.................................. 682 4,201
----------- --------- --------- ----------- -----------
Operating income................................. 19,562 29,073 84,834 61,050 89,391
Interest expense..................................... 3,401 8,132 36,047 27,540 27,534
Interest income...................................... (675) (3,506) (6,857) (6,048) (1,545)
Other income......................................... (1,456) (684) (4,233) (4,073) (6,369)
----------- --------- --------- ----------- -----------
Income from continuing operations before provision
for income taxes and extraordinary items........... 18,292 25,131 59,877 43,631 69,771
Provision for income taxes........................... 2,800 6,032 27,939 18,238 32,535
----------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary items................................ 15,492 19,099 31,938 25,393 37,236
Income from discontinued operations, net of income
taxes.............................................. 15,675 15,778 26,800 20,411 25,464
----------- --------- --------- ----------- -----------
Income before extraordinary items.................... 31,167 34,877 58,738 45,804 62,700
Extraordinary items--losses on early terminations of
credit facilities, net of income taxes............. 701 1,450 612
----------- --------- --------- ----------- -----------
Net income........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.30 $ 0.32
Income from discontinued operations.............. 0.34 0.24 0.31 0.24 0.23
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net income....................................... $ 0.68 $ 0.51 $ 0.64 $ 0.53 $ 0.55
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Diluted:
Income from continuing operations before
extraordinary items............................ $ 0.34 $ 0.28 $ 0.35 $ 0.29 $ 0.32
Income from discontinued operations.............. 0.34 0.23 0.29 0.23 0.22
Extraordinary items.............................. (0.01) (0.02) (0.01)
----------- --------- --------- ----------- -----------
Net Income....................................... 0.68 $ 0.50 $ 0.62 $ 0.51 $ 0.54
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Unaudited pro forma income from continuing operations
before extraordinary items (see Note 11)........... $ 29,962
---------
---------
Unaudited pro forma basic income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
Unaudited pro forma diluted income per share from
continuing operations before extraordinary items... $ 0.33
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------ PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
---------- ------ ---------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994............... 38,443,262 $ 38 $26,483 $ (340) $ 58,733 $ (7,562) $77,352
Transactions of Combined Companies
upon formation of Company:
Issuance of common stock............ 5,817,000 6 (5) 1
Capital contribution................ 1,500 1,500
Distributions to stockholders....... (11,300) (11,300)
Adjustments to stockholders'
equity............................ (12,597) 5,035 7,562
Cash dividends...................... (222) (222)
Issuance of common stock, net of
associated expenses in conjunction
with:
Initial public offering............. 5,606,250 6 32,684 32,690
Acquisition......................... 1,312,500 1 8,749 8,750
Transactions of Pooled Companies:
Exercise of warrants and stock
options........................... 20,345 201 201
Cash dividends...................... (16,086) (16,086)
Adjustment to conform the year-ends of
Pooled Companies.................... 2,235 2,235
Cumulative translation adjustments.... 207 207
Net income............................ 31,167 31,167
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1995............... 51,199,357 51 57,015 (133) 69,562 126,495
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offerings.................... 14,352,068 14 174,723 174,737
Acquisitions........................ 11,120,163 11 68,607 68,618
Exercise of stock options, including
tax benefits...................... 95,025 1,023 1,023
Transactions of Pooled Companies:
Issuances of common stock for cash
and repayment of debt............. 872,249 1 8,297 8,298
Capital contributions............... 500 500
Exercise of warrants and stock
options........................... 978,923 1 1,752 1,753
Cash and stock dividends............ 846,638 1 1,361 (32,017) (30,655)
Undistributed earnings of Subchapter S
corporations acquired in pooling-of-
interests business combinations..... 6,628 (6,628)
Adjustment to conform the year-ends of
Pooled Companies.................... 8,898 8,898
Cumulative translation adjustments.... 903 903
Net income............................ 34,176 34,176
---------- ------ ---------- ---------- -------- -------- -------------
Balance at April 30, 1996............... 79,464,423 79 319,906 770 73,991 394,746
</TABLE>
(Continued)
F-43
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
-------------------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS STOCK
------------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996................ 79,464,423 $ 79 $ 313,278 $ 770 $ 80,619
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 13,023,497 13 275,699
Direct equity investment............. 1,875,000 2 38,111
Acquisitions......................... 8,685,450 9 166,071
Exercise of stock options, including
tax benefits....................... 197,742 2,843
Employee stock purchase plan......... 229,998 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 409,631 6,859
Capital contributions................ 12,342 1,857
Exercise of warrants and stock
options............................ 478,616 1 1,979
Retirement of common stock........... 102,305 (443) (34)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations......................... 57,640 (57,640)
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------- ----- ------------ ----------- ---------- -----------
Balance at April 26, 1997................ 104,479,004 104 867,039 (5,583) 59,588
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 27,792,099 28 585,509
Repayment of debt.................... 28,179 570
Exercise of stock options, including
tax benefits....................... 609,494 1 7,600
Employee stock purchase plan......... 169,723 2,805
Share adjustments at Pooled
Companies............................ (36,520)
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------- ----- ------------ ----------- ---------- -----------
Balance at January 24, 1998
(unaudited)............................ 133,041,979 $ 133 $ 1,463,523 $ (113,022) $ 122,288
------------- ----- ------------ ----------- ---------- -----------
------------- ----- ------------ ----------- ---------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30, 1996................ $ 394,746
Issuances of common stock, net of
associated expenses in conjunction
with:
Public offering...................... 275,712
Direct equity investment............. 38,113
Acquisitions......................... 166,080
Exercise of stock options, including
tax benefits....................... 2,843
Employee stock purchase plan......... 3,145
Transactions of Pooled Companies:
Issuances of common stock for
repayment of debt and payment of
acquisition expenses............... 6,859
Capital contributions................ 1,857
Exercise of warrants and stock
options............................ 1,980
Retirement of common stock........... (477)
Cash dividends paid and declared..... (20,931)
Undistributed earnings of Subchapter S
corporations acquired in
pooling-of-interests business
combinations.........................
Adjustment to conform the year-ends of
Pooled Companies..................... 286
Cumulative translation adjustments..... (6,353)
Net income............................. 57,288
------------
Balance at April 26, 1997................ 921,148
Unaudited data:
Issuance of common stock, net of
associated expenses in conjunction
with:
Acquisitions......................... 585,537
Repayment of debt.................... 570
Exercise of stock options, including
tax benefits....................... 7,601
Employee stock purchase plan......... 2,805
Share adjustments at Pooled
Companies............................
Cumulative translation adjustments..... (107,439)
Net income............................. 62,700
------------
Balance at January 24, 1998
(unaudited)............................ $1,472,922
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements
F-44
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 31,167 $ 34,176 $ 57,288 $ 45,192 $ 62,700
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations....................... (15,675) (15,778) (26,800) (20,411) (25,464)
Depreciation and amortization............................. 6,521 10,999 36,102 23,233 41,787
Non-recurring acquisition costs........................... 8,057 8,001 7,316
Payments of restructuring costs........................... (1,900)
Unrealized foreign currency gain.......................... (3,420) (3,420)
Deferred income taxes..................................... (367) (196) (1,035) 3,600 73
Extraordinary losses...................................... 701 1,450 612
Equity in net income of affiliate......................... (782) (265) (878)
Gain on sale of investment................................ (1,059)
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in business
combinations):
Accounts receivable..................................... (18,911) 969 (26,237) (32,154) (29,940)
Inventories............................................. (6,130) 1,861 (3,400) (6,718) (14,417)
Prepaid expenses and other current assets............... (1,417) (23,780) (6,059) (1,539) (3,909)
Accounts payable........................................ 7,349 2,802 (26,692) (22,922) 2,245
Accrued liabilities..................................... 5,204 (565) 7,396 (1,771) 5,699
----------- --------- --------- ----------- -----------
Net cash provided by (used in) operating activities... 7,741 19,246 15,812 (9,247) 34,937
----------- --------- --------- ----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received............. (15,993) (89,223) (345,319) (323,813) (33,642)
Payments of acquisition costs............................... (7,283) (5,343) (4,094) (3,871)
Additions to property and equipment, net of disposals....... (11,049) (17,868) (34,036) (15,891) (28,200)
Investment in affiliate..................................... (41,270) (41,270) (40,773)
Proceeds from sale of investment............................ 5,729
Other....................................................... 867 (5,687) 2,013 (5,476) 3,190
----------- --------- --------- ----------- -----------
Net cash used in investing activities................. (26,175) (120,061) (423,955) (390,544) (97,567)
----------- --------- --------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 32,811 180,230 318,899 41,868 8,239
Proceeds from issuance of long-term debt.................... 6,553 139,040 225,387 224,080 457
Payments of long-term debt.................................. (3,643) (13,143) (174,788) (163,112) (10,647)
Net advances to discontinued operations..................... (111,891) (76,021) (99,213)
Proceeds from (payments of) short-term debt, net............ 3,433 (39,077) 24,132 259,705 172,000
Payments to terminate credit facility....................... (261) (261)
Payments of dividends at Pooled Companies................... (7,700) (8,287) (6,158) (6,122)
Capital contributed by stockholders of Pooled Companies..... 400 1,814 1,814
Adjustment to conform fiscal year-ends of certain Pooled
Companies................................................. 601 (1,397) 286 286
Capital contributed by Combined Company stockholder......... 1,500
Payments to stockholders of Combined Companies.............. (11,300)
----------- --------- --------- ----------- -----------
Net cash provided by financing activities............. 22,255 257,766 277,420 282,237 70,836
----------- --------- --------- ----------- -----------
Effect of exchange rates on cash and cash equivalents......... (180) (121) (511) (345) (3,159)
----------- --------- --------- ----------- -----------
Cash provided by (used in) discontinued operations............ 3,549 1,707 (8,223) (3,170) (3,815)
----------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 7,190 158,537 (139,457) (121,069) 1,232
Cash and cash equivalents at beginning of period.............. 17,756 24,946 183,483 183,483 44,026
----------- --------- --------- ----------- -----------
Cash and cash equivalents at end of period.................... $ 24,946 $ 183,483 $ 44,026 $ 62,414 $ 45,258
----------- --------- --------- ----------- -----------
----------- --------- --------- ----------- -----------
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 7,731 $ 3,426 $ 36,536 $ 28,980 $ 26,962
Income taxes paid......................................... 7,044 7,814 22,734 18,852 24,017
</TABLE>
F-45
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock, notes payable and cash in connection with
certain business combinations accounted for under the purchase method during
fiscal 1995, 1996 and 1997 and the nine months ended January 25, 1997 and
January 24, 1998. The fair values of the assets and liabilities of the acquired
companies at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE FISCAL YEAR ENDED ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable............................................. $ 15,350 $ 70,640 $ 99,747 $ 88,202 $ 27,284
Inventories..................................................... 10,331 49,602 115,995 119,584 18,970
Prepaid expenses and other current assets....................... 956 8,412 20,874 13,559 15,806
Property and equipment.......................................... 3,248 30,442 94,112 107,202 52,695
Intangible assets............................................... 21,079 119,493 490,011 432,219 371,606
Other assets.................................................... (1,149) 51,698 7,748 5,174 34,759
Short-term debt................................................. (8,253) (95,971) (20,612) (12,819) (8,755)
Accounts payable................................................ (9,180) (44,034) (99,753) (89,338) (20,058)
Accrued liabilities............................................. (3,297) (19,719) (52,464) (81,506) (13,870)
Long-term debt.................................................. (905) (11,635) (153,448) (115,017) (20,320)
Other long-term liabilities and minority interest............... (437) (7,751) (1,296) (8,262) (357)
----------- ----------- ----------- ----------- -----------
Net assets acquired..................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
The acquisitions were funded as follows:
Common stock.................................................... $ 8,750 $ 61,167 $ 155,595 $ 135,185 $ 424,118
Debt............................................................ 3,000 787
Cash............................................................ 15,993 89,223 345,319 323,813 33,642
----------- ----------- ----------- ----------- -----------
Total....................................................... $ 27,743 $ 151,177 $ 500,914 $ 458,998 $ 457,760
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Noncash transactions:
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited) the Company issued 291,671, 384,630 and 28,179 shares of common
stock, respectively, to repay $2,470, $6,359 and $570 of indebtedness,
respectively.
- - During fiscal 1996, 1997 and the nine months ended January 24, 1998
(unaudited), the Company recorded additional paid-in capital of
approximately $426, $1,250 and $2,168, respectively, related to the tax
benefit on stock options exercised.
- - During fiscal 1996, one Pooled Company converted $1,385 of debt to common
stock.
- - During fiscal 1996, one Pooled Company paid a dividend of $9,851 through the
issuance of 846,638 shares of common stock
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" and the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
and educational products and business services to corporate, commercial,
industrial and educational customers. The Company operates throughout the United
States, as well as in New Zealand, Australia and Canada and, through a 49% owned
affiliate, in the United Kingdom.
NOTE 2--FORMATION OF COMPANY
Concurrent with the closing of its initial public offering in February 1995,
the Company acquired four companies (the "Combined Companies") for a combination
of its common stock and cash and acquired two companies in business combinations
accounted for under the purchase method. Because of the substantial ongoing
interest of the stockholders of the Combined Companies in U.S. Office Products,
the assets and liabilities of the Combined Companies were combined on a
historical cost basis. The capital stock of the Combined Companies is included
in additional paid-in capital.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products,
the Combined Companies and the companies acquired in business combinations
accounted for under the purchase method (the "Purchased Companies") from their
respective acquisition dates and give retroactive effect to the results of the
companies acquired in business combinations accounted for under the
pooling-of-interests method (the "Pooled Companies") for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1997," "fiscal 1996" and "fiscal
1995" refer to the Company's fiscal years ended April 26, 1997 and April 30,
1996 and 1995, respectively. On August 20, 1996, the Company's Board of
Directors approved a change in the Company's fiscal year-end, effective for the
1997 fiscal year, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
F-47
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method. Substantially all goodwill is amortized
on a straight line basis over estimated useful lives of 25 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in value, if any, by comparing anticipated
undiscounted future cash flows from operations to net book value.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's wholly-owned foreign subsidiary has entered into forward
foreign currency exchange contracts (the "Exchange Contracts") with
counterparties to hedge the exposure of foreign currency fluctuations to the
extent permissible by hedge accounting requirements. In order to qualify for
hedge accounting, a foreign currency transaction must be designated as, and
effective as, a hedge of a firm foreign currency commitment or an existing
foreign currency denominated asset or liability. Gains and losses on Exchange
Contracts designated to firm foreign currency commitments are deferred and
accounted for as an adjustment to the purchase price of the asset, while gains
and losses on Exchange Contracts designated
F-48
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to an underlying asset or liability are reported as other income or loss in the
Company's financial statements. The offsetting transaction loss or gain
resulting from the foreign currency denominated asset or liability is also
reflected in other income or loss in the Company's financial statements. At
April 26, 1997, the Exchange Contracts, in the notional amount of $3,319, hedge
certain foreign currency denominated firm purchase commitments. The Exchange
Contracts generally have maturity dates of 60 days or less. Discounts or
premiums on the Exchange Contracts are amortized over the life of the contracts.
The Company's wholly-owned foreign subsidiary also entered into interest
rate swap agreements (the "Swap Agreements") with counterparties to convert the
interest rates associated with certain outstanding debt from variable rates to
fixed rates. In order to qualify for hedge accounting, an interest rate swap
must be designated to a specific debt and there must be a high correlation
between the interest rate component of the value of the swap and changes in the
variable interest rates on the underlying debt. The Swap Agreements were
specifically designated and were fully correlated with changes in the variable
interest rates on the underlying debt. The notional amount of the Swap
Agreements was $43,000 at April 30, 1996. Amounts to be paid or received under
the Swap Agreements are accrued as interest rates change and are recognized over
the life of the Swap Agreements as an adjustment to interest expense. During
fiscal 1997, the Swap Agreements were terminated at the time of the
extinguishment of the underlying debt, resulting in a loss of $117 and was
included in other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- - The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- - The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 and the
5 1/2% Convertible Subordinated Notes due 2003 are based on quoted market
prices;
- - The carrying amounts of the Company's debt, other than the 5 1/2% Convertible
Subordinated Notes due 2001 and the 5 1/2% Convertible Subordinated Notes
due 2003, approximate fair value, estimated by discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions elected to be taxed as
Subchapter S corporations, and accordingly, no federal income taxes were
recorded by those companies for periods prior to their acquisition by U.S.
Office Products.
F-49
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return since it is management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to short-term leases is recognized
on a monthly basis over the life of the lease. Certain long-term leases qualify
as sales-type leases and, accordingly, the present value of the future lease
payments is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly-owned subsidiary Mail Boxes Etc. ("MBE"),
enters into area and individual franchise agreements in the United States and
master license agreements in other countries. Area franchise agreements grant
the area franchisee the exclusive right to market individual franchise centers
for the Company in the area franchisee's territory. The area franchisee
generally receives a commission on the individual franchises sold as well as a
share of the royalties earned by the Company from centers in the area
franchisee's territory. Individual franchise agreements grant the individual
franchisee the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
F-50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include legal and accounting fees, investment banking fees,
recognition of transaction related obligations and various other acquisition
related costs.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance costs related to the Company's
employees in accordance with EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)."
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the Consolidated Statement of Income as a
component of selling, general and administrative expenses. During fiscal 1995,
1996 and 1997, the Company incurred advertising expenses of $3,309, $7,233 and
$14,355, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have a material effect on the Company's
consolidated operating results or financial position.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
during fiscal 1997. Under the provisions of SFAS 123, companies can elect to
account for stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the intrinsic
value method prescribed in APB Opinion No. 25. The Company has elected to
continue using the intrinsic value method to account for stock-based
compensation plans. Pro forma disclosures of net
F-51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and net income per share, as if the fair value-based method of accounting
defined in SFAS 123 has been applied, are presented in Note 15.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--STRATEGIC RESTRUCTURING PLAN
In January 1998, the Company's Board of Directors (the "Board") approved a
comprehensive restructuring plan (the "Strategic Restructuring Plan"). The
principal elements of the Strategic Restructuring Plan are (i) a self-tender
offer by the Company (the "Equity Self-Tender") to purchase 37,037 shares of
Company common stock (including shares that may be issued on exercise of stock
options) at $27.00 per share and the incurrence of significant additional debt
to pay a portion of the purchase price of the shares in the Equity Self Tender;
(ii) after acceptance of shares in the Equity Self Tender, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
(the "Spin-Off Companies") that will conduct the Company's current print
management, corporate travel services, educational supplies and technology
solutions businesses (the "Distributions"); and (iii) following acceptance of
shares in the Equity Self Tender and the record date for the Distributions, the
sale to an affiliate of an investment fund managed by Clayton, Dubilier & Rice,
Inc. ("Investor") of equity interests in U.S. Office Products. In these
transactions, Investor will not acquire any equity interest in the Spin-Off
Companies. The Distributions are expected to be tax-free to both the Company and
its stockholders (except for any cash in lieu of fractional shares received by
stockholders). As part of the financing for the Strategic Restructuring Plan,
the Company is expanding its bank credit facility, issuing new subordinated
indebtedness and offering to repurchase or reduce the conversion price on
convertible notes previously issued. The Company expects the Strategic
Restructuring Plan to be completed in the second calendar quarter of 1998. The
transactions are subject to a number of conditions, including financing,
approval of the Company's stockholders and receipt of regulatory approvals.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The income from discontinued operations
included in the consolidated statement of income represents the sum of the
results
F-52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
of the Company's Print Management, Corporate Travel Services, Educational
Supplies and Technology Solutions divisions for the periods presented and is
summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FISCAL 1995:
Revenues..................................... $ 139,732 $ 34,569 $ 119,510 $ 88,999 $ 382,810
Operating income............................. 5,571 2,905 4,479 8,199 21,154
Income before provision for income taxes..... 3,982 2,992 1,558 8,097 16,629
Provision for income taxes................... 317 18 218 401 954
Income from discontinued operations,
net of income taxes........................ 3,665 2,974 1,340 7,696 15,675
FISCAL 1996:
Revenues..................................... $ 314,999 $ 45,267 $ 150,343 $ 114,293 $ 624,902
Operating income............................. 12,455 3,068 2,484 9,252 27,259
Income (loss) before provision for (benefit
from) income taxes......................... 6,933 2,863 (3,194) 10,631 17,233
Provision for (benefit from) income taxes.... (33) 565 173 750 1,455
Income (loss) from discontinued operations,
net of income taxes........................ 6,966 2,298 (3,367) 9,881 15,778
FISCAL 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for income taxes..... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations,
net of income taxes........................ 7,573 4,097 8,409 6,721 26,800
NINE MONTHS ENDED JANUARY 25, 1997
(UNAUDITED):
Revenues..................................... $ 244,764 $ 41,527 $ 159,977 $ 101,295 $ 547,563
Operating Income............................. 14,750 3,105 10,839 8,448 37,142
Income before provision for income taxes..... 10,259 3,031 7,878 8,182 29,350
Provision for income taxes................... 2,249 551 4,085 2,054 8,939
Income from discontinued operations net of
income taxes............................... 8,010 2,480 3,793 6,128 20,411
</TABLE>
F-53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 24, 1998
(UNAUDITED):
Revenues..................................... $ 257,777 $ 80,707 $ 247,880 $ 142,512 $ 728,876
Operating Income............................. 14,028 5,719 21,349 11,630 52,726
Income before provision for income taxes..... 12,577 5,522 16,916 11,644 46,659
Provision for income taxes................... 5,629 2,794 7,734 5,038 21,195
Income from discontinued operations net of
income taxes............................... 6,948 2,728 9,182 6,606 25,464
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at U.S. Office Products' weighted average interest rates, based upon
the average intercompany debt outstanding during the periods presented.
Intercompany debt allocated to the Spin-Off Companies generally is comprised of
funding provided to the Spin-Off Companies by U.S. Office Products for
acquisitions and acquisition related expenses, repayments of long-term and
short-term debt of acquired companies, payments of direct operating expenses of
the Spin-Off Companies and the net results of daily advances and sweeps of cash
by the Company to keep each Spin-Off Company's cash balance at or near zero on a
daily basis. To the extent that the sum of the intercompany funding and
third-party debt outstanding exceeded the amount of debt to be allocated to the
Spin-Off Companies pursuant to the investment agreement with Investor, such
excess amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from
U.S. Office Products during the periods presented.
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assests of the
Company's Print Management, Corporate Travel Services, Educational Supplies and
Technology Solutions divisions for the periods presented and are summarized as
follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 30, 1996:
Current assets............................... $ 78,071 $ 6,103 $ 38,557 $ 25,640 $ 148,371
Property, plant and equipment, net........... 32,703 7,948 7,647 1,756 50,054
Intangible assets, net....................... 879 5,456 7,142 13,477
Other assets................................. 6,029 539 777 875 8,220
Current liabilities.......................... (56,532) (7,402) (42,670) (22,344) (128,948)
Long-term liabilities........................ (34,065) (6,869) (15,766) (800) (57,500)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 27,085 $ 5,775 $ (4,313) $ 5,127 $ 33,674
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
F-54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
APRIL 26, 1997:
Current assets............................... $ 81,310 $ 6,935 $ 55,709 $ 30,542 $ 174,496
Property, plant and equipment, net........... 34,175 7,953 14,478 2,164 58,770
Intangible assets, net....................... 705 7,112 20,824 28,641
Other assets................................. 7,807 581 359 2,005 10,752
Current liabilities.......................... (66,413) (11,886) (39,712) (20,530) (138,541)
Long-term liabilities........................ (7,208) (5,218) (35,052) (3,218) (50,696)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 50,376 $ 5,477 $ 16,606 $ 10,963 $ 83,422
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
JANUARY 24, 1998 (UNAUDITED):
Current assets............................... $ 85,326 $ 22,609 $ 86,676 $ 64,618 $ 259,229
Property, plant and equipment, net........... 31,063 19,406 20,489 5,074 76,032
Intangible assets, net....................... 1,995 85,525 94,651 63,891 246,062
Other assets................................. 8,473 1,002 2,595 508 12,578
Current liabilities.......................... (58,449) (20,236) (35,529) (31,252) (145,466)
Long-term liabilities........................ (10,530) (15,957) (63,307) (12,558) (102,352)
------------ ---------- ------------ ----------- ------------
Other net assets of discontinued
operations............................... $ 57,878 $ 92,349 $ 105,575 $ 90,281 $ 346,083
------------ ---------- ------------ ----------- ------------
------------ ---------- ------------ ----------- ------------
</TABLE>
The amounts to become receivable upon the Distributions reflected in the
unaudited January 24, 1998 Consolidated Balance Sheet are expected to be
recovered from the Spin-Off Companies in connection with the Distributions.
PURCHASE ACCOUNTING RESTATEMENT
On December 24, 1997, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission which included audited supplemental
consolidated financial statements (the "Supplemental Financial Statements"). The
Supplemental Financial Statements gave retroactive effect to 20 fiscal 1998
business combinations, including the Mail Boxes Etc. acquisition, which were
originally accounted for under the pooling-of-interests method.
As a result of the Strategic Restructuring Plan and as required by generally
accepted accounting principles, the Company has restated its consolidated
financial statements for all periods to account for these acquisitions (as well
as two subsequent business combinations originally accounted for under the
pooling-of-interests method) under the purchase method. In relation to amounts
reflected in the Supplemental Financial Statements, this restatement and the
reclassification of assets and liabilities for discontinued operations, as
discussed above, had the combined effect of reducing the Company's reported
total assets at April 26, 1997 by $267,430 and reported net income for fiscal
1995, 1996 and 1997 by $10,602 (or $0.23 per share), $14,998 (or $0.22 per
share) and $17,811 (or $0.20 per share), respectively. Additionally, the
restatement of the 22 business combinations as purchase transactions gave rise
to approximately
F-55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
$422.8 million of goodwill, associated with both continuing and discontinued
operations, during the nine months ended January 24, 1998.
NOTE 5--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1996 and 1997, the Company issued 8,440,852 and 22,108,776 shares
of common stock, respectively, to acquire 14 companies (the "1996 Poolings") and
40 companies, including 25 companies related to the continuing operations (the
"1997 Poolings"), respectively, in business combinations accounted for under the
pooling-of-interests method. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Certain of the Pooled Companies previously reported on fiscal
years ending other than April 30, 1996 and April 26, 1997.
Commencing on May 1, 1995 and 1996, the year-ends of the 1996 Poolings and
the 1997 Poolings were changed to April 30, 1996 and April 26, 1997,
respectively, resulting in adjustments to retained earnings of $2,235, $8,898
and $286 during fiscal 1995, 1996 and 1997, respectively. Following is a summary
of the results related to the adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- ---------- ----------
Revenues....................................................................... $ 55,126 $ 245,737 $ (9,907)
Costs and expenses............................................................. 52,891 236,839 (10,193)
--------- ---------- ----------
Net adjustment............................................................. $ 2,235 $ 8,898 $ 286
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of U.S. Office Products (excluding the results of Pooled Companies
prior to the dates on which they were acquired), and the Pooled Companies up to
the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
FOR THE YEAR ENDED APRIL 30, 1995:
Revenues.............................................................. $ 120,479 $ 538,015 $ 658,494
Income from continuing operations before extraordinary items.......... $ 1,514 $ 13,978 $ 15,492
FOR THE YEAR ENDED APRIL 30, 1996:
Revenues.............................................................. $ 488,670 $ 572,858 $ 1,061,528
Income from continuing operations before extraordinary items.......... $ 7,828 $ 11,271 $ 19,099
FOR THE YEAR ENDED APRIL 26, 1997:
Revenues.............................................................. $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items.......... $ 27,978 $ 3,960 $ 31,938
FOR THE NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Revenues.............................................................. $ 1,300,421 $ 197,899 $ 1,498,320
Income from continuing operations before extraordinary items.......... $ 19,677 $ 5,716 $ 25,393
FOR THE NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Revenues.............................................................. $ 1,930,113 $ $ 1,930,113
Income from continuing operations before extraordinary items.......... $ 37,236 $ $ 37,236
</TABLE>
PURCHASE METHOD
In fiscal 1995, in addition to the acquisitions of the Combined Companies,
the Company made six acquisitions, including five related to continuing
operations, accounted for under the purchase method for an aggregate purchase
price of $29,849, consisting of $18,099 of cash, $3,000 of notes payable and
1,312,500 shares of common stock with a market value of $8,750. The total assets
related to these six acquisitions were $72,192, including goodwill of $21,079.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
In fiscal 1996, the Company made 34 acquisitions, including 31 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $206,937, consisting of $130,178 of cash, $8,141 of debt and
11,120,163 shares of common stock with a market value of $68,618. The total
assets related to these 34 acquisitions were $414,113, including goodwill of
$127,870. The results of these acquisitions have been included in the Company's
results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method for an aggregate
purchase price of $520,891 consisting of $354,811 of cash, and 8,685,450 shares
of common stock with a market value of $166,080. The total assets related to
these 77 acquisitions were $861,647, including goodwill of $506,386. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
F-57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the fiscal years ended April 30, 1996 and April 26, 1997 and
includes the Company's consolidated financial statements, which give retroactive
effect to the acquisitions of the Pooled Companies for all periods presented,
and the results of the Purchased Companies as if all such purchase acquisitions
had been made at the beginning of fiscal 1996. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets, adjustments in executive compensation and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 30, APRIL 26,
1996 1997
------------ ------------
Revenues.................................................................... $ 2,413,720 $ 2,496,519
Income from continuing operations before extraordinary items................ 35,361 48,825
Income per share from continuing operations before extraordinary items...... 0.30 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1996 or the
results which may occur in the future.
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is being accounted for under the equity
method. Under the terms of the agreement, the Company agreed to invest
approximately $80 million for working capital into Dudley over a two-year
period. The Company has currently invested approximately $41.3 million of the
total $80 million in Dudley which is included in other assets on the
Consolidated Balance Sheet. The Company has included its share of Dudley's net
income as a component of other income on the Consolidated Statement of Income.
NOTE 6--ACCRUED ACQUISITION COSTS
In conjunction with the acquisitions of the fiscal 1997 Purchased Companies,
the Company accrued the direct external costs incurred in conjunction with the
consummation of the acquisitions and the costs to consolidate acquired
operations into existing Company facilities, including the external costs
associated with closing redundant facilities of acquired companies, and
severance and relocation costs related to the acquired companies' employees.
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
F-58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 30, 1996, April 26, 1997 and January 24, 1998:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE & ASSETS &
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................... $ $ $ $
Additions................................. 1,593 2,484 6,712 10,789
----------- ------ ----------- ---------
Balance at April 26, 1997................... 1,593 2,484 6,712 10,789
Unaudited data:
Additions................................. 1,442 3,244 4,686
Utilizations.............................. (256) (141) (5,400) (5,797)
----------- ------ ----------- ---------
Balance at January 24, 1998................. $ 1,337 $ 3,785 $ 4,556 $ 9,678
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 7--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs for the periods ended April 30, 1996, April 26, 1997 and
January 24, 1998:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE- DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 30 1995:
Additions.............................. $ 682 $ 682
Utilizations........................... (682) (682)
------ ----- ----------- ---------
Balance at April 30, 1996................
Additions.............................. 1,337 308 2,556 4,201
Utilizations........................... (302) (229) (2,150) (2,681)
------ ----- ----------- ---------
Balance at April 26, 1997................ 1,035 79 406 1,520
Unaudited data:
Utilizations........................... (937) (79) (348) (1,364)
------ ----- ----------- ---------
Balance at January 24, 1998.............. $ 98 $ $ 58 $ 156
------ ----- ----------- ---------
------ ----- ----------- ---------
</TABLE>
F-59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ----------
<S> <C> <C>
Land........................................................................... $ 4,878 $ 31,934
Buildings...................................................................... 32,140 44,814
Furniture and fixtures......................................................... 42,340 121,701
Warehouse equipment............................................................ 23,290 24,726
Equipment under capital leases................................................. 7,308 8,602
Leasehold improvements......................................................... 8,653 16,107
----------- ----------
118,609 247,884
Less: Accumulated depreciation................................................. (41,080) (65,251)
----------- ----------
Net property and equipment..................................................... $ 77,529 $ 182,633
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal years 1995, 1996 and 1997 was $4,906, $7,926
and $20,699, respectively.
NOTE 9--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill......................................................... $ 136,338 $ 625,074 $ 928,365
Other............................................................ 2,549 3,063 3,915
---------- ---------- ------------
138,887 628,137 932,280
Less: Accumulated amortization................................... (3,747) (16,663) (28,558)
---------- ---------- ------------
$ 135,140 $ 611,474 $ 903,722
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Amortization expense for fiscal years 1995, 1996, 1997 and the nine months
ended January 24, 1998 was $801, $2,711, $12,416 and $13,830, respectively.
F-60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Credit facilities with banks, average interest rates of 7.6% at April 26, 1997 and
7.8% at April 30, 1996.......................................................... $ 1,020 $ 140,090
Annual renewal loans provided by banks and other financial institutions of foreign
subsidiary secured by lease receivables of foreign subsidiary. Interest rates
ranging from 7.8% to 10.2% at April 30, 1996.................................... 67,660
Bank lines of credit of foreign subsidiary operations secured by assets of those
operations. Interest rates ranging from 9.2% to 9.8% at April 30, 1996......... 12,731
Other............................................................................. 4,749 1,367
Current maturities of long-term debt.............................................. 8,014 2,668
---------- ----------
Total short-term debt....................................................... $ 94,174 $ 144,125
---------- ----------
---------- ----------
</TABLE>
The Company currently has an agreement under which a syndicate of financial
institutions, led by Bankers Trust Company, as Agent (the "Bank"), is providing
the Company with a $500 million credit facility (the "Credit Facility") bearing
interest, at the Company's option, at the Bank's base rate plus an applicable
margin of up to 1.25%, or a eurodollar rate plus an applicable margin of up to
2.5%. The availability under the Credit Facility is subject to certain
sublimits including $100 million for working capital loans and $400 million for
acquisition loans. The Credit Facility is secured by a majority of the assets
of the Company and its subsidiaries and contains customary covenants, including
financial covenants with respect to the Company's consolidated leverage and
interest coverage ratios, capital expenditures, payment of dividends and
purchases and sales of assets, and customary default provisions, including
provisions related to non-payment of principal and interest, default under other
debt agreements and bankruptcy. The Company was in compliance with or obtained
waivers relating to these covenants at April 26, 1997. At April 26, 1997, the
balance outstanding under the Credit Facility was $140,090 and included five
eurodollar contracts, expiring within 30 days, totaling $105,000 at an average
interest rate of 7.2%.
F-61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$31.60 per share, subject to adjustment in certain events....................... $ 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into
shares of common stock at any time prior to maturity at a conversion price of
$19.00 per share, subject to adjustment in certain events....................... $ 143,750 143,750
Notes payable, secured by certain assets of the Company, interest rates ranging
from 8.0% to 10.0%, maturities from October 1996 through 2003................... 13,384
Other............................................................................. 22,370 3,610
Capital lease obligations......................................................... 4,740 5,517
---------- ----------
184,244 382,877
Less: Current maturities of long-term debt........................................ (8,014) (2,668)
---------- ----------
Total long-term debt........................................................ $ 176,230 $ 380,209
---------- ----------
---------- ----------
</TABLE>
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 1999 unless the closing price of the common stock is at least
150% of the conversion price for a period of time prior to the notice of
redemption. Costs incurred in connection with the issuance of the 2003 Notes
are included in other assets and are being amortized over the seven year period
of maturity. The fair value of the 2003 Notes at April 26, 1997, based upon
quoted market prices, totaled $184,000.
The 2001 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after February 3, 1998, but may not be
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the
2001 Notes are included in other assets and are being amortized over the five
year period of maturity. The fair value of the 2001 Notes at April 26, 1997,
based upon quoted market prices, totaled $147,344.
F-62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 2,668
1999.............................................................. 2,211
2000.............................................................. 1,524
2001.............................................................. 144,436
2002.............................................................. 219
Thereafter........................................................ 231,819
---------
$ 382,877
---------
---------
</TABLE>
NOTE 11--INCOME TAXES
Domestic and foreign income from continuing operations before provision for
income taxes and extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Domestic......................................................................... $ 16,099 $ 22,139 $ 38,024
Foreign.......................................................................... 2,193 2,992 21,853
--------- --------- ---------
Total...................................................................... $ 18,292 $ 25,131 $ 59,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................................................... $ 2,126 $ 4,632 $ 18,776
State........................................................................ 232 351 1,987
Foreign...................................................................... 809 1,245 8,211
--------- --------- ---------
3,167 6,228 28,974
--------- --------- ---------
Deferred income tax expense (benefit)............................................ (367) (196) (1,035)
--------- --------- ---------
Total provision for income taxes........................................... $ 2,800 $ 6,032 $ 27,939
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ 1,386 $ 708
Allowance for doubtful accounts............................................................ 1,325 1,253
Accrued liabilities........................................................................ 2,971 6,091
--------- ---------
Total current deferred tax assets...................................................... 5,682 8,052
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (4,457) (2,357)
Intangible assets.......................................................................... (1,063) (961)
Internal Revenue Service tax assessment.................................................... (3,383) (3,383)
Other...................................................................................... 2,717 4,243
--------- ---------
Total long-term deferred tax liabilities................................................. (6,186) (2,458)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (504) $ 5,594
--------- ---------
--------- ---------
</TABLE>
The Internal Revenue Service ("IRS") tax assessment relates to the deferral
of a gain on the sale of land and a building by a subsidiary of the Company. The
IRS has determined that a portion of the gain recorded by the subsidiary does
not qualify for deferral and has assessed the Company additional taxes. The
subsidiary has recorded a deferred tax liability, including interest, as a
result of the assessment. The Company has filed an appeal with the IRS relating
to the above assessment; however, the IRS has not yet responded to the appeal.
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
APRIL 30, APRIL 30, APRIL 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory rate........................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. 1.3 1.4 3.3
Subchapter S corporation income not subject to
corporate level taxation......................................................... (27.2) (26.1) (3.3)
Foreign earnings not subject to U.S. taxes......................................... (4.2) (4.1) (12.8)
Nondeductible goodwill............................................................. 2.7 3.7 4.9
Nondeductible acquisition costs.................................................... 8.4 4.7
Foreign taxes...................................................................... 4.4 4.9 13.7
Other.............................................................................. 3.3 0.8 1.2
----------- ----------- -----------
Effective income tax rate.......................................................... 15.3% 24.0% 46.7%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
F-64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11--INCOME TAXES (CONTINUED)
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
<TABLE>
<CAPTION>
FOR THE FISCAL
YEAR ENDED
-----------------
APRIL 26,
1997
-----------------
<S> <C>
Income from continuing operations before extraordinary items per consolidated statement of
income....................................................................................... $ 31,938
Pro forma income tax provision adjustment...................................................... 1,976
-------
Pro forma income from continuing operations before extraordinary items......................... $ 29,962
-------
-------
</TABLE>
NOTE 12--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998................................................................... $ 953 $ 46,645
1999................................................................... 1,662 38,434
2000................................................................... 1,055 30,700
2001................................................................... 697 20,514
2002................................................................... 470 15,458
Thereafter............................................................. 3,433 53,778
--------- ----------
Total minimum lease payments........................................... 8,270 $ 205,529
----------
----------
Less: Amounts representing interest.................................... (2,753)
---------
Present value of net minimum lease payments............................ $ 5,517
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1995, 1996 and 1997 was
$12,587, $19,023 and $40,183, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements.
NOTE 14--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue
Code. The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service. In fiscal 1997, the Company's matching contribution expense was
$1,195.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For fiscal 1995, 1996 and 1997, the
subsidiaries incurred expenses totaling $2,023, $2,138 and $1,398, respectively,
related to these plans.
NOTE 15--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company has adopted SFAS No. 128 during the nine months
ended January 24, 1998 and has restated all prior period EPS data. The following
information presents the
F-66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's computations of basic and diluted EPS from continuing operations
before extraordinary items for the periods presented in the consolidated
statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
FISCAL 1995:
Basic EPS.............................................................. $ 15,492 45,562 $ .34
---
---
Effect of dilutive employee stock options.............................. 142
------------ -------------
Diluted EPS............................................................ $ 15,492 45,704 $ .34
------------ ------------- ---
------------ ------------- ---
FISCAL 1996:
Basic EPS.............................................................. $ 19,099 67,545 $ .28
---
---
Effect of dilutive employee stock options.............................. 829
------------ -------------
Diluted EPS............................................................ $ 19,099 68,374 $ .28
------------ ------------- ---
------------ ------------- ---
FISCAL 1997:
Basic EPS.............................................................. $ 31,938 90,026 $ .35
---
---
Effect of dilutive employee stock options.............................. 1,735
------------ -------------
Diluted EPS............................................................ $ 31,938 91,761 $ .35
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 25, 1997 (UNAUDITED):
Basic EPS.............................................................. $ 25,393 85,978 $ .30
---
---
Effect of dilutive employee stock options.............................. 1,846
------------ -------------
Diluted EPS............................................................ $ 25,393 87,824 $ .29
------------ ------------- ---
------------ ------------- ---
NINE MONTHS ENDED JANUARY 24, 1998 (UNAUDITED):
Basic EPS.............................................................. $ 37,236 114,758 $ .32
---
---
Effect of dilutive employee stock options.............................. 2,427
------------ -------------
Diluted EPS............................................................ $ 37,236 117,185 $ .32
------------ ------------- ---
------------ ------------- ---
</TABLE>
The Company had additional employee stock options and two series of
convertible debt securities outstanding during the periods presented that were
not included in the computation of diluted EPS because they were anti-dilutive.
COMMON STOCK
In November 1994, the Board of Directors of the Company approved a one
thousand-for-one split of the Company's common stock and changed the par value
of common stock from $1 per share to $.001 per share. The consolidated
financial statements have been adjusted to reflect the stock split. In February
1996, the Company's stockholders approved the amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 25,000,000 to 100,000,000 shares. In August 1996,
the Company's stockholders approved the amendment to the
F-67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
Company's Restated Certified of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
In October 1997, the Board of Directors of the Company approved a three for
two split of the Company's common stock. The financial statements give
retroactive effect for the split for all periods presented.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the
Company. The maximum number of options to purchase common stock granted in any
calendar or fiscal year under the Plan, as amended, is equal to 20% of the
aggregate number of shares of the Company's common stock outstanding at the time
an award is granted, less, in each case, the number of shares subject to
previously outstanding awards under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock has been
reserved for issuance under the Directors' Plan. At April 26, 1997, options to
acquire 108,000 shares of common stock have been granted under the Directors'
Plan.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options have equaled the
market price on the date of grant, no compensation expense has been recognized
for stock options granted. Had compensation cost for the Company's stock
options been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS 123, the Company's net
income and net income per share would have been impacted as indicated in the
following table. The pro forma results shown below reflect only the impact of
options granted in fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
--------------------
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Income from continuing operations:
As reported..................................................... $ 18,398 $ 30,488
Pro forma....................................................... 16,339 17,842
Income from continuing operations per share:
As reported:
Basic......................................................... $ 0.27 $ 0.33
Diluted....................................................... 0.27 0.33
Pro forma:
Basic......................................................... $ 0.24 $ 0.20
Diluted....................................................... 0.24 0.19
</TABLE>
F-68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.58% 6.66%
Expected volatility of USOP stock........................................ 58.5% 44.0%
</TABLE>
The weighted-average fair value of options granted was $12.44 and $17.06 for
fiscal 1996 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1994.......... 125,498 $ 0.45 125,498 $ 0.45
Granted.......................... 944,250 5.95
Canceled......................... (10,500) 6.67
------------
Balance at April 30, 1995.......... 1,059,248 5.29 177,998 1.89
Granted.......................... 4,146,886 12.55
Exercised........................ (95,025) 6.25
Canceled......................... (24,300) 8.47
------------
Balance at April 30, 1996.......... 5,086,809 11.18 324,798 3.77
Granted.......................... 6,729,165 20.41
Exercised........................ (197,744) 8.39
Canceled......................... (73,444) 12.65
------------
Balance at April 26, 1997.......... 11,544,786 $ 16.60 1,598,228 $ 10.10
------------
------------
</TABLE>
The following table summarizes information about stock options outstanding
at April 26, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE PRICE
- ------------------------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.45 to $6.67................. 884,498 7.2 years $ 5.09 476,630 $ 4.32
$6.68 to $13.33................ 2,660,398 7.9 years 9.33 702,303 9.70
$13.34 to $20.00............... 4,234,986 9.3 years 17.55 313,866 16.25
$20.01 to $26.67............... 3,737,004 9.3 years 23.27 105,429 20.65
$26.68 to $29.92............... 27,900 9.1 years 28.13
------------ ----------
$0.45 to $29.92................ 11,544,786 8.7 years $ 16.60 1,598,228 $ 10.10
------------ ----------
------------ ----------
</TABLE>
F-69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--STOCKHOLDERS' EQUITY (CONTINUED)
The options outstanding information includes 125,498, 58,802 and 343,488
options to acquire common stock at exercise prices of $.45, $10.59 and $10.70,
respectively, which were granted at certain Pooled Companies prior to their
respective acquisitions by the Company.
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
NOTE 16--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 1995:
Revenues.......................................... $ 629,920 $ 28,574 $ 658,494
Operating income.................................. 18,133 1,429 19,562
Identifiable assets of continuing operations at
year-end........................................ 220,878 5,512 226,390
FISCAL 1996:
Revenues.......................................... $ 984,387 $ 77,141 $ 1,061,528
Operating income.................................. 25,540 3,533 29,073
Identifiable assets of continuing operations at
year-end........................................ 584,170 188,134 772,304
FISCAL 1997:
Revenues.......................................... $ 1,415,161 $ 700,793 $ 2,115,954
Operating income.................................. 56,126 28,708 84,834
Identifiable assets of continuing operations at
year-end........................................ 782,615 753,254 1,535,869
</TABLE>
The amounts listed above as identifiable assets of continuing operations at
year-end differ from the total asset amounts presented on the Consolidated
Balance Sheet since net assets of discontinued operations of $33,514, $33,674
and $171,122 at April 30, 1995 and 1996 and April 26, 1997, respectively, were
excluded from the above analysis but are included in total assets on the
Company's Consolidated Balance Sheet.
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data. The
amounts differ from the amounts previously reported during fiscal 1996 and 1997
in the Company's Quarterly Reports on Form 10-Q as a result of the restatement
of the financial statements to give retroactive effect to the results of the
F-70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
companies acquired during fiscal 1996 and 1997 in business combinations
accounted for under the pooling-of-interests method and as a result of the
reporting of the results of Spin-Off Companies as discontinued operations.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 205,940 $ 246,956 $ 268,645 $ 339,987 $ 1,061,528
Gross profit.................................... 50,976 60,487 66,742 93,887 272,092
Operating income................................ 1,484 6,666 8,115 12,808 29,073
Income from continuing operations before
extraordinary items........................... 1,460 4,629 5,789 7,221 19,099
Income (loss) from discontinued operations...... 3,387 5,550 7,727 (886) 15,778
Net income...................................... 4,847 10,179 13,516 5,634 34,176
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.24
Net income.................................. 0.08 0.15 0.20 0.07 0.51
Diluted:
Income from continuing operations before
extraordinary items....................... 0.02 0.07 0.09 0.09 0.28
Income (loss) from discontinued
operations................................ 0.06 0.08 0.11 (0.01) 0.23
Net income.................................. 0.08 0.15 0.20 0.07 0.50
</TABLE>
F-71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ---------- ------------
Revenues........................................ $ 364,195 $ 537,334 $ 596,791 $ 617,634 $ 2,115,954
<S> <C> <C> <C> <C> <C>
Gross profit.................................... 98,299 153,284 169,329 176,755 597,667
Operating income................................ 12,909 22,473 25,668 23,784 84,834
Income from continuing operations before
extraordinary items........................... 6,855 9,771 8,767 6,545 31,938
Income from discontinued operations............. 9,475 8,933 2,003 6,389 26,800
Net income...................................... 16,330 18,092 10,770 12,096 57,288
Per share amounts:
Basic:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.31
Net income.................................. 0.20 0.21 0.12 0.12 0.64
Diluted:
Income from continuing operations before
extraordinary items....................... 0.08 0.11 0.10 0.06 0.35
Income from discontinued operations......... 0.12 0.10 0.02 0.06 0.29
Net income.................................. 0.20 0.20 0.12 0.12 0.62
Pro forma income from continuing operations
before extraordinary items (see Note 11)...... 6,431 9,166 8,225 6,140 29,962
Pro forma basic income per share from continuing
operations before extraordinary item.......... 0.08 0.11 0.09 0.06 0.33
Pro forma diluted income per share from
continuing operations before extraordinary
item.......................................... 0.08 0.10 0.09 0.06 0.33
</TABLE>
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, U.S. Office Products announced its intention to complete
the Strategic Restructuring Plan described in Note 4. In addition, subsequent to
April 26, 1997 and through March 9, 1998, the Company has completed 42 business
combinations related to continuing operations for an aggregate purchase price of
$502.3 million, consisting of approximately $79.8 million of cash and 20.4
million shares of the Company's common stock with an aggregate market value on
the dates of acquisition of approximately $422.5 million. In addition, on
December 22, 1997, U.S. Office Products made an additional equity investment of
$40.8 million in Dudley Stationery Limited, its 49% owned independent office
products dealer in the United Kingdom, to fund additional acquisitions at
Dudley.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Strategic Restructuring Plan and the
acquisitions described above had been consummated as of
F-72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the beginning of fiscal 1997. The results presented below include certain pro
forma adjustments to reflect (i) substantially higher amortization expenses as
compared to prior periods (as a result of reclassifying 12 business combinations
as purchase acquisitions (including the Company's acquisition of Mail Boxes
Etc.), rather than under the pooling-of-interests method, as the Company had
expected when it completed those acquisitions); (ii) substantially higher
interest expense, as a result of increased borrowing that the Company expects to
incur to help finance the cost of the Tender Offer; and (iii) higher effective
income tax rates, due to increased non-deductible goodwill expense and the
Company's inability to acquire subchapter S corporations in pooling-of-interests
transactions:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS ENDED
APRIL 26, 1997 JANUARY 24, 1998
---------------- ------------------
<S> <C> <C>
Revenues............................................... $ 2,794,009 $ 2,070,655
Income from continuing operations before extraordinary
items................................................ 11,332 11,186
Basic income per share from continuing operations
before extraordinary items........................... 0.08 0.08
Diluted income per share from continuing operations
before extraordinary items........................... 0.08 0.08
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
On April 14, 1998, a stockholder purporting to represent a class composed of
all U.S. Office Products' stockholders filed an action in the Delaware Chancery
Court. The action claims that the Directors breached their fiduciary duty to the
stockholders of U.S. Office Products by changing the terms of the Equity-Self
Tender to include employee stock options. The complaint seeks injunctive relief,
damages and attorneys fees. The Company believes that this lawsuit is without
merit and intends to vigorously contest it.
F-73
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mail Boxes Etc.
at April 30, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997,
in conformity with generally accepted accounting principles.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
--------------------------------------------
Ernst & Young LLP
San Diego, California
June 6, 1997
</TABLE>
F-74
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................................................. $ 3,992 $ 1,416
Restricted cash--franchisee deposits...................................................................... 1,613 2,073
Short-term investments.................................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April 30, 1997 and
1996, respectively...................................................................................... 6,547 6,799
Receivable from National Media Fund....................................................................... 250 770
Inventories............................................................................................... 447 544
Current portion of notes receivable....................................................................... 6,048 6,756
Current portion of net investment in sales-type leases.................................................... 2,322 2,414
Deferred income taxes..................................................................................... 1,272 1,846
Re-acquired area and center rights held for resale........................................................ 629 638
Other..................................................................................................... 1,394 1,063
--------- ---------
Total current assets.................................................................................. 51,856 46,144
Notes receivable, net..................................................................................... 12,977 10,831
Net investment in sales-type leases....................................................................... 6,067 7,518
Property and equipment:
Land.................................................................................................... 1,200 1,200
Building and improvements............................................................................... 5,076 4,201
Office furniture and equipment.......................................................................... 4,307 4,018
Vehicles................................................................................................ 209 209
--------- ---------
Total property and equipment.......................................................................... 10,792 9,628
Less accumulated depreciation and amortization.......................................................... 4,831 4,247
--------- ---------
Net property and equipment.............................................................................. 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at April 30, 1997
and 1996, respectively.................................................................................. 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997 and 1996,
respectively............................................................................................ 6,443 3,240
Deferred income taxes..................................................................................... 1,249 1,307
Other assets.............................................................................................. 739 904
--------- ---------
Total Assets.......................................................................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................................................................... $ 1,363 $ 2,096
Franchisee deposits....................................................................................... 2,097 2,619
Royalties, referrals and commissions payable.............................................................. 1,760 2,515
Accrued employee expenses and related taxes............................................................... 2,390 1,963
Other accrued expenses.................................................................................... 1,550 2,012
Income taxes payable...................................................................................... 769 838
Current maturities of long term debt...................................................................... 692 958
--------- ---------
Total current liabilities............................................................................. 10,621 13,001
Long-term debt, net of current maturities................................................................... 3,916 1,402
Commitments and contingencies...............................................................................
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.............
Common stock, no par value, 40,000,000 shares authorized, with 11,300,273 and 11,139,698 shares issued and
outstanding at April 30, 1997 and 1996, respectively.................................................... 16,728 14,944
Retained earnings......................................................................................... 54,410 46,419
--------- ---------
Total shareholders' equity............................................................................ 71,138 61,363
--------- ---------
Total liabilities and shareholders' equity............................................................ $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-75
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
Total Revenues............................................................... 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000
--------- --------- ---------
Total cost and expenses...................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
Net income................................................................... $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
Net income per common share...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares outstanding................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-76
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, April 30, 1994................................................ 11,569 $ 19,195 $ 30,920 $ 50,115
Exercise of employee stock options and other........................... 146 928 928
Common stock repurchased............................................... (657) (5,681) (5,681)
Income tax benefit from stock option activity.......................... 13 13
Net income............................................................. 6,770 6,770
--------- --------- --------- ---------
Balance, April 30, 1995................................................ 11,058 14,455 37,690 52,145
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 221 2,135 2,135
Common stock repurchased............................................... (140) (1,922) (1,922)
Income tax benefit from stock option activity.......................... 276 276
Net income............................................................. 8,729 8,729
--------- --------- --------- ---------
Balance, April 30, 1996................................................ 11,139 14,944 46,419 61,363
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-77
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income........................................................................ $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements..................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts.......................... (530) 880 1,236
Loss (gain) on disposal of property and equipment............................... (7) 4 122
Deferred income taxes........................................................... 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................. 460 (459) (252)
Accounts and notes receivable................................................... (760) (1,049) (7,386)
Receivable from National Media Fund............................................. 520 830 (1,600)
Assets leased to franchisees and inventories.................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale.............................. 109 378 261
Other current assets............................................................ (331) (58) 421
Other assets.................................................................... (38) 152 173
Accounts payable................................................................ (733) 945 419
Franchisee deposits............................................................. (522) 466 747
Royalties, referrals and commissions payable.................................... (755) 66 610
Accrued employee expenses and related taxes..................................... 427 500 697
Other accrued expenses.......................................................... (369) 838 821
Income taxes payable............................................................ 535 397 730
--------- --------- ---------
Net cash flows provided from operating activities............................. 5,908 10,802 1,090
Investing Activities:
Net change in short-term investments............................................ (5,517) (11,773) 389
Additions to property and equipment............................................. (1,292) (472) (477)
Principal payments received on sales-type leases................................ 3,407 3,628 3,223
Re-acquired area rights......................................................... (439) (185) (887)
--------- --------- ---------
Net cash flows provided from (used in) investing activities..................... (3,841) (8,802) 2,248
Financing Activities:
Borrowing under line of credit.................................................. 1,630 3,720 3,800
Repayments under line of credit................................................. (2,150) (4,550) (2,200)
Repayments on notes payable..................................................... (354) (146) (54)
Repurchase of common stock...................................................... (410) (1,922) (5,681)
Proceeds from the issuance of common stock...................................... 1,793 1,923 937
--------- --------- ---------
Net cash flows provided from (used in) financing activities..................... 509 (975) (3,198)
--------- --------- ---------
Increase in cash and cash equivalents............................................... 2,576 1,025 140
Cash and cash equivalents at beginning of year...................................... 1,416 391 251
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for Income taxes...................................... $ 3,762 $ 6,348 $ 5,479
</TABLE>
F-78
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest expense.................................................................... $ 261 $ 155 $ 98
Supplemental Schedule of Non-Cash Activities:
Equipment sold under sales-type leases.......................................... $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................. $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................. $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights.......... $ 104 $ 468
Exchange of area rights......................................................... $ 260
</TABLE>
See accompanying notes.
F-79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November 1983
as a California corporation. It operates domestically through one wholly-owned
subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants territorial
franchise rights for the operation or sale of service centers specializing in
postal, packaging, business and communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; the excess is being amortized on the straight-line method over
20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated this entity as a wholly-owned subsidiary,
MBE-UK. All accounts of this foreign subsidiary have been measured using U.S.
dollars as the functional currency. The gains and losses arising from the
measurement of the foreign subsidiary's account have not been significant. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
The Company provides franchisees with a system of business training, advice
regarding site location, marketing, advertising programs and management support
designed to assist the franchisee in opening and operating MBE Centers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries.
Area franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area franchisee's
territory. The area franchisee generally receives a commission on individual
franchises sold as well as a share of future royalties earned by the Company
from centers in the area franchisee's territory. Individual franchise agreements
grant the individual franchisee the exclusive right to open and operate a
franchise center in the individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is completed. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant initial obligations that must be completed before
any revenue is recognized are: all operating manuals are provided and training
is completed.
F-80
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of area
franchisees, individual franchisees and MBE. Certain advertising fees, based on
franchisees' sales (as defined), are collected by the Company for the National
Media Fund. Such advertising fees are not included in the accompanying financial
statements. As of April 30, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs.
These advances, including interest, are repaid to the Company based on the
collection of the advertising fees and availability of funds.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities for which the Company
does not have the intent or the ability to hold to maturity are classified as
available for sale along with the Company's investments in equity securities.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. At April 30, 1997 and 1996, the Company had no investments
that were classified as trading or held to maturity as defined by Statement No.
115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available for sale is included in interest income.
The following is a summary of cash and cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund....................................................................... 3,641 77
Short-term investments:
U.S. Government securities.............................................................. 5,842 4,000
Mutual fund preferred equity securities................................................. 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
F-81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
1996.
"Restricted cash-franchisee deposits" is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When all of
the requirements for recognizing revenue for an individual, area or master
license sale are completed (see the "Revenue Recognition" section of Note 1),
then the deposit amount is transferred from this separate account into MBE's
regular account and the revenue from the sale is recognized. If MBE's
obligations are not completed then these deposits are usually refundable. The
account, "Franchisee deposits", in the liability section of the balance sheet
includes the restricted cash deposit amount and other deposits received from its
franchisees.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments. Receivables from franchisees include trade
receivables, lease receivables and notes receivable. Credit is extended based on
an evaluation of the franchisee's financial condition. Sales-type leases are
collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of resources and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist of supplies and equipment held for resale to franchisees
and equipment held for lease. Inventories are recorded at the lower of cost
(first-in, first-out method) or market.
RE-ACQUIRED INDIVIDUAL AND AREA FRANCHISE RIGHTS
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a better
support system and then reselling the areas within a short period of time. The
Company may acquire individual center rights to upgrade the Center and then
resell it within a short period of time. The Company had an investment of
approximately $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The Company may also repurchase the
area rights with the primary intention of retaining the royalties normally
shared with the former area franchisees and maintaining such rights as long-term
investments. The area
F-82
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repurchases have been accounted for as purchases. The Company records these area
repurchases at cost less accumulated amortization. Periodically the Company
assesses the fair value of these areas based on estimated cash flows to
determine if an impairment in the value has occurred and an adjustment is
necessary. As of April 30, 1997 no adjustment is necessary. The Company had an
investment of $6.4 million and $3.2 million in such area rights at April 30,
1997 and 1996, respectively. Area franchise rights held as long-term investments
are amortized over a period of 20 years.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Building................................................... 31.5 years
12.5--31.5
Building improvements...................................... years
Office furniture and equipment............................. 3-5 years
Vehicles................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
NET INCOME PER COMMON SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents (stock options) outstanding during the period.
F-83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:..................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following summarizes
the components of the net investment in sales-type leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000 -$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
million is available for borrowing under the line of credit. The line of credit
is unsecured and bears interest at a rate based on LIBOR plus certain basis
F-84
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
4. DEBT (CONTINUED)
points (6.81% at April 30, 1997). The agreement expires on September 1, 1998, at
which time all outstanding borrowing can be converted to a three-year term loan,
which would be payable in equal monthly installments. The line of credit
agreement contains various covenants, including limitations on additional
indebtedness and maintaining certain financial ratios.
5. NOTES PAYABLE
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made in
monthly installments of $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998 ---$442; 1999--$452; 2000--$447; 2001--$457; 2002--$463;
and thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has derived tax deductions measured by the excess of the market
value over the option price at the date employee stock options were exercised.
The cumulative related tax benefit of approximately $1.4 million has been
credited to common stock. Significant components of the Company's deferred tax
assets for federal and state income taxes as of April 30 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-85
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the amount of tax computed by multiplying income
before taxes by the applicable statutory rates and the amount of reported taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................................ 5.0% 5.5% 5.6%
Other................................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</TABLE>
7. STOCK OPTIONS
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 million shares available for future grant under the stock option
plan for employees and 160 thousand shares available for future grant under the
stock option plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
----------------------------
<S> <C> <C>
NUMBER OF WGTD. AVG.
SHARES EXERCISED PRICE
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year...................................................... 1,113 $ 9.85
Granted............................................................................... 489 $ 17.54
Exercised............................................................................. (180) $ 9.97
Forfeited............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year.................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year.................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
F-86
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
----- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
----- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
----- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
----------- -------------
<S> <C> <C>
Adjusted pro forma net income.......................................................... $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.................................................. $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
F-87
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1977 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS
- ------------------------------------------------------------------------------ EXERCISABLE
OPTION WGTD. AVE ---------------------------------------
RANGE OF SHARES REMAINING WGTD. AVE. NUMBER WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE EXERCISABLE EXER. PRICE
- -------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 ...................................... 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$ 8.25..................................... 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50..................................... 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50.................................... 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13.................................... 432 9.1 $ 17.70 18 $ 18.27
----- ----------- ----------- ----- -----------
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</TABLE>
9. ROYALTY EXPENSES
Royalties shared with area franchisees are included in franchise operations
in the accompanying consolidated statements of income and are as follows (in
thousands): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
10. EMPLOYEE BENEFIT PLANS
In November 1988, the Company adopted an amended and restated Stock Purchase
and Salary Savings Plan (Plan) covering substantially all employees that have
been employed for at least six months and meet other age and eligibility
requirements. Employees may contribute up to ten percent of compensation per
year (subject to a maximum limit by federal tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
F-88
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its chief
executive officer, under which the Company agreed to obtain a split dollar life
insurance policy for his benefit. The Company contributed $100 thousand in both
FY97 and FY96 toward the funding of this policy. The Company has retained an
equity interest in this policy equal to the extent of its contributions.
Consequently, there is no effect on the Company's earnings as a result of these
contributions.
Contributions after FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still involved in various lawsuits and claims from its
franchisees and former employees in the course of conducting its business. While
the Company intends to vigorously defend these actions, management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation. It is possible that the
Company's results of operations in a particular quarter or annual period could
be materially adversely affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position or liquidity.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling UPS Services. The Company
receives royalty revenue based on revenues earned by the franchisees. The
Company recognized royalty and marketing fee revenues generated from UPS
services of $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
14. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information. For
interim quarterly financial statements, the provision for
F-89
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 (CONTINUED)
14. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
income taxes is estimated using the best available information for projected
results for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY97 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses................................................ 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes.............................. 1,331 (341) 2,310 1,534
Net income (loss)...................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share.............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues......................................................... $ 12,803 $ 15,097 $ 16,164 $ 15,093
Total cost and expenses................................................ 10,279 11,804 11,870 11,479
Provision for (benefit from) income taxes.............................. 1,036 1,345 1,751 1,488
Net income (loss)...................................................... 1,622 2,091 2,708 2,308
Earnings (loss) per share.............................................. .14 .18 .24 .20
</TABLE>
F-90
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
1997
------------
<S> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................................... $ 1,059
Restricted cash--franchisee deposits.............................................................. 1,923
Short-term investments............................................................................ 31,354
Accounts receivable, net.......................................................................... 7,806
Inventories....................................................................................... 533
Current portion of notes receivable............................................................... 8,998
Current portion of net investment in sales-type leases............................................ 3,388
Deferred income taxes............................................................................. 1,272
Re-acquired area and center rights held for resale................................................ 612
Other............................................................................................. 1,637
------------
Total current assets............................................................................ 58,582
Notes receivable, net............................................................................. 18,131
Net investment in sales-type leases............................................................... 5,133
Property and equipment, net....................................................................... 6,686
Excess of cost over assets acquired, net.......................................................... 268
Re-acquired area rights........................................................................... 1,157
Deferred income taxes............................................................................. 1,249
Other assets...................................................................................... 958
------------
Total assets.................................................................................... $ 92,164
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 1,952
Franchisee deposits............................................................................... 2,395
Royalties, referrals and commissions payable...................................................... 2,760
Accrued employee expenses and related taxes....................................................... 2,089
Other accrued expenses............................................................................ 2,038
Income taxes payable.............................................................................. 1,523
Current maturities of debt and notes payable...................................................... 274
------------
Total current liabilities....................................................................... 13,031
Long-term debt, net of current maturities........................................................... 2,448
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding.....
Common stock, no par value, 40,000,000 shares authorized, with 11,422,091 shares issued
outstanding at October 31, 1997................................................................. 18,340
Retained earnings................................................................................. 58,345
------------
Total shareholders' equity...................................................................... 76,685
------------
Total liabilities and shareholders' equity.................................................... $ 92,164
------------
------------
</TABLE>
See accompanying notes.
F-91
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
<S> <C> <C> <C> <C>
10/31/97 10/31/96 10/31/97 10/31/96
--------- --------- --------- ---------
Revenue:
Royalty and marketing fees........................................ $ 8,466 $ 7,985 $ 17,161 $ 15,586
Franchise fees.................................................... 3,802 2,736 6,144 4,531
Sales of supplies and equipment................................... 3,537 3,899 6,049 6,929
Interest income on leases and other............................... 2,537 2,163 4,413 4,151
Company centers................................................... 204 264 458 630
--------- --------- --------- ---------
Total revenues................................................ 18,546 17,047 34,225 31,827
Cost and Expenses:
Franchise operations.............................................. 4,515 4,328 8,598 8,488
Franchise development............................................. 1,840 1,742 3,316 2,954
Cost of supplies and equipment sold............................... 2,552 2,912 4,396 5,189
Marketing......................................................... 1,773 1,713 3,048 3,061
General and administrative........................................ 3,251 2,099 5,591 4,341
Company centers................................................... 197 284 459 680
Litigation settlement expenses.................................... 5,000 5,000
Non recurring charges............................................. 2,510
--------- --------- --------- ---------
Total cost and expenses....................................... 14,128 18,078 27,918 29,713
--------- --------- --------- ---------
Operating Income (loss)............................................... 4,418 (1,031) 6,307 2,114
Interest on investments and other..................................... 309 220 631 476
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes............. 4,727 (811) 6,938 2,590
Provision for income taxes............................................ 1,881 (341) 3,003 990
--------- --------- --------- ---------
Net income (loss)............................................. $ 2,846 $ (470) $ 3,935 $ 1,600
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share:................................... $ .24 $ (.04) $ .33 $ .14
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common equivalent shares outstanding...... 12,101 11,198 12,088 11,774
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-92
<PAGE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Operating Activities:
Net income................................................................................. $ 3,935 $ 1,600
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization............................................................ 556 523
Gain on sale of re-acquired area rights.................................................. (2,644) (339)
Gain on sale of equipment under sales-type lease agreements.............................. (166) (241)
Changes in assets and liabilities:
Restricted cash.......................................................................... (310) 80
Accounts and notes receivable............................................................ (1,792) 461
Receivable from National Media Fund...................................................... 250 770
Assets leased to franchisees and inventories............................................. (675) (1,032)
Re-acquired area and center rights (held for resale)..................................... (143) (86)
Other current assets..................................................................... (243) (1,447)
Other assets............................................................................. (127) (191)
Accounts payable......................................................................... 589 288
Franchisee deposits...................................................................... 298 89
Royalties, referrals and commissions payable............................................. 1,000 (26)
Accrued employee expenses and related taxes.............................................. (301) (929)
Other accrued expenses................................................................... 488 4,806
Income taxes payable..................................................................... 754 (838)
--------- ---------
Net cash flows provided from operating activities...................................... 1,469 3,488
Investing Activities:
Net change in short-term investments..................................................... (4,012) (2.840)
Additions to property and equipment...................................................... (1,106) (215)
Principal payments received on sales-type leases......................................... 624 1,777
--------- ---------
Net cash flows (used in) investment activities......................................... (4,494) (1,278)
Financing Activities:
Borrowings under revolving loan.......................................................... 930
Repayments under revolving loan.......................................................... (250) (1,700)
Repayments on notes payable.............................................................. (1,270) (136)
Repurchase of common stock............................................................... (112) (283)
Proceeds from the issuance of common stock............................................... 1,724 945
--------- ---------
Net cash flows provided from (used in) financing activities............................ 92 (244)
Increase in cash and cash equivalents........................................................ (2,933) 1,966
Cash and cash equivalents at beginning of period............................................. 3,992 1,416
--------- ---------
Cash and cash equivalents at end of period................................................... $ 1,059 $ 3,382
--------- ---------
--------- ---------
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes............................................. $ 2,240 $ 3,270
Interest................................................................................. 164 85
Supplemental Schedule with Non-Cash Investment and Financing Activities:
Equipment sold under sales-type agreements............................................... $ 755 $ 1,048
Additions to debt for acquisition of Area rights......................................... 597 1,780
</TABLE>
See accompanying notes.
F-93
<PAGE>
MAIL BOXES ETC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 1. BASIS OF PRESENTATION:
NOTE 1. PRESENTATION
The condensed consolidated balance sheet as of October 31, 1997, the
condensed consolidated statements of operations for the three-month periods and
six-month periods ended October 31, 1997 and 1996, and the condensed
consolidated statements of cash flows for the six-month periods then ended have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. In addition, certain Risk Factors may also
impact future financial reports. It is suggested that the condensed consolidated
financial statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1997 Annual Report on
Form 10-K, as well as the Risk Factors discussed in the Form 10-K Report. The
results of operations for the quarter ended October 31, 1997 are not necessarily
indicative of the operating results for the full year.
NOTE 2. SUBSEQUENT EVENT
During November 1997, Mail Boxes Etc. was acquired by U.S. Office Products.
U.S. Office Products issued approximately 15.4 million shares of its common
stock in exchange for all the outstanding shares of Mail Boxes Etc.,
representing an exchange ratio of 1.349 shares of U.S. Office Products common
stock for each share of Mail Boxes Etc. common stock.
F-94
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted from Eligible
Institutions. The Letter of Transmittal and certificates for Shares and any
other required documents should be sent or delivered by each tendering person or
his broker, dealer, commercial bank, trust company or other nominee to the
Depositary at one of its addresses set forth below.
THE DEPOSITARY IS:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
BY MAIL: BY FACSIMILE TRANSMISSION:
<S> <C>
First Chicago Trust Company of New York (For Eligible Institutions Only)
Tenders & Exchanges (201) 222-4720
P.O. Box 2569 or
Suite 4660 (201) 222-4721
Jersey City, New Jersey 07303-2569 CONFIRM BY TELEPHONE:
(201) 222-4707
BY HAND: BY OVERNIGHT COURIER:
First Chicago Trust Company of New York First Chicago Trust Company of New York
Tenders & Exchanges Tenders & Exchanges
c/o The Depository Trust Company 14 Wall Street, 8th Floor
55 Water Street Suite 4680
DTC TAD New York, New York 10005
Vietnam Veterans Memorial Plaza
New York, New York 10041
</TABLE>
Any questions or requests for assistance or for additional copies of the
Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at the telephone numbers and
addresses set forth below. You may also contact the Dealer Manager or your
broker, dealer, commercial bank or trust company for assistance concerning the
Offer. To confirm the delivery of your Shares, you are directed to contact the
Depositary.
THE INFORMATION AGENT IS:
[LOGO]
156 Fifth Avenue
New York, NY 10010
Call Collect (212) 929-5550
or
Call Toll Free (800) 322-2885
THE DEALER MANAGER IS:
MORGAN STANLEY DEAN WITTER
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Call Collect (212) 761-5722
or
Call Toll Free (800) 223-2440 ext. 5722
May 4, 1998
<PAGE>
[LOGO]
May 4, 1998
Dear Stockholder:
U.S. Office Products Company is offering to purchase 37,037,037 shares of
its common stock (including shares that may be issued upon exercise of stock
options) at a price of $27 per share. This offer is part of a comprehensive
restructuring plan approved by your Board of Directors. The restructuring plan
includes the creation by U.S. Office Products of four companies that will own
and operate U.S. Office Products' current corporate travel, educational
supplies, print management, and technology solutions businesses and the
distribution to U.S. Office Products' stockholders of shares of those companies.
It also involves an investment in U.S. Office Products by an affiliate of an
investment fund managed by Clayton, Dubilier & Rice, Inc., a private investment
firm.
The offer is explained in detail in the enclosed Offer to Purchase and
Letter of Transmittal. If you want to tender your shares, the instructions on
how to do so are also explained in detail in the enclosed materials. I encourage
you to read carefully these materials before making any decision with respect to
the offer.
This offer is scheduled to expire at 12:00 Midnight, New York City time, on
Monday, June 1, 1998.
Neither U.S. Office Products nor its Board of Directors makes any
recommendation to holders whether to tender all or any shares. U.S. Office
Products' directors and executive officers, except for me, intend to tender
shares in the offer.
Very truly yours,
Thomas Morgan
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORPORATE HEADQUARTERS
1025 Thomas Jefferson Street, NW - Suite 600 East - Washington, DC 20007 - (202)
339-6700 - Fax: (202) 339-6755
<PAGE>
MORGAN STANLEY DEAN WITTER
MORGAN STANLEY & CO. INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
OFFER TO PURCHASE FOR CASH
37,037,037 SHARES OF ITS COMMON STOCK
AT
$27 PER SHARE
OF
U.S. OFFICE PRODUCTS COMPANY
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, JUNE 1, 1998,
UNLESS THE OFFER IS EXTENDED.
May 4, 1998
To Brokers, Dealers, Commercial
Banks, Trust Companies and
Other Nominees:
We have been appointed by U.S. Office Products Company, a Delaware
corporation (the "Company"), to act as Dealer Manager in connection with the
Company's offer to purchase for cash 37,037,037 shares of its common stock,
$.001 par value per share (the "Shares"), at a price of $27 per Share, net to
the seller in cash, upon the terms and subject to the conditions set forth in
the Company's Offer to Purchase dated May 4, 1998 (the "Offer to Purchase") and
the related Letter of Transmittal (which together constitute the "Offer"). The
37,037,037 Shares includes Shares that may be tendered upon exercise of
outstanding stock options with an exercise price of less than $27 per Share
under the Company's stock option plans ("Option Shares"), as described in the
Offer to Purchase. Unless otherwise noted, the term Shares includes Option
Shares. The Company will purchase all Shares validly tendered and not withdrawn
upon the terms and subject to the conditions set forth in the Offer to Purchase
and in the related Letter of Transmittal, including the provisions relating to
proration described in the Offer to Purchase.
The Offer is conditioned upon a minimum of 37,037,037 Shares being tendered.
The Offer is also subject to certain conditions set forth in Section 5 of the
Offer to Purchase.
For your information and for forwarding to your clients for whom you hold
Shares registered in your name or in the name of your nominee, we are enclosing
the following documents:
1. Offer to Purchase dated May 4, 1998;
2. 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. Notice of Guaranteed Delivery to be used to accept the Offer if the
Shares and all other required documents cannot be delivered to the
Depositary by the Expiration Date (as defined in the Offer to Purchase);
4. Letter dated May 4, 1998 from the Company to its stockholders;
<PAGE>
5. A form of letter that may be sent to your clients for whose accounts
you hold Shares registered in your name or in the name of your nominee, with
space provided for obtaining such clients' instructions with regard to the
Offer; and
6. Return envelope addressed to First Chicago Trust Company of New York,
the Depositary.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER, THE
PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON MONDAY, JUNE 1, 1998, UNLESS THE OFFER IS EXTENDED.
The Company will not pay any fees or commissions to any broker, dealer or
other person (other than the Dealer Manager, the Information Agent, the
Depositary and the ESPP Agent as described in the Offer to Purchase) for
soliciting tenders of Shares pursuant to the Offer. The Company will, however,
upon request, reimburse brokers, dealers, commercial banks and trust companies
for reasonable and necessary costs and expenses incurred by them in forwarding
materials to their customers. The Company will pay all stock transfer taxes
applicable to its purchase of Shares pursuant to the Offer, subject to
Instruction 7 of the Letter of Transmittal. No broker, dealer, bank, trust
company or fiduciary shall be deemed to be either our agent or the agent of the
Company, the Information Agent or the Depositary for the purposes of the Offer.
Any inquiries you may have with respect to the Offer should be addressed to,
and additional copies of the enclosed materials may be obtained from, the
Information Agent or the undersigned at the addresses and telephone numbers set
forth on the back cover of the Offer to Purchase.
Very truly yours,
MORGAN STANLEY DEAN WITTER
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
THE AGENT OF THE COMPANY, THE DEALER MANAGER, THE INFORMATION AGENT OR THE
DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY
STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE
DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
<PAGE>
OFFER TO PURCHASE FOR CASH
37,037,037 SHARES OF ITS COMMON STOCK
AT
$27 PER SHARE
OF
U.S. OFFICE PRODUCTS COMPANY
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, JUNE 1, 1998
UNLESS THE OFFER IS EXTENDED.
To Our Clients:
Enclosed for your consideration are the Offer to Purchase dated May 4, 1998
(the "Offer to Purchase") and the related Letter of Transmittal (which together
constitute the "Offer") in connection with the offer by U.S. Office Products
Company, a Delaware corporation (the "Company"), to purchase for cash 37,037,037
shares of its common stock, $.001 par value per share (the "Shares"), at a price
of $27 per Share, net to the seller in cash, upon the terms and subject to the
conditions of the Offer. The 37,037,037 Shares includes Shares that may be
tendered upon exercise of outstanding stock options with an exercise price of
less than $27 per Share under the Company's stock option plans ("Option
Shares"), as described in the Offer to Purchase. Unless otherwise noted, the
term Shares includes Option Shares. The Company will purchase all Shares validly
tendered and not withdrawn upon the terms and subject to the conditions of the
Offer, including the provisions relating to proration described in the Offer to
Purchase. We are the holder of record of Shares held for your account. A tender
of such Shares can be made only by us as the holder of record 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 SHARES HELD BY US FOR YOUR
ACCOUNT.
As described in the Offer to Purchase, the Company reserves the right to
purchase more than 37,037,037 Shares. The Company will return all Shares not
purchased, including Shares not purchased as a result of proration.
We request instructions as to whether you wish us to tender any or all of
the Shares held by us for your account, upon the terms and subject to the
conditions set forth in the Offer to Purchase and the Letter of Transmittal.
Please note carefully the following:
1. PRICE: The tender price is $27 per Share, net to you in cash.
2. EXPIRATION DATE: The Offer, the proration period and withdrawal
rights expire at 12:00 Midnight, New York City time, on Monday, June 1,
1998, unless the Company extends the Offer.
3. CONDITIONS: The Offer is conditioned upon a minimum of 37,037,037
Shares being tendered. The Offer is also subject to the conditions set forth
in Section 5 of the Offer to Purchase.
4. TRANSFER TAXES: Any stock transfer taxes applicable to the sale of
Shares to the Company pursuant to the Offer will be paid by the Company,
except as otherwise provided in Instruction 7 of the Letter of Transmittal.
As described in the Offer to Purchase, if fewer than all Shares validly
tendered and not withdrawn prior to the expiration of the Offer are to be
purchased by the Company, the Company will purchase Shares validly tendered and
not withdrawn prior to the expiration of the Offer on a pro rata basis, if
necessary (with appropriate adjustments to avoid purchases of fractional
Shares).
<PAGE>
If you wish to have us tender any or all of your Shares, please so instruct
us by completing, executing, detaching and returning to us the instruction form
on the detachable part hereof. An envelope to return your instructions to us is
enclosed. If you authorize tender of your Shares, all such Shares will be
tendered unless otherwise specified on the detachable part hereof.
YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO
SUBMIT A TENDER ON YOUR BEHALF ON OR BEFORE THE EXPIRATION OF THE OFFER. THE
OFFER, THE PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON MONDAY, JUNE 1, 1998, UNLESS THE COMPANY EXTENDS THE OFFER.
The Offer is not being made to, nor will tenders be accepted from or on
behalf of, holders of Shares in any jurisdiction in which the making of the
Offer or acceptance thereof would not be in compliance with the laws of such
jurisdiction. In those jurisdictions the laws of which require that the Offer be
made by a licensed broker or dealer, the Offer shall be deemed to be made on
behalf of the Company by Morgan Stanley & Co. Incorporated, as the Dealer
Manager, or one or more registered brokers or dealers licensed under the laws of
such jurisdiction.
<PAGE>
INSTRUCTIONS WITH RESPECT TO
OFFER TO PURCHASE FOR CASH
37,037,037 SHARES OF COMMON STOCK
OF U.S. OFFICE PRODUCTS COMPANY
The undersigned acknowledge(s) receipt of your letter and the enclosed Offer
to Purchase, dated May 4, 1998, and the related Letter of Transmittal (which
together constitute the "Offer"), in connection with the offer by U.S. Office
Products Company to purchase for cash 37,037,037 shares of its common stock,
$.001 par value per share (the "Shares") at a price of $27 per Share, net to the
undersigned in cash.
The undersigned hereby instruct(s) you to tender to the Company the number
of Shares indicated below or, if no number is indicated, all Shares held by you
for the account of the undersigned, upon the terms and subject to the conditions
set forth in the Offer to Purchase and the related Letter of Transmittal.
Number
of
Shares
to be
Tendered:
Shares*
*
Unless
otherwise
indicated,
it will
be
assumed
that all
Shares
held by
us for
your
account
are to be
tendered.
CONDITIONAL TENDERS
By completing this box, the undersigned conditions the tender authorized
hereby on the following minimum number of Shares being purchased if any are
purchased.
Minimum number of Shares to be sold:
------ Shares
Unless this box is completed, the tender authorized hereby will be made
unconditionally.
SIGN HERE
- ----
- --
--
Signature(s)
Daytime
Telephone
Number
Taxpayer
ID No.
or
Social
Security
No. --
Please
print
name(s)
and
address(es)
here
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
U.S. OFFICE PRODUCTS COMPANY
PURSUANT TO ITS OFFER TO PURCHASE
DATED MAY 4, 1998
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MONDAY, JUNE 1, 1998, UNLESS THE OFFER IS EXTENDED.
TO: FIRST CHICAGO TRUST COMPANY OF NEW YORK, DEPOSITARY
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT COURIER:
First Chicago Trust Company of New York First Chicago Trust Company of New York
Tenders & Exchanges Tenders & Exchanges
P.O. Box 2569 14 Wall Street, 8th Floor
Suite 4660 Suite 4680
Jersey City, New Jersey 07303-2569 New York, New York 10005
</TABLE>
BY HAND:
First Chicago Trust Company of New York
Tenders & Exchanges
c/o The Depository Trust Company
55 Water Street DTC TAD
Vietnam Veterans Memorial Plaza
New York, New York 10041
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Letter of Transmittal is to be used only if certificates are to be
forwarded herewith, unless an Agent's Message (as defined in the Offer to
Purchase) is utilized, or if delivery of Shares (as defined below) is to be made
by book-entry transfer to the Depositary's account at The Depository Trust
Company ("DTC" or the "Book-Entry Transfer Facility") pursuant to the procedures
set forth in Section 2 of the Offer to Purchase.
OPTION SHARES. Holders of unexercised options granted under the Company's
option plans may not use this Letter of Transmittal to direct the tender of
Option Shares (as defined in the Offer to Purchase). Such option holders must
follow the instructions set forth in the materials on green paper and must use
the "Notice of Instructions (Options)" sent to them separately.
ESPP SHARES. Participants in the U.S. Office Products Company Employee
Stock Purchase Plan may not use this Letter of Transmittal to direct the tender
of Shares held through such plan. Such participants must follow the instructions
set forth in the materials on gold paper and must use the "Tender Instruction
Form for Shares in the U.S. Office Products Company Employee Stock Purchase
Plan" sent to them separately. American Stock Transfer & Trust Company, the
agent for the plan, will submit this Letter of Transmittal on behalf of
tendering plan participants.
PLEDGED SHARES. Holders of Pledged Shares (as defined in the Offer to
Purchase) may not use this Letter of Transmittal to direct the tender of Pledged
Shares. Such holders must follow the instructions set forth in the materials on
purple paper and must use the "Notice of Instructions, Power of Attorney and
Agreement (Pledged Shares)" sent to them separately. First Chicago Trust Company
of New York, as agent for holders of Pledged Shares, will submit this Letter of
Transmittal on behalf of holders tendering Pledged Shares.
If a holder owns Shares, in addition to any Option Shares, ESPP Shares
and/or Pledged Shares, that he or she desires to tender, such holder must submit
both this Letter of Transmittal and the applicable Notice of Instructions.
Stockholders who cannot deliver their Shares and all other documents
required hereby to the Depositary by the Expiration Date (as defined in the
Offer to Purchase), or who are unable to comply with the procedures for
book-entry transfer on a timely basis, must tender their Shares pursuant to the
guaranteed delivery procedure set forth in Section 2 of the Offer to Purchase.
See Instruction 2. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Depositary.
<PAGE>
Stockholders tendering Shares OTHER THAN Option Shares, ESPP Shares and
Pledged Shares should complete the following chart:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
-------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S)
APPEAR(S) ON SHARES TENDERED
SHARE CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
<CAPTION>
TOTAL NUMBER
OF
SHARES NUMBER OF
CERTIFICATE REPRESENTED BY SHARES
NUMBER(S)* CERTIFICATE(S)* TENDERED**
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
Total Shares
- -------------------------------------------------------------------------------------------
</TABLE>
Indicate in this box order (by certificate number) in which Shares are to be
purchased in event of proration. (Attach additional signed list if
necessary):*** See Instruction 8.
1st: ______; 2nd: ______; 3rd: ______; 4th: ______; 5th: ______; 6th:
______
* Need not be completed by stockholders tendering by book-entry transfer
through DTC.
** Unless otherwise indicated, it will be assumed that all Shares represented
by any certificates delivered to the Depositary are being tendered. See
Instruction 4.
*** If you do not designate an order, in the event less than all Shares tendered
are purchased due to proration, Shares will be selected for purchase by the
Depositary.
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO
THE DEPOSITARY'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE
THE FOLLOWING:
Name of Tendering Institution______________________________________________
DTC Account No.____________________________________________________________
Transaction Code No._______________________________________________________
/ / CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE
FOLLOWING:
Name of Tendering Stockholder(s)____________________________________________
Date of Execution of Notice of Guaranteed Delivery__________________________
If delivery is by book-entry transfer:
Name of Tendering Institution
DTC Account No.____________________________________________________________
Transaction Code No.________________________________________________________
CONDITIONAL TENDER
(SEE INSTRUCTION 5)
/ / CHECK HERE IF TENDER OF SHARES IS CONDITIONED ON THE COMPANY PURCHASING ALL
OR A MINIMUM NUMBER OF TENDERED SHARES, AND COMPLETE THE FOLLOWING:
Minimum Number of Shares to be Sold________________________________________
NOTE: SIGNATURE MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to U.S. Office Products Company, a Delaware
corporation (the "Company"), the shares of common stock, $.001 par value per
share (the "Shares") described above, pursuant to the Company's offer to
purchase 37,037,037 Shares at a price of $27 per Share, net to the seller in
cash, upon the terms and subject to the conditions set forth in the Offer to
Purchase dated May 4, 1998 (the "Offer to Purchase"), receipt of which is hereby
acknowledged, and in this Letter of Transmittal (which, together with the Offer
to Purchase, constitutes the "Offer"). The 37,037,037 Shares includes Shares
that may be tendered upon exercise of outstanding stock options with an exercise
price of less than $27 per Share under the Company's stock option plans ("Option
Shares"), as described in the Offer to Purchase. Unless otherwise noted, the
term Shares includes Option Shares.
Subject to, and effective upon, acceptance for payment of and payment for
the Shares tendered herewith in accordance with the terms of the Offer, the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to all the Shares that are being
tendered hereby and appoints the Depositary the true and lawful agent and
attorney-in-fact of the undersigned with respect to such Shares, with full power
of substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to (a) deliver certificates for such Shares, or
transfer ownership of such Shares on the account books maintained by the
Book-Entry Transfer Facility, together, in any such case, with all accompanying
evidences of transfer and authenticity, to or upon the order of the Company, (b)
present such Shares for transfer and cancellation on the books of the Company
and (c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such Shares, all in accordance with the terms of the Offer.
The undersigned hereby represents and warrants that the undersigned has a
net long position in Shares at least equal to the Shares being tendered and has
full power and authority to tender, sell, assign and transfer the Shares
tendered hereby and that, when the same are accepted for payment by the Company,
the Company will acquire good and unencumbered title thereto, free and clear of
all liens, restrictions, charges, encumbrances and adverse claims. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Depositary or the Company to be necessary or desirable to complete
the sale, assignment and transfer of the Shares tendered hereby and has read,
understands and agrees with all of the terms of the Offer.
The undersigned understands that, upon the terms and subject to the
conditions of the Offer (including the provisions related to proration), the
Company will pay $27 per Share for Shares validly tendered, not withdrawn and
accepted in the Offer. The undersigned understands that tenders of Shares
pursuant to any one of the procedures described in Section 2 of the Offer to
Purchase and in the instructions hereto will constitute an agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Offer.
Unless otherwise indicated under "Special Payment Instructions," please
issue the check for the purchase price of any Shares purchased, and return any
Shares not tendered or not purchased, in the name(s) of the undersigned (or, in
the case of Shares tendered by book-entry transfer, by credit to the account at
the Book-Entry Transfer Facility). Similarly, unless otherwise indicated under
"Special Delivery Instructions," please mail the check for the purchase price of
any Shares purchased and any certificates for Shares not tendered or not
purchased (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signature(s). In the event that both
"Special Payment Instructions" and "Special Delivery Instructions" are
completed, please issue the check for the purchase price of any Shares purchased
and return any Shares not tendered or not purchased in the name(s) of, and mail
said check and any certificates to, the person(s) so indicated. The undersigned
recognizes that the Company has no obligation, pursuant to the "Special Payment
Instructions," to transfer any Shares from the name of the registered holder(s)
thereof or to order the registration or transfer of such Shares tendered by
book-entry transfer, if the Company does not accept for payment any of the
Shares so tendered. The undersigned also recognizes that shares of the Spin-Off
Companies distributed in the Distributions (as defined in the Offer to Purchase)
will be distributed to the person designated to receive certificates in the
"Special Payment Instructions."
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Except as stated in the Offer, this tender is
irrevocable.
3
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, 6, 7 AND 9) (SEE INSTRUCTIONS 1, 4, 6, 7 AND 9)
To be completed ONLY if the check To be completed ONLY if the check
for the purchase price of Shares for the purchase price of Shares
purchased or certificates for purchased or certificates for
Shares not tendered or not Shares not tendered or not
purchased are to be issued in the purchased are to be mailed to
name of someone other than the someone other than the undersigned
undersigned. or to the undersigned at an address
Issue/ / check other than that shown below the
/ / certificates to: undersigned's signature(s).
Name(s)............................ Deliver/ / check
(PLEASE PRINT) / / certificates to:
................................... Name...............................
Address............................ (PLEASE PRINT)
................................... ...................................
(ZIP CODE) Address............................
................................... ...................................
(TAXPAYER IDENTIFICATION NO.) (ZIP CODE)
SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
.................................................................
.................................................................
SIGNATURE(S) OF OWNER(S)
Name(s)..........................................................
(PLEASE PRINT)
.................................................................
Capacity (full title)............................................
Address..........................................................
.................................................................
.................................................................
(ZIP CODE)
Daytime Telephone Number.........................................
Dated............................................................
(Must be signed by registered holder(s) exactly as name(s)
appear(s) on stock certificate(s) or on a security position
listing or by person(s) authorized to become registered holder(s)
by certificates and documents transmitted herewith. If signature
is by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person
acting in a fiduciary or representative capacity, please set
forth full title and see Instruction 6.)
GUARANTEE OF SIGNATURE(S), IF REQUIRED
(SEE INSTRUCTIONS 1 AND 6)
Name of Firm.....................................................
Authorized Signature.............................................
Dated............................................................
PAYER'S NAME: FIRST CHICAGO TRUST COMPANY OF NEW YORK
4
<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 ___________________________________________________________________________
5
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a financial
institution (including most banks and brokerage houses) which is a participant
in the Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Program, or the Stock Exchange Medallion Program (an "Eligible
Institution"). Signatures on this Letter of Transmittal need not be guaranteed
(a) if this Letter of Transmittal is signed by the registered holder(s) of the
Shares (which term, for purposes of this document, shall include any participant
in the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of Shares) tendered herewith and such holder(s) have not
completed the box entitled "Special Payment Instructions" on this Letter of
Transmittal or (b) if such Shares are tendered for the account of an Eligible
Institution.
2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARES; GUARANTEED DELIVERY
PROCEDURE. This Letter of Transmittal is to be used if certificates are to be
forward herewith or if delivery of Shares is to be made by book-entry transfer
pursuant to the procedures set forth in Section 2 of the Offer to Purchase. For
a stockholder to validly tender Shares, certificates for all physically
delivered Shares, or a confirmation of a book-entry transfer of all Shares
delivered electronically into the Depositary's account at the Book-Entry
Transfer Facility, as well as a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and any other documents required by this
Letter of Transmittal, must be received by the Depositary at one of its
addresses set forth on the front page of this Letter of Transmittal by the
Expiration Date. Unless extended, the Expiration Date is 12:00 Midnight, New
York City time, on Monday, June 1, 1998.
Stockholders who cannot deliver their Shares and all other required
documents to the Depositary by the Expiration Date must tender their Shares
pursuant to the guaranteed delivery procedure set forth in Section 2 of the
Offer to Purchase. Pursuant to such procedure: (a) such tender must be made by
or through an Eligible Institution, (b) a properly completed and duly executed
Notice of Guaranteed Delivery substantially in the form provided by the Company
must be received by the Depositary by the Expiration Date, and (c) the
certificates for all physically delivered Shares, or a confirmation of a
book-entry transfer of all Shares delivered electronically into the Depositary's
account at the Book-Entry Transfer Facility, as well as a properly completed and
duly executed Letter of Transmittal (or facsimile thereof) and any other
documents required by this Letter of Transmittal, and must be received by the
Depositary within three trading days after the date of execution of such Notice
of Guaranteed Delivery, all as provided in Section 2 of the Offer to Purchase.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING SHARE CERTIFICATES, IS AT
THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY.
No alternative or contingent tenders will be accepted, except for
conditional tenders as indicated under Instruction 5, and no fractional Shares
will be purchased. By executing this Letter of Transmittal (or facsimile
thereof), the tendering stockholder waives any right to receive any notice of
the acceptance for payment of the Shares.
3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Shares Tendered" is inadequate, the certificate numbers and/or the number of
Shares should be listed on a separate signed schedule attached hereto.
4. PARTIAL TENDERS (NOT APPLICABLE TO STOCKHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER). If fewer than all the Shares represented by any certificates
delivered to the Depositary are to be tendered, fill in the number of Shares
which are to be tendered in the box entitled "Number of Shares Tendered". In
such case, a new certificate for the remainder of the Shares represented by the
old certificate will be sent to the person(s) signing this Letter of
Transmittal, unless otherwise provided in the appropriate box on this Letter of
Transmittal, as promptly as practicable after the expiration or termination of
the Offer. All Shares represented by certificates delivered to the Depositary
will be deemed to have been tendered unless otherwise indicated.
5. CONDITIONAL TENDERS. As described in the Offer to Purchase, stockholders
may condition their tender of Shares on all or a minimum number of their
tendered Shares being purchased ("Conditional Tenders"). If the Company
purchases less than all Shares tendered before the Expiration Date and not
withdrawn, any Shares tendered pursuant to a Conditional Tender for which the
condition was not satisfied shall be deemed withdrawn, subject to reinstatement
if such Conditionally Tendered Shares are all the Shares held by the person
tendering and the Conditionally Tendered Shares are subsequently selected by lot
for purchase subject to Section 1 of the Offer to Purchase. All tendered Shares
shall be deemed unconditionally tendered unless the Conditional Tender section
is completed. The Conditional Tender alternative is made available so that
stockholders may assure that any gain that they realize will be capital gain
rather than ordinary income for U.S. federal income tax purposes. It is the
stockholder's responsibility to calculate the minimum number of Shares that must
be tendered to assure capital gain treatment, and each stockholder is urged to
consult his or her own tax advisor.
6. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
tendered hereby, the signature(s) must correspond with the name(s) as written on
the face of the certificates without any change whatsoever.
If any of the Shares tendered hereby are held of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any of the Shares tendered hereby are registered in different names on
different certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal as there are different registrations of
certificates.
6
<PAGE>
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares tendered hereby, no endorsements of certificates or separate stock powers
are required unless payment of the purchase price is to be made, or Shares not
tendered or not purchased are to be returned, in the name of any person other
than the registered holder(s). Signatures on any such certificates or stock
powers must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares tendered hereby, certificates must be
endorsed or accompanied by appropriate stock powers, in either case, signed
exactly as the name(s) of the registered holder(s) appear(s) on the certificates
of such Shares. Signature(s) on any such certificates or stock powers must be
guaranteed by an Eligible Institution. See Instruction 1.
If this Letter of Transmittal or any certificate or stock power is 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 the authority of such person so to act must be submitted.
7. STOCK TRANSFER TAXES. Except as provided in this Instruction, the Company
will pay any stock transfer taxes with respect to the sale and transfer of any
Shares to it or its order pursuant to the Offer. If, however, payment of the
purchase price is to be made to, or Shares not tendered or not purchased are to
be returned in the name of, any person other than the registered holder(s), or
tendered Shares are registered in the name of a person other than the name of
the person(s) signing this Letter of Transmittal, the amount of any stock
transfer taxes (whether imposed on the registered holder(s), such other person
or otherwise) payable on account of the transfer to such person will be deducted
from the purchase price unless satisfactory evidence of the payment of such
taxes, or exemption therefrom, is submitted.
8. ORDER OF PURCHASE IN EVENT OF PRORATION. As described in Section 1 of the
Offer to Purchase, stockholders may designate the order in which their Shares
are to be purchased in the event of proration. The order of purchase may have an
effect on the federal income tax classification of any gain or loss on the
Shares purchased. See Sections 1 and 12 of the Offer to Purchase.
9. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the check for the purchase
price of any Shares purchased is to be issued, or any Shares not tendered or not
purchased are to be returned, in the name of a person other than the person(s)
signing this Letter of Transmittal or if the check or any certificates for
Shares not tendered or not purchased are to be mailed to someone other than the
person(s) signing this Letter of Transmittal or to the person(s) signing this
Letter of Transmittal at an address other than that shown above, the appropriate
boxes on this Letter of Transmittal should be completed.
10. U.S. FEDERAL INCOME TAX WITHHOLDING. Under U.S. federal income tax laws,
the Depositary will be required to withhold 31% of the amount of any payments
made to certain U.S. stockholders pursuant to the Offer. In order to avoid such
backup withholding, each tendering U.S. stockholder must provide the Depositary
with such stockholder's correct taxpayer identification number by completing the
Substitute Form W-9 set forth above. In general, if a stockholder is an
individual, the taxpayer identification number is the social security number of
such individual. If the Depositary is not provided with the correct taxpayer
identification number, the stockholder may be subject to a $50 penalty imposed
by the Internal Revenue Service and payments that are made to such stockholder
pursuant to the Offer may be subject to backup withholding. Certain stockholders
(including, among others, all corporations and certain foreign individuals) are
not subject to these backup withholding and reporting requirements. For this
purpose, a U.S. stockholder is (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or under
the law of the United States or any political subdivision thereof (other than
any partnership treated as foreign under Treasury regulations), (iii) any estate
the income of which is subject to U.S. 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. For further information concerning backup withholding and
instructions for completing the Substitute Form W-9 (including how to obtain a
taxpayer identification number if you do not have one and how to complete the
Substitute Form W-9 if Shares are held in more than one name), consult the
enclosed GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Shares to be deemed invalidly tendered, but may require the Depositary to
withhold 31% of the amount of any payments made pursuant to the Offer. Backup
withholding is not an additional U.S. federal income tax. Rather, the U.S.
federal income tax liability of a person 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.
NOTE: FAILURE TO COMPLETE AND RETURN THE SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF THE AMOUNT 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.
Unless the Depositary determines that a reduced rate of withholding is
applicable pursuant to a tax treaty or that an exemption from withholding is
applicable, the Company will be required to withhold U.S. federal income tax at
a rate of 30% from such gross proceeds paid to a non-U.S. stockholder or his
agent. For this purpose, a non-U.S. stockholder is any stockholder that is not
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the law of the United States or
any political subdivision thereof (other than any partnership treated as foreign
under Treasury regulations), (iii) any estate the income of which is subject to
U.S. 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
7
<PAGE>
authority to control all substantial decisions of the trust. The Depositary will
determine the applicable rate of withholding by reference to a stockholder's
address and any IRS Form 1001 submitted to the Depositary, unless facts and
circumstances indicate such reliance is not warranted or if applicable law (for
example, an applicable tax treaty or Treasury regulations thereunder) requires
some other method for determining a stockholder's residence. A non-U.S.
stockholder may be eligible to file for a refund of such tax or a portion of
such tax if such stockholder meets the "complete redemption", "substantially
disproportionate" or "not essentially equivalent to a dividend" tests described
in the Offer to Purchase under "U.S. Federal Income Tax Considerations" or if
such stockholder is entitled to a reduced rate of withholding pursuant to a
treaty and the Depositary withheld at a higher rate. In order to claim an
exemption from withholding on the grounds that gross proceeds paid pursuant to
the Offer are effectively connected with the conduct of a trade or business
within the United States, a non-U.S. stockholder must deliver to the Depositary
a properly executed IRS Form 4224 claiming such exemption. Such Forms can be
obtained from the Depositary. Non-U.S. stockholders are urged to consult their
own tax advisors regarding the application of U.S. federal income tax
withholding, including eligibility for a withholding tax reduction or exemption
and the refund procedure. Because non-U.S. stockholders are subject to U.S.
federal income tax withholding, they will not be subject to U.S. federal income
tax backup withholding.
11. IRREGULARITIES. All questions as to the number of Shares accepted, the
form of documents and the validity, eligibility (including time of receipt) and
acceptance for payment of any tender of Shares will be determined by the Company
in its sole discretion, which determinations shall be final and binding on all
parties. The Company reserves the absolute right to reject any or all tenders of
Shares it determines not to be in proper form or the acceptance of which or
payment for which may, in the opinion of the Company's counsel, be unlawful. The
Company also reserves the absolute right to waive any of the conditions of the
Offer and any defect or irregularity in the tender of any particular Shares, and
the company's interpretation of the terms of the Offer (including these
instructions) will be final and binding on all parties. No tender of Shares will
be deemed to be properly made until all defects and irregularities have been
cured or waived. Unless waived, any defects or irregularities in connection with
tenders must be cured within such time as the Company shall determine. None of
the Company, the Dealer Manager, the Depositary, the Information Agent (as the
foregoing are defined in the Offer to Purchase) or any other person is or will
be obligated to give notice of any defects or irregularities in tenders and none
of them will incur any liability for failure to give any such notice.
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance or additional copies of the Offer to Purchase and this Letter of
Transmittal should be directed to the Information Agent and the Dealer Manager
at their respective addresses and telephone numbers set forth below.
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO]
156 Fifth Avenue
New York, NY 10010
Call Collect (212) 929-5550
THE DEALER MANAGER FOR THE OFFER IS:
MORGAN STANLEY DEAN WITTER
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Call Collect (212) 761-5722
or
Call Toll Free (800) 223-2440 ext. 5722
8
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF SHARES OF COMMON STOCK
OF
U.S. OFFICE PRODUCTS COMPANY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The attached form, or a form substantially equivalent to the attached form,
must be used to accept the Offer (as defined below) if certificates for shares
of common stock of U.S. Office Products Company and all other documents required
by the Letter of Transmittal cannot be delivered to the Depositary on or prior
to the Expiration Date (as defined in Section 1 of the Offer to Purchase defined
below). Such form may be delivered by hand or transmitted by mail, or (for
Eligible Institutions only) by facsimile transmission, to the Depositary. See
Section 2 of the Offer to Purchase. THE ELIGIBLE INSTITUTION THAT COMPLETES THIS
FORM MUST COMMUNICATE THE GUARANTEE TO THE DEPOSITARY AND MUST DELIVER THE
LETTER OF TRANSMITTAL AND CERTIFICATES FOR SHARES TO THE DEPOSITARY WITHIN THE
TIME SET FORTH IN THE LETTER OF TRANSMITTAL. FAILURE TO DO SO COULD RESULT IN A
FINANCIAL LOSS TO SUCH ELIGIBLE INSTITUTION.
TO: FIRST CHICAGO TRUST COMPANY OF NEW YORK, DEPOSITARY
<TABLE>
<S> <C>
BY MAIL: BY FACSIMILE TRANSMISSION:
First Chicago Trust Company (For Eligible Institutions Only)
of New York (201) 222-4720
Tenders & Exchanges or
P.O. Box 2569 (201) 222-4721
Suite 4660 CONFIRMATION OF FACSIMILE TRANSMISSION ONLY:
Jersey City, New Jersey 07303-2569 (201) 222-4707
BY HAND: BY OVERNIGHT COURIER:
First Chicago Trust Company First Chicago Trust Company
of New York Tenders & Exchanges
Tenders & Exchanges 14 Wall Street, 8th Floor
c/o The Depository Trust Company Suite 4680
55 Water Street New York, New York 10005
DTC TAD
Vietnam Veterans Memorial Plaza
New York, New York 10041
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN THOSE
SHOWN ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER
THAN THAT LISTED ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution 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 U.S. Office Products Company (the
"Company"), upon the terms and subject to the conditions set forth in the Offer
to Purchase dated May 4, 1998 (the "Offer to Purchase") and the related Letter
of Transmittal (which together constitute the "Offer"), receipt of which is
hereby acknowledged, the number (indicated below) of shares of common stock,
$.001 par value per share of the Company, pursuant to the guaranteed delivery
procedure set forth in Section 2 in the Offer to Purchase.
NUMBER OF SHARES BEING TENDERED HEREBY:
<TABLE>
<S> <C>
Number of Shares................................... SIGN HERE
Certificate Nos. (if available): ...................................................
................................................... ...................................................
................................................... Signature(s)
If Shares will be tendered by book-entry transfer: Dated:.............................................
Name of Tendering Institution:..................... Name(s) of Stockholders:
................................................... ...................................................
Account No...................................... at ...................................................
/ / The Depository Trust Company (Please Type or Print)
...................................................
...................................................
(Address)
...................................................
(Zip Code)
...................................................
(Daytime Telephone No.)
...................................................
(Taxpayer ID No. or Social Security No.)
</TABLE>
<PAGE>
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm that is a member of a registered national securities
exchange or the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office, branch or agency in the
United States, guarantees (a) that the above named person(s) "own(s)" the Shares
tendered hereby within the meaning of Rule 14e-4 under the Securities Exchange
Act of 1934, as amended, (b) that such tender of Shares complies with Rule 14e-4
and (c) to deliver to the Depositary the Shares tendered hereby, together with a
properly completed and duly executed Letter(s) of Transmittal (or facsimile(s)
thereof), unless an Agent's Message is utilized, and any other required
documents, all within three Nasdaq Stock Market trading days of the date hereof.
______________________________________
(Name of Firm)
______________________________________
(Authorized Signature)
______________________________________
(Name)
______________________________________
(Address)
______________________________________
(Zip Code)
<TABLE>
<S> <C>
Dated: (Daytime Telephone No.)
</TABLE>
DO NOT SEND STOCK CERTIFICATES WITH THIS FORM. YOUR STOCK CERTIFICATES MUST BE
SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE>
This announcement is neither an offer to purchase nor a solicitation of an
offer to sell Shares ( as defined below). The Offer is made solely by the
Offer to Purchase dated May 4, 1998, and the related Letter of Transmittal,
and is being made to all holders of Shares. The Offer is not being made to
(nor will any tender of Shares 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 Shares therein would not be in compliance with the laws of such
jurisdiction. However, the Company may, in 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 Morgan Stanley & Co. Incorporated, the Dealer Manager for
the Offer, or one or more registered brokers or dealers that are licensed
under the laws of such jurisdiction.
Notice of Offer to Purchase for Cash
by
U.S. Office Products Company
37,037,037 Shares of its Common Stock
at
$27 Per Share
U.S. Office Products Company, a Delaware corporation (the "Company"), is
offering to purchase 37,037,037 shares of its common stock, par value $.001
per share, at a price of $27 per Share. The number of Shares to be purchased
by the Company includes Shares that may be tendered upon exercise of stock
options with an exercise price of less than $27 per Share granted under the
Company's stock option plans ("Option Shares"). The Company will purchase
Option Shares for a price of $27 per Share minus the exercise price of the
option. Unless otherwise noted, the term "Shares" includes Option Shares. The
Company's offer is subject to the terms and conditions set forth in the Offer
to Purchase dated May 4, 1998 (the "Offer to Purchase") and in the related
Letter of Transmittal (which together constitute the "Offer"). If, prior to
the Expiration Date, more than 37,037,037 Shares (or such other number of
Shares as the Company may elect to purchase) are properly tendered and not
withdrawn, the Company will, upon the terms and subject to the conditions of
the Offer, purchase Shares on a pro rata basis from stockholders and option
holders whose Shares are properly tendered and not withdrawn. The term
"Expiration Date" means 12:00 Midnight, New York City time, on Monday,
June 1, 1998, unless the Company, in its sole discretion, shall have extended
the period of time during which the Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date at which the Offer, as
so extended by the Company, will expire. Capitalized terms used herein
without definition have the meaning given to them in the Offer to Purchase.
The Offer is conditioned upon a minimum of 37,037,037 Shares being tendered
and not withdrawn, and on certain other conditions, including receipt of
financing on acceptable terms and satisfaction of all conditions to the
consummation of distributions by the Company to its stockholders of all of
the common stock of four of its subsidiaries and all conditions to an equity
investment in the Company by an affiliate of an investment fund managed by
Clayton, Dubilier & Rice, Inc. (in each case, other than in respect of the
Offer). See Section 5 in the Offer to Purchase for a description of these
conditions.
<PAGE>
- -------------------------------------------------------------------------------
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 1, 1998, UNLESS THE OFFER IS
EXTENDED.
- -------------------------------------------------------------------------------
Neither the Company nor its Board of Directors makes any recommendation to
holders as to whether to tender or refrain from tendering Shares. Holders
must make their own decisions whether to tender Shares and, if so, how many
Shares to tender. The Company has been advised that its directors and
executive officers, except for the Chief Executive Officer, Thomas Morgan,
intend to tender Shares in the Offer.
The Offer is part of the Company's Strategic Restructuring Plan adopted by
the Board of Directors of the Company, which is described in detail in Annex
A to the Offer to Purchase. The primary purpose of the Offer is to provide to
stockholders an opportunity to receive cash for a portion of their investment
in the Company at a premium to recent market prices, without the ususal
transaction costs associated with a market sale. Further, the purchase of
Option Shares will reduce the potential additional dilution to stockholders
of the Company and of the companies being distributed that would otherwise
result from the adjustments that are expected to be made to the terms of the
Company's outstanding options as a result of the distributions. The purchase
of Option Shares will also permit employees to participate in the Offer
without having to exercise their options in advance of tendering. Stockholders
should note that those Shares purchased in the Offer will not receive shares
of the four companies that the Company is distributing as part of its
Strategic Restructuring Plan.
Shares tendered in the Offer may be withdrawn at any time prior to 12:00
Midnight, New York City time, on Monday, June 1, 1998 and, unless theretofore
accepted for payment by the Company as provided in the Offer to Purchase, may
also be withdrawn after 12:00 Midnight, New York City time, on Tuesday, June
30, 1998. For a withdrawal to be effective, a written, telegraphic or
facsimile transmission notice of withdrawal must be timely received by the
Depositary, First Chicago Trust Company of New York, at one of its addresses
set forth on the back cover of the Offer to Purchase. Any such notice of
withdrawal must specify the name and social security number of the person who
tendered the Shares to be withdrawn, the number of Shares to be withdrawn and
the name of the registered holder, if different from that of the person who
tendered such Shares. If the certificates have been delivered or otherwise
identified to the Depositary, then, prior to the release of such
certificates, the tendering stockholder must submit the serial numbers shown
on the particular certificates evidencing the Shares to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution (as defined in Section 2 of the Offer to Purchase) except in the
case of Shares tendered by an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer set forth in
Section 2 of the Offer to Purchase, the notice of withdrawal must specify the
name and the number of the account at the Book-Entry Transfer Facility (as
defined therein) to be credited with the withdrawn Shares and otherwise
comply with the procedures of such facility. All questions as to the form and
validity (including time of receipt) of notices of withdrawal will be
determined by the Company, in its sole discretion, which determination shall
be final and binding. None of the Company, the Dealer Manager, the
Depositary, the Information Agent or any other person shall be obligated to
give any notice of any defects or irregularities in any notice of withdrawal
and none of them shall incur any liability for failure to give any such
notice. Any Shares properly withdrawn will thereafter be deemed not tendered
for purposes of the Offer. However, withdrawn Shares may be retendered by the
Expiration Date by again following any of the procedures described in Section
2 of the Offer to Purchase and the Special Instructions for holders of
certain Shares. The withdrawal rights described in this paragraph apply to
all holders of Shares including holders who tender Pledged Shares, ESPP
Shares and Option Shares, each as defined below. However, holders of such
Shares should refer to the Special Instructions for such holders included with
the Offer to Purchase for details on how they can exercise their withdrawal
rights.
<PAGE>
The Offer to Purchase, the Letter of Transmittal and the Special Instructions
for holders of certain types of Shares contain important information that
should be read before any decision is made with respect to the Offer. These
documents are being mailed to record holders of Shares and option holders,
and will be furnished to brokers, dealers, commercial banks, trust companies
and similar persons whose names, or the names of whose nominees, appear on
the Company's stockholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing for subsequent
transmittal to beneficial owners of Shares.
The Company has made separate arrangements for holders to tender Option
Shares, Shares that are pledged to the Company to secure potential future
obligations in connection with the sale of a business to the Company
("Pledged Shares"), and Shares that were acquired through the Company's
Employee Stock Purchase Plan ("ESPP Shares"). These arrangements are
explained in the Offer to Purchase and Special Instructions being
distributed. Holders should be careful to follow the directions that apply to
their Shares or Option Shares as set forth in Section 2 of the Offer to
Purchase and in the Special Instructions.
The Offer to Purchase constitutes part of an Issuer Tender Offer Statement on
Schedule 13E-4 (the "Schedule 13E-4") filed with the Securities and Exchange
Commission by the Company pursuant to Section 13(e) of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder. The Schedule 13E-4 and all exhibits thereto and incorporated
herein by reference.
Any questions or requests for assistance may be directed to MacKenzie
Partners, Inc., the Information Agent, or Morgan Stanley & Co. Incorporated,
the Dealer Manager, at their addresses and telephone numbers set forth below.
Requests for copies of the Offer to Purchase, the Letter of Transmittal, the
Notice of Guaranteed Delivery or the Special Instructions for holders of
Pledged Shares, ESPP Shares and Option Shares may be obtained from the
Information Agent and will be furnished promptly at the Company's expense.
Stockholders may also contact their broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the Offer.
The Information Agent for the Offer is:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Call Collect (212) 929-5500
or
Call Toll-Free (800) 322-2885
The Dealer Manager for the Offer is:
MORGAN STANLEY DEAN WITTER
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Call Collect (212) 761-5722
or
Call Toll-Free (800) 223-2440 ext. 5722
May 4, 1998
<PAGE>
May 4, 1998
MEMORANDUM TO HOLDERS OF USOP OPTIONS
<TABLE>
<CAPTION>
TO: Holders of Stock Options Granted Under the U.S. Office Products Company Stock Option
Plans Identified Herein
<S> <C>
FROM: U.S. Office Products (the "Company")
RE: Tender of Option Shares in the Company's Equity Self-Tender Offer
</TABLE>
INTRODUCTION
The Company has announced that it is offering to purchase a total of
37,037,037 shares of its common stock (the "Shares") at a per share price of $27
in an equity self-tender offer. This number includes Shares that may be tendered
upon the exercise of vested and unvested options, with an exercise price of less
than $27 per Share, granted under the Company's stock option plans listed below
("Option Shares"). Unless otherwise noted, the term Shares includes Option
Shares. All holders of options granted under the following plans (the "Option
Plans") are eligible to participate in the Company's offer:
- U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive
Plan (and its predecessor);
- U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan;
- U.S. Office Products Company 1997 Stock Option Plan for Former
Non-Employee Directors of Mail Boxes Etc.;
- U.S. Office Products Company 1997A Stock Option Plan for Employees of Mail
Boxes Etc.; and
- U.S. Office Products Company 1997B Stock Option Plan for Employees of Mail
Boxes Etc.
The terms of the Company's offer are explained in detail in the Offer to
Purchase dated May 4, 1998, and the related Letter of Transmittal, enclosed with
this memorandum. In addition, we are providing you with materials printed on
green paper to assist you in understanding how to participate in the Company's
offer. These materials are:
- This memorandum
- A question and answer sheet
- The "Notice of Instructions (Options)"
You must carefully follow the instructions below and in the enclosed Notice
of Instructions (Options) if you want to participate in the Company's offer.
Failure to follow such instructions may make you ineligible to tender your
Option Shares in the Company's offer.
OPTION HOLDERS ELIGIBLE TO PARTICIPATE
As a holder of outstanding options granted under one of the Option Plans,
you may elect to tender some or all of the Option Shares you would be entitled
to receive upon exercise of your options. Holders of both vested and unvested
options may tender Option Shares underlying their options. However, an option
holder is not eligible to tender Option Shares underlying unvested options
unless the option holder tenders Option Shares underlying ALL vested options
that have an exercise price of less than $27 per Share.
HOW TO PARTICIPATE
IN ORDER TO PARTICIPATE, YOU MUST FILL OUT THE FORM ON GREEN PAPER CALLED
"NOTICE OF INSTRUCTIONS (OPTIONS)" AND SEND IT TO FIRST CHICAGO TRUST COMPANY OF
NEW YORK ("FIRST CHICAGO"), AS AGENT FOR HOLDERS OF OPTION SHARES (AT THE
ADDRESS INDICATED ON THE FORM), SO IT IS RECEIVED BEFORE 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON JUNE 1, 1998.
<PAGE>
On this form, you will direct First Chicago to exercise your options and
tender the Option Shares in the offer. This is a "conditional" exercise, which
means that if some or all of the Option Shares are not purchased in the offer
because of the proration process described below and in the Offer to Purchase
(or for any other reason), the options will be returned to you as unexercised
options. The terms that applied to such options before the offer will apply
after (including the vesting schedule), subject to the adjustments that
otherwise will be made as a result of the Strategic Restructuring Plan.
You will not pay the exercise price in cash for the options. Instead, the
Company is allowing "cashless" exercise. This means that Option Shares will be
tendered for you at the $27 per Share price, and the amount of cash that you
will receive for Option Shares purchased will equal the difference between $27
and your applicable option exercise price. Applicable taxes that the Company is
required to deduct will be subtracted from the amount of cash you receive.
If you would prefer to actually exercise your VESTED options and tender the
Shares you receive in the Offer, you can do so. If you do exercise vested
options, you will follow the same procedures applicable to all other Company
stockholders. If you decide to exercise your options in order to receive Shares
to tender in the Offer, you will need to exercise such options in sufficient
time to obtain Shares to tender before the Expiration Date for the Company's
offer, 12:00 Midnight, New York City time, on June 1, 1998.
HOW MANY SHARES WILL BE PURCHASED
In the offer, the Company is offering to purchase a total of 37,037,037
Shares at a per Share price of $27. As noted above, this number includes Option
Shares.
If more than 37,037,037 Shares are tendered, the Company will prorate the
number of Shares it purchases from each person who tenders Shares. This means
that the Company will not purchase all of the Option Shares you tender under
these circumstances. If all eligible stockholders and option holders participate
to the fullest extent possible in the offer, it is possible that only
approximately 22.5% of your Option Shares will be purchased.
If the Company must purchase only a pro rata portion of tendered Option
Shares, the rules for deciding which Option Shares will be purchased are as
follows:
- FIRST RULE: Option Shares underlying vested options will be purchased
before Option Shares underlying unvested options ("vested options" include
options that have vested as of the Expiration Date).
- SECOND RULE: After the first rule is applied, Option Shares will be
purchased in the order of exercise price, starting with Option Shares
underlying options with the lowest exercise price. (If Option Shares
underlying vested options with the same exercise price are subject to
proration, the Company will first purchase those Option Shares underlying
options with the earliest vesting date. For Option Shares underlying
unvested options, if the unvested options have the same exercise price,
Option Shares underlying unvested options will be purchased in the order
that the options vest, starting with the options that vest earliest.)
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER YOU SHOULD PARTICIPATE IN THE OFFER. YOU
NEED TO MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS
AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN,
INTEND TO TENDER SHARES IN THE OFFER.
The Company's offer is explained in detail in the enclosed documents, which
we urge you to read carefully.
If you wish to tender any Option Shares, please read and fill out the Notice
of Instructions (Options) carefully.
SHOULD YOU HAVE ANY QUESTIONS, PLEASE CONTACT FIRST CHICAGO AT
1-800-251-4215.
2
<PAGE>
QUESTIONS AND ANSWERS ON
TENDER OFFER AND PROCEDURES FOR
HOLDERS OF OPTIONS
1. WHAT IS THE OFFER?
On May 4, 1998, the Company offered to purchase 37,037,037 shares of its
common stock, par value $.001 per share (the "Shares"), at $27 per share. This
offer will be open until it expires at 12:00 Midnight, New York City time, on
June 1, 1998, unless extended by the Company. The number of Shares includes
Shares that can be tendered upon exercise of options with an exercise price of
less than $27 per Share under any of the following option plans ("Option
Shares"), and unless otherwise noted the term Shares includes Option Shares:
- U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive
Plan (and its predecessor);
- U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan;
- U.S. Office Products Company 1997 Stock Option Plan for Former
Non-Employee Directors of Mail Boxes Etc.;
- U.S. Office Products Company 1997A Stock Option Plan for Employees of Mail
Boxes Etc.; and
- U.S. Office Products Company 1997B Stock Option Plan for Employees of Mail
Boxes Etc.
The offer is not being made for Option Shares if the exercise price of the
underlying option is $27 per Share or greater. The offer, which is subject to a
number of other conditions, is fully described in the Offer to Purchase dated
May 4, 1998 provided to you. Please read it carefully.
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER STOCKHOLDERS OR OPTION HOLDERS SHOULD
PARTICIPATE IN THE OFFER. YOU MUST MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN
ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF
EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
2. MUST I ACTUALLY EXERCISE MY OPTIONS IN ORDER TO PARTICIPATE IN THE OFFER?
No. As a holder of unexercised options the Company is allowing you to
"conditionally" exercise all or part of your options and tender the Option
Shares you would be entitled to receive upon such exercise. This "conditional"
exercise means that you will exercise your options on the condition that the
Option Shares are actually purchased by the Company in the offer. Because the
Company may not purchase all of the Option Shares you tender, the options
relating to Option Shares that are not actually purchased by the Company will be
deemed unexercised and will continue to have the same terms and conditions
(including vesting schedule) that they currently have.
3. DO I HAVE TO PAY THE EXERCISE PRICE WITH CASH?
No. In order to facilitate your participation in the offer, the Company is
allowing you to exercise your options without paying the exercise price in cash.
This is called a "cashless exercise." This means that your options will be
exercised and the Option Shares will be tendered, and the amount of cash you
receive for each Option Share purchased will equal the difference between $27
and the option exercise price, less withholding taxes.
4. IF MY OPTIONS ARE NOT VESTED MAY I STILL TENDER OPTION SHARES UNDERLYING
THEM?
Yes, subject to certain conditions. In order to tender Option Shares
underlying unvested options, you must first tender Option Shares underlying all
of your vested options that have an exercise price less than $27 per Share. If
the Option Shares from your unvested options are not purchased in the offer, the
vesting schedule for the options will be the same as before the offer. Options
that vest before the Expiration Date will be treated as vested options for
purposes of the offer.
<PAGE>
5. WILL ALL OPTION SHARES THAT I TENDER BE PURCHASED IN THE OFFER?
Probably not. If all eligible stockholders and option holders participate to
the fullest extent possible in the offer, it is possible that only approximately
22.5% of your Option Shares will be purchased. The Company currently does not
know how many Shares will be tendered in the offer. However, if more than
37,037,037 Shares are validly tendered, the Company will purchase up to
37,037,037 Shares on a pro rata basis. If the Company must prorate the Shares it
purchases pursuant to the offer, the Company will apply the following rules for
deciding which Option Shares are purchased:
- FIRST RULE: Option Shares underlying vested options will be purchased
before Option Shares underlying unvested options ("vested options" include
options that have vested as of the Expiration Date).
- SECOND RULE: After the first rule is applied, Option Shares will be
purchased in the order of exercise price, starting with Option Shares
underlying options with the lowest exercise price. (If Option Shares
underlying vested options with the same exercise price are subject to
proration, the Company will first purchase those Option Shares underlying
options with the earliest vesting date. For Option Shares underlying
unvested options, if the unvested options have the same exercise price,
Option Shares will be purchased in the order that the options vest,
starting with the options that vest earliest.)
6. WHAT WILL HAPPEN TO MY OPTIONS IF THE OPTION SHARES ARE NOT PURCHASED?
If Option Shares are not purchased by the Company because of proration or
otherwise, then the options underlying such Option Shares will be deemed not to
have been exercised. These options will then have the same terms as they did
before the offer (including vesting schedule), but will be subject to certain
adjustments as a result of the Strategic Restructuring Plan (as defined in the
Offer to Purchase). See Question 9 below.
7. HOW WILL I KNOW IF MY OPTION SHARES HAVE BEEN PURCHASED AND WHEN WILL I BE
PAID?
After the offer expires, all tenders submitted in the offer will be
tabulated. This may take up to five business days. Soon thereafter, you will be
advised by First Chicago of the number, if any, of your Option Shares that were
accepted in the offer. You will receive a check for the purchase price of all of
your Option Shares accepted in the offer (less the applicable exercise price or
prices and applicable withholding taxes) promptly thereafter.
8. WILL I BE TAXED ON THE MONEY I RECEIVE?
If you receive cash in the offer in exchange for Option Shares from either
unvested or vested options (including any incentive stock options you received
under the Mail Boxes Etc. option plans), you will be treated as receiving
compensation income per Share sold equal to the excess of the Offer Price over
the exercise price per Share of the options from which the Option Shares are
sold in the offer. Such income will be taxed to you at ordinary income rates
and, if you are a current or former employee, will be subject to withholding for
income and employment taxes.
In addition, if you hold incentive stock options under the Mail Boxes Etc.
option plans that have an exercise price that is lower than the trading price of
the Company common stock on the Expiration Date, those options may no longer
qualify as incentive stock options if they are tendered and not accepted due to
proration. (As noted above, all of your Option Shares actually accepted will be
treated the same without regard to whether the options were incentive stock
options.) The IRS may also take the position that all of your incentive stock
options that have an exercise price that is lower than the trading price of the
Company common stock on the Expiration Date, even if you do not tender them in
the offer, will no longer qualify as
2
<PAGE>
incentive stock options as a result of the offer, because they could have been
tendered. Generally, you won't be taxed on the exercise of an incentive stock
option if you satisfy certain holding period requirements (these holding period
requirements will not be satisfied if you receive cash in the offer). However,
if your incentive stock option no longer qualifies as an incentive stock option,
you will have compensation income at the time you exercise the option in an
amount equal to the difference between the fair market value of the stock on the
date of exercise and the exercise price. Furthermore, special tax rules may
apply to you if you receive cash in the offer in exchange for Shares that you
acquired through the prior exercise of incentive stock options. If you hold
incentive stock options or own Shares that were acquired through the exercise of
incentive stock options, you should consult your tax advisor with respect to the
tax consequences of the offer.
9. WHAT WILL HAPPEN TO ANY OPTIONS I STILL HOLD AFTER THE OFFER?
Options remaining after the offer are expected to be adjusted or replaced in
connection with the Company's Strategic Restructuring Plan. As a part of the
Company's Strategic Restructuring Plan, the Company is spinning off certain of
its operating divisions (print management, corporate travel, technology
solutions and school supplies), which are becoming public companies. These
companies are called the "Spin-Off Companies." Options held by employees who
will become employees of one of the Spin-Off Companies (or a subsidiary thereof)
will be converted into options to purchase common stock of that particular
Spin-Off Company. Options held by employees who remain with the Company (or a
subsidiary thereof) will remain outstanding and exercisable for Shares, but will
be adjusted. In either case, 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 of the Spin-Off Companies). The formula will not affect when
the options vest or when employees can exercise the options. These adjustments
are described in greater detail in Annex A to the Offer to Purchase under the
heading "The Strategic Restructuring Plan--Adjustments to Employee Stock
Options."
10. HOW DO I TENDER MY OPTION SHARES IN THE OFFER?
The only way that you can tender Option Shares in the offer is by completing
the Notice of Instructions (Options) form on green paper, signing the form, and
returning it to First Chicago at the address indicated on the form. The Notice
of Instructions (Options) MUST be received by First Chicago before 12:00
Midnight, New York City time, on June 1, 1998.
Please return your instructions PROMPTLY, recognizing the slow delivery time
inherent in the U.S. mail today. If you use U.S. mail, we recommend using
registered mail, return receipt requested. You may mail your Notice of
Instructions (Options) Form to First Chicago in the preaddressed envelope that
has been provided for your reply or send it by an alternate, faster means (such
as hand delivery or overnight courier). Please remember that in all events the
materials must be received by First Chicago before 12:00 Midnight, New York City
time, on June 1, 1998.
DO NOT DELIVER YOUR INSTRUCTIONS TO YOUR HUMAN RESOURCES DEPARTMENT OR TO
YOUR BENEFITS ADMINISTRATOR OR TO THE COMPANY.
11. CAN I EXERCISE MY OPTIONS AND TENDER SHARES?
Yes. You may exercise any of your VESTED options, pay the exercise price,
receive Shares, and tender those Shares in the offer. If you intend to do this,
you must exercise your options in sufficient time to get the Shares, complete
the appropriate tender forms and submit them to the Depositary.
3
<PAGE>
12. WHAT IF I HOLD SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK IN ADDITION TO MY
STOCK OPTIONS?
If you have actual Shares in your possession (or at a brokerage firm), you
may tender those Shares as well. In this case, you may receive two or more sets
of offer materials. You should be careful to follow the separate directions that
apply to Shares and Option Shares. In the event the Company must prorate the
number of Shares and Option Shares it purchases from each stockholder and option
holder, the total number of Shares and Option Shares you tender will be prorated
independently.
13. CAN I CHANGE MY MIND AND WITHDRAW OPTION SHARES THAT I DIRECTED TO BE
TENDERED?
Yes, but only if you perform the following steps:
- You must send a signed notice of withdrawal to First Chicago, Attn:
Tenders and Exchanges.
- The notice of withdrawal must be in writing. You may fax your notice of
withdrawal to (201) 222-4720 or (201) 222-4721.
- The notice of withdrawal must state your name and social security number
and the amount of Option Shares that you wish to withdraw from the offer.
- The notice of withdrawal must be received by First Chicago before 12:00
Midnight, New York City time, on June 1, 1998.
The withdrawal procedures are described in the Notice of Instructions
(Options). You must follow these instructions carefully.
You are entitled to retender Option Shares after withdrawal, provided that
all resubmitted materials are completed properly and delivered on time in
accordance with the instructions applicable to the original submission.
14. WHAT DO I DO IF I HAVE ANY QUESTIONS ABOUT THE TENDER OFFER?
If you have questions about the offer or need help in properly responding to
the offer, you may call First Chicago at 1-800-251-4215.
******
This question and answer sheet is intended to help you understand the offer
and how options will be handled in the offer. The Offer to Purchase contains the
legal terms of the offer, and is controlling.
4
<PAGE>
NOTICE OF INSTRUCTIONS
(OPTIONS)
(NOTE: Before completing this Notice of Instructions, you should read the
attached memorandum from U.S. Office Products Company and question and answer
sheet, as well as the Offer to Purchase. THIS FORM SHOULD BE USED ONLY BY
HOLDERS OF OPTIONS FOR SHARES GRANTED UNDER ONE OF THE OPTION PLANS WHO DESIRE
TO TENDER OPTION SHARES TO THE COMPANY.)
THIS NOTICE OF INSTRUCTIONS FORM MUST BE RECEIVED BY FIRST CHICAGO BEFORE 12:00
MIDNIGHT, NEW YORK CITY TIME, ON JUNE 1, 1998. YOU MUST SIGN AND COMPLETE THIS
FORM FOR YOUR DIRECTION TO BE VALID.
TO: FIRST CHICAGO TRUST COMPANY OF NEW YORK ("FIRST CHICAGO")
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT COURIER:
First Chicago Trust Company of New York First Chicago Trust Company of New York
Tenders & Exchanges Tenders & Exchanges
P.O. Box 2569 14 Wall Street, 8th Floor
Suite 4660 Suite 4680
Jersey City, New Jersey 07303-2569 New York, New York 10005
</TABLE>
BY HAND:
First Chicago Trust Company of New York
Tenders & Exchanges
c/o The Depository Trust Company
55 Water Street DTC TAD
Vietnam Veterans Memorial Plaza
New York, New York 10041
NOTE: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF OPTION HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON
OPTION ACCOUNT(S))
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
I acknowledge receipt of your letter enclosing materials relating to the
Offer to Purchase dated May 4, 1998 (the "Offer to Purchase") and the related
Letter of Transmittal with respect to an equity self-tender offer by U.S. Office
Products Company, a Delaware corporation (the "Company"), for 37,037,037 shares
of common stock, $.001 par value per share (the "Shares"), at a price of $27 per
Share (the "Offer Price"). The number of Shares that the Company is offering to
purchase includes Option Shares (as defined herein). Unless otherwise noted, the
term Shares includes Option Shares.
<PAGE>
1. I hereby exercise options, for the amount of Shares set forth herein
("Option Shares"), granted to me under one of the following plans (collectively,
the "Option Plans"):
- U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive
Plan (and its predecessor);
- U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan;
- U.S. Office Products Company 1997 Stock Option Plan for Former
Non-Employee Directors of Mail Boxes Etc.;
- U.S. Office Products Company 1997A Stock Option Plan for Employees of Mail
Boxes Etc.; and
- U.S. Office Products Company 1997B Stock Option Plan for Employees of Mail
Boxes Etc.
My exercise of options hereunder is subject to the condition that any
options for Option Shares tendered but not purchased by the Company because of
proration or otherwise, shall be deemed not to have been exercised. None of the
options underlying any of the Option Shares tendered has an exercise price of
$27 or greater.
2. I hereby elect as follows with respect to my options:
(CHOOSE ONLY ONE)
/ / I wish to exercise and tender Option Shares from ALL of my options (both
vested and unvested) that have an exercise price of less than $27 per Share.
/ / I wish to exercise and tender Option Shares from ALL of my vested
options that have an exercise price of less than $27 per Share and NONE of
my unvested options.
/ / I wish to exercise and tender Option Shares from ALL of my vested
options that have an exercise price of less than $27 per Share and ______ of
my unvested options that have an exercise price of less than $27 per Share
(please indicate a number of Option Shares from your unvested options you
wish to tender).
/ / I wish to exercise and tender ______ Option Shares from my vested
options that have an exercise price of less than $27 per Share and no Option
Shares from my unvested options (please indicate a number of Option Shares
from your vested options you wish to tender).
If none of the boxes is checked and the form is otherwise properly
completed, signed and returned to First Chicago, Option Shares from all of
your options that have an exercise price of less than $27 per Share (both
vested and unvested) will be tendered.
3. This notice instructs you to tender, at the $27 per Share purchase price
set forth in the Offer to Purchase, the Option Shares that I am entitled to
receive upon exercise, as instructed above, pursuant to the terms and conditions
set forth in the Offer to Purchase you have furnished to me. By signing this
Notice of Instructions I hereby agree that if any Option Shares are validly
tendered and accepted, I will receive a cash payment equal to (a) the number of
Option Shares that are accepted for purchase, times (b) the difference between
the applicable option exercise price(s) and the $27 purchase price, less (c) any
taxes required to be withheld, and further agree to be bound by the terms and
conditions set forth herein and in the Offer to Purchase.
4. I understand and acknowledge that the Company is allowing me to
conditionally exercise my unvested options solely for the purpose of allowing me
to tender Option Shares from my unvested options in the Company's offer, subject
to the following conditions:
i) that I actually tender such Option Shares; and
ii) that such Option Shares are in fact purchased by the Company in the
Offer to Purchase.
Further, I understand and acknowledge that any options with respect to
Option Shares not purchased in the Offer will be deemed not to have been
exercised, and will continue to be governed by such options' existing terms and
conditions (including vesting schedule).
<PAGE>
5. If I hold incentive stock options orginally granted under one of the
former Mail Boxes Etc. option plans, I agree to the amendment, if necessary, of
such options to the extent I actually tender such Option Shares and they are
infact purchased.
6. Option Shares tendered pursuant to the Offer to Purchase may be withdrawn
at any time prior to 12:00 Midnight, New York City time, on June 1, 1998. After
that, Option Shares may be withdrawn if they have not been accepted for payment
by the Company as provided in the Offer to Purchase by 12:00 Midnight, New York
City time, on June 30, 1998. An option holder must submit a written, telegraphic
or facsimile transmission notice of withdrawal so that it is received by First
Chicago at the address indicated above before 12:00 Midnight, New York City
time, on June 1, 1998. Any such notice of withdrawal must specify the name and
social security number of the option holder who tendered the Option Shares to be
withdrawn and the number of Option Shares to be withdrawn. All questions as to
the form and validity (including time of receipt) of notices of withdrawal will
be determined by the Company, in its sole discretion, which determination shall
be final and binding. None of the Company, First Chicago, the Dealer Manager,
the Depositary, the Information Agent, or any other person shall be obligated to
give any notice of any defects or irregularities in any notice of withdrawal and
none of them shall incur any liability for failure to give any such notice. Any
Option Shares properly withdrawn will thereafter be deemed not tendered for
purposes of the Offer to Purchase. However, withdrawn Option Shares may be
retendered by the Expiration Date by again following the procedures for properly
tendering Option Shares.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS
TO WHETHER TO EXERCISE OR REFRAIN FROM EXERCISING ANY OUTSTANDING OPTIONS TO
PURCHASE SHARES OR TO TENDER OR REFRAIN FROM TENDERING ANY SHARES OR OPTION
SHARES. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS,
EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES
IN THE OFFER.
THIS NOTICE OF INSTRUCTIONS FORM MUST BE RECEIVED BY FIRST CHICAGO BEFORE
12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 1, 1998. YOU MUST SIGN AND COMPLETE
THIS FORM FOR YOUR DIRECTION TO BE VALID.
GENERAL TERMS AND CONDITIONS OF THE OFFER APPLICABLE TO OPTION SHARE TENDERS:
[NOTE: THE FOLLOWING TERMS AND CONDITIONS ARE IN ADDITION TO, AND SHALL NOT
BE CONSTRUED TO LIMIT IN ANY WAY, THE TERMS AND CONDITIONS SET FORTH IN THE
OFFER TO PURCHASE.]
1. The undersigned will, upon request, execute and deliver any additional
documents deemed by First Chicago, the Depositary or the Company to be necessary
or desirable to complete the sale, assignment and transfer of the Option Shares
tendered hereby and has read, understands and agrees with all of the terms of
the Offer to Purchase.
2. The undersigned understands that tenders of Option Shares pursuant to the
procedures described in Section 2 of the Offer to Purchase and in this Notice of
Instructions (Options) will constitute an agreement between the undersigned and
the Company upon the terms and subject to the conditions of the Offer to
Purchase.
3. All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Except as stated in the Offer to Purchase, this
tender is irrevocable.
4. The Company will pay any stock transfer taxes with respect to the sale
and transfer of any Option Shares to it or its order pursuant to the Offer to
Purchase. The undersigned understands that (a) the purchase price will be paid
to the undersigned (the holder CANNOT elect to have the purchase price paid to
another person); and (b) the undersigned will be responsible for paying federal
and state income taxes arising from the sale of the Option Shares in the Offer
(a portion of which will be withheld as described in Instruction 5 below).
<PAGE>
5. Under the U.S. federal income tax laws, the Depositary will be required
to withhold income and employment taxes from the amount of any payments made to
option holders pursuant to the Offer to Purchase.
6. All questions as to the number of Option Shares accepted, the form of
documents and the validity, eligibility (including time of receipt) and
acceptance for payment of any tender of Option Shares will be determined by the
Company in its sole discretion, which determinations shall be final and binding
on all parties. The Company reserves the absolute right to reject any or all
tenders of Option Shares it determines not to be in proper form or the
acceptance of which or payment for which may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Offer and any defect or irregularity in the tender of
any particular Option Shares, and the Company's interpretation of the terms of
the Offer to Purchase (including this Notice of Instructions (Options)) will be
final and binding on all parties. No tender of Option Shares will be deemed to
be properly made until all defects and irregularities have been cured or waived.
Unless waived, any defects or irregularities in connection with tenders must be
cured within such time as the Company shall determine. None of the Company,
First Chicago, the Dealer Manager, the Depositary, the Information Agent or any
other person is or will be obligated to give notice of any defects or
irregularities in tenders and none of them will incur any liability for failure
to give any such notice.
7. If this Notice of Instructions is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary capacity, such person should so indicate when
signing, and proper evidence satisfactory to the Company of the authority of
such person so to act must be submitted to First Chicago.
8. Questions and requests for assistance or additional copies of the Offer
to Purchase and this Notice of Instructions (Options) should be directed to
First Chicago at 1-800-251-4215.
<TABLE>
<C> <S> <C>
SIGN HERE
..............................................................................................................
..............................................................................................................
SIGNATURE(S) OF OPTION HOLDER
Name(s).......................................................................................................
(PLEASE PRINT)
..............................................................................................................
Capacity (full title).........................................................................................
Address (if different from that shown on the cover page)......................................................
..............................................................................................................
..............................................................................................................
(ZIP CODE)
Daytime Telephone Number......................................................................................
Dated.........................................................................................................
(Must be signed by option holder(s) exactly as name(s) appear(s) on option account(s) or by authorized
agent(s) of option holder(s). If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a fiduciary or representative
capacity, please set forth full title. See Instruction 7.)
</TABLE>
<PAGE>
May 4, 1998
MEMORANDUM TO PARTICIPANTS IN EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
TO: Participants in the U.S. Office Products Company Employee Stock Purchase Plan
("ESPP")
<S> <C>
FROM: U.S. Office Products Company (the "Company")
RE: Tender of Shares in the U.S. Office Products Company Equity Self-Tender Offer
</TABLE>
INTRODUCTION
The Company has announced that it is offering to purchase a total of
37,037,037 shares of its common stock (the "Shares") at a per share price of $27
in an equity self-tender offer. This number includes Shares that may be tendered
upon the exercise of options with an exercise price of less than $27 per Share
under the Company's stock option plans ("Option Shares"). Unless otherwise
noted, the term Shares includes Options Shares. This memorandum explains how
you, as a participant in the ESPP, can participate in the Company's offer with
respect to Shares held in your ESPP account if you so choose.
The terms of the offer are explained in detail in the Offer to Purchase
dated May 4, 1998 and the related Letter of Transmittal enclosed with this
memorandum. In addition, we are providing you with materials printed on gold
paper to assist you in understanding how to participate with respect to Shares
held in your ESPP account. These materials are:
- This memorandum
- A question and answer sheet
- A "Notice to Participants in the U.S. Office Products Company Employee
Stock Purchase Plan" from American Stock Transfer & Trust Company, the
agent for the ESPP (the "ESPP Agent")
- The "Tender Instruction Form for Shares in the U.S. Office Products
Company Employee Stock Purchase Plan"
You must carefully follow the instructions below and in the Tender
Instruction Form for Shares in the U.S. Office Products Company Employee Stock
Purchase Plan if you want to tender the Shares held in your ESPP account.
Failure to follow such instructions properly may make you ineligible to tender
such Shares in the Company's offer.
ESPP PARTICIPANTS ELIGIBLE TO PARTICIPATE
As you know, the ESPP requires participants to hold all shares purchased
through the ESPP for at least one year before they can be sold. To allow ESPP
participants to participate fully in the Company's offer, the one-year sale
restriction has temporarily been waived. Consequently, you may tender all of the
Shares you have purchased through the ESPP through the end of the purchase
period that ended in January 1998. These Shares are called "ESPP Shares." For
administrative reasons, Shares purchased through the ESPP after the purchase
period ending in January 1998 will remain subject to the one-year restriction
and cannot be tendered in the Company's offer.
Any of your ESPP Shares that do not satisfy the one-year sale restriction
and that are not purchased in the Company's offer because of the proration
process as described below and in the Offer to Purchase (or for any other
reason) will be returned to your ESPP account. These Shares will not be eligible
for sale until the one-year restriction period has been satisfied. Waiver of the
one-year sale restriction applies only for the purpose of allowing you to
participate in the Company's offer. You may not otherwise sell Shares purchased
through the ESPP that you have not held for one year.
<PAGE>
HOW TO PARTICIPATE
IN ORDER TO TENDER ESPP SHARES, YOU MUST FILL OUT THE FORM ON GOLD PAPER
CALLED "TENDER INSTRUCTION FORM FOR SHARES IN THE U.S. OFFICE PRODUCTS COMPANY
EMPLOYEE STOCK PURCHASE PLAN" AND SEND IT TO THE ESPP AGENT (AT THE ADDRESS
INDICATED ON THE FORM) SO IT IS RECEIVED BEFORE 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON MAY 29, 1998 IN ORDER TO ALLOW THE ESPP AGENT SUFFICIENT TIME TO SUBMIT
THE TENDER ON YOUR BEHALF.
On this form, you may direct the ESPP Agent to tender either a specific
number, or all, of your ESPP Shares, if you desire the Company to purchase them
in the Company's offer.
Pursuant to this authority, the ESPP Agent will complete a Letter of
Transmittal with respect to the ESPP Shares you direct the ESPP Agent to tender
on your behalf. BECAUSE THE TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
WILL GOVERN THE TENDER OF YOUR ESPP SHARES, YOU SHOULD READ THE LETTER OF
TRANSMITTAL CAREFULLY. HOWEVER, THE LETTER OF TRANSMITTAL SHOULD NOT BE
COMPLETED AND RETURNED TO THE ESPP AGENT OR FIRST CHICAGO FOR TENDERING ESPP
SHARES.
HOW MANY SHARES WILL BE PURCHASED
In the offer, the Company is offering to purchase a total of 37,037,037
Shares at a per share price of $27. As noted above, the number includes Option
Shares. This number also includes ESPP Shares.
If more than 37,037,037 Shares are tendered, the Company will prorate the
number of Shares it purchases from each person who tenders Shares. This means
that the Company will not purchase all of the ESPP Shares you tender under these
circumstances. If all eligible stockholders and option holders participate to
the fullest extent in the offer, it is possible that only approximately 22.5% of
your ESPP Shares will be purchased. If the Company prorates the number of ESPP
Shares it purchases from you, it will purchase those ESPP Shares with the
earliest purchase date first (that is, ESPP Shares that have been in your ESPP
account the longest).
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER YOU SHOULD PARTICIPATE IN THE OFFER. YOU
NEED TO MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS
AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN,
INTEND TO TENDER SHARES IN THE OFFER.
The Company's offer is explained in detail in the enclosed documents, which
we urge you to read carefully.
If you wish to tender any ESPP Shares, please read and complete the Tender
Instruction Form for Shares in the U.S. Office Products Company Employee Stock
Purchase Plan carefully.
SHOULD YOU HAVE ANY QUESTIONS, PLEASE CONTACT THE ESPP AGENT AT
1-800-278-4353.
2
<PAGE>
QUESTIONS AND ANSWERS ON
TENDER OFFER AND PROCEDURES FOR
PARTICIPANTS IN THE U.S. OFFICE PRODUCTS COMPANY
EMPLOYEE STOCK PURCHASE PLAN
1. WHAT IS THE OFFER?
On May 4, 1998, the Company offered to purchase 37,037,037 shares of its
common stock, par value $.001 per share (the "Shares"), at $27 per Share. This
offer will be open until it expires at 12:00 Midnight, New York City time, on
June 1, 1998, unless extended by the Company. The number of Shares includes
Shares that can be tendered upon exercise of options with an exercise price of
less than $27 per Share under the Company's option plans ("Option Shares"), and
unless otherwise noted the term Shares includes Option Shares. The number of
Shares also includes Shares acquired through the Company's Employee Stock
Purchase Plan ("ESPP Shares").
The Offer, which is subject to a number of conditions, is fully described in
the Offer to Purchase dated May 4, 1998 and the related Letter of Transmittal
provided to you. Please read these documents carefully.
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER STOCKHOLDERS SHOULD PARTICIPATE IN THE
OFFER. YOU MUST MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN ADVISED THAT ITS
DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS
MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
2. IF MY SHARES IN THE ESPP ARE SUBJECT TO THE RESTRICTION ON SALE BECAUSE I
ACQUIRED THEM LESS THAN ONE YEAR AGO, MAY I STILL TENDER THEM?
Yes. The Company has decided for purposes of the offer ONLY to waive the
one-year sale restriction temporarily for ESPP Shares purchased through the ESPP
as of the end of the purchase period that ended in January 1998. You may tender
all of your ESPP Shares that you have purchased through the ESPP through that
purchase period. Shares purchased through the ESPP after the purchase period
that ended in January 1998, however, will remain subject to the one-year
restriction, and cannot be tendered.
Any of your ESPP Shares that do not satisfy the one-year sale restriction
and that are not purchased in the offer because of proration or for any other
reason will be returned to your ESPP account. These Shares will not be eligible
for sale until the one-year restriction period has been satisfied. Waiver of the
one-year sale restriction applies only for the purpose of allowing you to
participate in the offer. You may not otherwise sell ESPP Shares purchased that
you have not held for one year.
3. WILL ALL MY ESPP SHARES THAT I TENDER BE PURCHASED IN THE OFFER?
Probably not. If all eligible stockholders and option holders participate to
the fullest extent possible in the offer, it is possible that only approximately
22.5% of your ESPP Shares will be purchased. The Company currently does not know
how many Shares will be tendered in the offer. However, if more than 37,037,037
Shares are validly tendered, the Company will purchase 37,037,037 Shares on a
pro rata basis.
If Company prorates the number of ESPP Shares it purchases from you, it will
purchase those ESPP Shares with the earliest purchase date first (that is,
Shares that you have held in your ESPP account the longest).
4. WHAT WILL HAPPEN TO MY SHARES IN THE ESPP IF THEY ARE NOT PURCHASED?
If any of your ESPP Shares are not purchased by the Company because of
proration or otherwise, the ESPP Shares not purchased will be returned to the
ESPP Agent to return to your ESPP account. These ESPP Shares will then have the
same terms as they did before the offer (including restriction on sale).
However, as a result of the distributions by the Company of the shares of
certain of its operating divisions (print management, corporate travel,
technology solutions and school supplies), which are becoming public companies,
ESPP participants (like other holders of Shares, excluding Option Shares) will
receive shares of these new public companies.
<PAGE>
5. HOW WILL I KNOW IF MY SHARES IN THE ESPP HAVE BEEN PURCHASED AND WHEN WILL I
BE PAID?
After the offer expires, all tenders submitted in the offer will be
tabulated. This may take up to five business days. Soon thereafter, you will be
advised of the number, if any, of your ESPP Shares that were accepted in the
offer. You will receive a check for the purchase price (less applicable
withholding taxes) promptly thereafter.
6. WILL I BE TAXED ON THE MONEY I RECEIVE?
Yes. All of your ESPP Shares were purchased at 85% of the then-current
trading price of the Shares. This 15% discount is your "Bargain Amount." The
difference between the amount you receive in the offer and your purchase price
of the ESPP Shares (including the Bargain Amount) is your "Gain Amount." If the
ESPP Shares you tender in the offer were purchased in or before the Company's
fiscal quarter that ended on July 27, 1996, you will be treated as having
received compensation income (like additional wages) in an amount equal to the
lesser of the Bargain Amount or the Gain Amount. That income will be taxed to
you at ordinary income rates and will be subject to withholding of federal
income and employment taxes by the Company. If the Gain Amount exceeds the
Bargain Amount, the excess will be treated in the same manner as gain recognized
by any other stockholder.
If the ESPP Shares you tender in the offer were purchased in a fiscal
quarter of the Company that began after July 27, 1996, the full Gain Amount will
be treated as compensation income to you. That income will taxed to you at
ordinary income rates and will be subject to withholding of federal income and
employment taxes by the Company.
You should also review the Offer to Purchase and Letter of Transmittal for
more detailed tax information and, if necessary, consult a tax advisor.
7. HOW DO I TENDER MY ESPP SHARES IN THE OFFER?
The only way that you can tender ESPP Shares in the offer is by completing
the Tender Instruction Form for Shares in the U.S. Office Products Company
Employee Stock Purchase Plan on gold paper, signing the form, and returning it
to American Stock Transfer & Trust Co., the ESPP Agent, at the address indicated
on the form. The ESPP Agent will complete a Letter of Transmittal for these ESPP
Shares to be tendered in the offer. The Tender Instruction Form for Shares in
the U.S. Office Products Company Employee Stock Purchase Plan must be received
by the ESPP Agent before 12:00 Midnight, New York City time, on May 29, 1998 in
order to allow the ESPP Agent sufficient time to tender on your behalf.
Please return your instructions PROMPTLY, recognizing the slow delivery time
inherent in the U.S. mail today. If you use U.S. mail, we recommend using
registered mail, return receipt requested. You may hand deliver or mail your
Tender Instruction Form for Shares in the U.S. Office Products Company Employee
Stock Purchase Plan to the ESPP Agent in the preaddressed envelope that has been
provided for your reply or send it by an alternate, faster means (such as
overnight courier). Please remember that in all events the materials must be
received by the ESPP Agent before 12:00 Midnight New York City time, on May 29,
1998.
DO NOT DELIVER YOUR INSTRUCTIONS TO YOUR HUMAN RESOURCES DEPARTMENT OR TO
YOUR BENEFITS ADMINISTRATOR OR TO THE COMPANY.
8. WHAT IF I HOLD OTHER SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK IN ADDITION
TO MY ESPP SHARES?
If you have Shares other than ESPP Shares in your possession (or at a
brokerage firm), you may tender the other Shares as well. In this case, you may
receive two or more sets of offer materials. You should be careful to follow the
separate directions that apply to Shares and ESPP Shares. In the event the
2
<PAGE>
Company must prorate the number of Shares it purchases from each stockholder,
the Company will purchase the same percentage of the Shares and the ESPP Shares
that you tender.
9. CAN I CHANGE MY MIND AND WITHDRAW SHARES THAT I DIRECTED TO BE TENDERED?
Yes, but only if you perform the following steps:
- You must send a signed notice of withdrawal to the ESPP Agent.
- The notice of withdrawal must be in writing. You may fax your notice of
withdrawal to the ESPP Agent at 718-234-5001.
- The notice of withdrawal must state your name, social security number and
the amount of ESPP Shares that you wish to withdraw from the Offer.
- The notice of withdrawal must be received by the ESPP Agent before 12:00
Midnight, New York City time on June 1, 1998.
The withdrawal procedures are described in greater detail in the Tender
Instruction Form for Shares in the U.S. Office Products Company Employee Stock
Purchase Plan. You must follow these instructions carefully.
You are entitled to resubmit tender materials after withdrawal, provided
that the resubmitted materials are completed properly and delivered on time in
accordance with the instructions applicable to the original submission.
10. WHAT DO I DO IF I HAVE ANY QUESTIONS ABOUT THE TENDER OFFER?
If you have questions about the operation of the offer or need help in
properly responding to the offer, you may call the ESPP Agent at 1-800-278-4353.
******
This question and answer sheet is intended to help you understand the offer
and how ESPP Shares will be handled in the offer. The Offer to Purchase and
Letter of Transmittal contain the legal terms of the offer, and are controlling.
3
<PAGE>
FOR HOLDERS OF ESPP SHARES
TENDER INSTRUCTION FORM
FOR SHARES IN
THE U.S. OFFICE PRODUCTS COMPANY
EMPLOYEE STOCK PURCHASE PLAN
(NOTE: Before completing this Tender Instruction Form, you should read the
attached memorandum from U.S. Office Products Company, question and answer sheet
and letter from American Stock Transfer & Trust Company ("AST"), the agent for
the U.S. Office Products Company Employee Stock Purchase Plan ("ESPP"). THIS
FORM SHOULD BE USED ONLY BY EMPLOYEES WHO HAVE SHARES IN THE ESPP WHO DESIRE TO
TENDER SUCH SHARES TO THE COMPANY.)
THIS TENDER INSTRUCTION FORM MUST BE RECEIVED BY AST BEFORE 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON MAY 29, 1998. YOU MUST SIGN AND
COMPLETE THIS FORM FOR YOUR DIRECTION TO BE VALID.
TO: American Stock Transfer & Trust Company, Agent for the U.S. Office
Products Company Employee Stock Purchase Plan
By Mail, Overnight Delivery or Hand:
40 Wall Street
46th Floor
New York, NY 10005
Attention: Reorganization Department
Telephone: 718-921-8200
Facsimile: 718-234-5001
NOTE: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF ESPP PARTICIPANT
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON
ON ESPP ACCOUNT STATEMENT, INCLUDING ESPP ACCOUNT NUMBER
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
I am a participant in the ESPP who has Shares in such plan ("ESPP Shares")
and, as such, I have received a copy of the Offer to Purchase dated May 4, 1998
(the "Offer to Purchase") and the related Letter of Transmittal relating to the
offer by U.S. Office Products Company, a Delaware corporation (the "Company"),
to purchase up to 37,037,037 shares of its common stock, par value $.001 per
share (the "Shares"), at a price of $27 per Share (the "Offer Price"). The
number of Shares the Company is offering to purchase includes Shares that may be
tendered upon the exercise of options with an exercise price of
<PAGE>
less than $27 per Share under the Company's stock option plans ("Option
Shares"), and unless otherwise noted, the term Shares includes Option Shares.
I hereby acknowledge my desire to tender to the Company at the Offer Price
certain Shares as described herein upon the terms and subject to the conditions
set forth in the Offer to Purchase, Letter of Transmittal and this Tender
Instruction Form.
This notice instructs you to tender, at the Offer Price, the following
number of Shares I own in the ESPP:
/ / ______ (insert number) ESPP Shares
/ / All of my ESPP Shares eligible for tender
Instructions: Check one of the boxes. If the first box is checked, insert
the number of your ESPP Shares that you desire to be tendered on your
behalf. If neither box is checked and the form is otherwise properly
completed, signed and retured to AST, all of your ESPP Shares eligible
for tender will be tendered.
ESPP Shares tendered pursuant to the offer may be withdrawn at any time
prior to 12:00 Midnight, New York City time, on June 1, 1998. After that date,
ESPP Shares tendered pursuant to the offer may be withdrawn if they have not
been accepted for purchase by the Company as provided in the Offer to Purchase
by 12:00 Midnight, New York City time, on June 30, 1998. An owner of ESPP Shares
must submit a written, telegraphic or facsimile transmission notice of
withdrawal so that it is received by AST at the address indicated above no later
than 12:00 Midnight, New York City time, on June 1, 1998. Any such notice of
withdrawal must specify the name and social security number of the owner who
tendered the ESPP Shares to be withdrawn and the number of ESPP Shares to be
withdrawn. All questions as to the form and validity (including time of receipt)
of notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding. None of the Company,
AST, the Dealer Manager, the Depositary, the Information Agent, or any other
person shall be obligated to give any notice of any defects or irregularities in
any notice of withdrawal and none of them shall incur any liability for failure
to give any such notice. Any ESPP Shares properly withdrawn will thereafter be
deemed not tendered for purposes of the offer. However, withdrawn ESPP Shares
may be retendered by the Expiration Date by again following the procedures for
properly tendering ESPP Shares.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS
TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY SHARES. THE COMPANY HAS BEEN
ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF
EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
THIS NOTICE OF INSTRUCTIONS FORM MUST BE RECEIVED BY AST BEFORE 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MAY 29, 1998 IN ORDER TO ALLOW AST SUFFICIENT
TIME TO TENDER ON YOUR BEHALF. YOU MUST SIGN AND COMPLETE THIS FORM FOR YOUR
DIRECTION TO BE VALID.
ANY TENDERING STOCKHOLDER OR OTHER PAYEE (OTHER THAN A NON-U.S. STOCKHOLDER)
WHO FAILS TO COMPLETE FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE
LETTER OF TRANSMITTAL OR SPECIAL INSTRUCTIONS MAY BE SUBJECT TO U.S. FEDERAL
INCOME TAX BACKUP WITHHOLDING EQUAL TO 31% OF THE GROSS PROCEEDS PAID TO SUCH
STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. THE DEPOSITARY WILL WITHHOLD
30% OF THE GROSS PROCEEDS PAID TO NON-U.S. STOCKHOLDERS UNLESS THE DEPOSITARY
DETERMINES THAT A REDUCED RATE OF WITHHOLDING IS AVAILABLE PURSUANT TO A TAX
TREATY OR THAT AN EXEMPTION FROM WITHHOLDING IS AVAILABLE. AS A RESULT, NON-U.S.
STOCKHOLDERS WILL NOT BE SUBJECT TO U.S. FEDERAL INCOME TAX BACKUP WITHHOLDING.
SEE INSTRUCTION 10 TO THE LETTER OF TRANSMITTAL.
<PAGE>
SIGN HERE
.............................................
.............................................
SIGNATURE(S) OF OWNER(S)
Name(s)......................................
(PLEASE PRINT)
Capacity (full title)........................
Address (if different from that shown on
cover page)..................................
.............................................
.............................................
(ZIP CODE)
Daytime Telephone Number.....................
Dated........................................
(Must be signed by the participant(s) exactly
as name(s) appear(s) on the participant's
ESPP account. If signature is by a trustee,
executor, administrator, guardian,
attorney-in-fact, agent, officer of a
corporation or other person acting in a
fiduciary or representative capacity, please
set forth full title and provide proper
evidence to ESPP Agent satisfactory to the
Company of authority to sign.)
<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
NUMBER "TIN" (IRS) that I am subject to backup withholding as a result of
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>
[LOGO]
NOTICE TO PARTICIPANTS
IN THE U.S. OFFICE PRODUCTS COMPANY
EMPLOYEE STOCK PURCHASE PLAN
OFFER TO PURCHASE FOR CASH
BY
U.S. OFFICE PRODUCTS COMPANY
37,037,037 SHARES OF ITS COMMON STOCK
AT
$27 PER SHARE
May 4, 1998
To Participants in the U.S. Office Products Company Employee Stock Purchase Plan
("ESPP"):
Pursuant to the Offer to Purchase dated May 4, 1998, and the related Letter
of Transmittal, U.S. Office Products Company, a Delaware corporation (the
"Company"), is offering to purchase 37,037,037 shares of its common stock, $.001
par value per share (the "Shares"), at $27 per Share (the "Offer Price"). The
number of Shares the Company is offering to purchase includes Shares that may be
tendered upon the exercise of options with an exercise price of less than $27
per Share under the Company's stock option plans ("Option Shares"). Unless
otherwise noted, the term Shares includes Option Shares.
American Stock Transfer & Trust Company ("AST") is the holder of record of
Shares held for your account in the ESPP. A tender of your Shares in the ESPP
("ESPP Shares") can only be made by us, as your agent, pursuant to your
instructions.
IF YOU WISH TO PARTICIPATE IN THIS OFFER BY TENDERING ESPP SHARES, YOU MUST
NOTIFY AST BY COMPLETING THE "TENDER INSTRUCTION FORM FOR SHARES IN THE U.S.
OFFICE PRODUCTS COMPANY EMPLOYEE STOCK PURCHASE PLAN" ON GOLD PAPER, SIGNING THE
FORM, AND RETURNING IT TO US AT THE ADDRESS INDICATED ON THE FORM BEFORE 12:00
MIDNIGHT, NEW YORK CITY TIME, ON MAY 29, 1998 IN ORDER TO ALLOW US SUFFICIENT
TIME TO TENDER ON YOUR BEHALF. If you wish to tender all or any amount of your
ESPP Shares please instruct us by the deadline. If you do not respond to this
notice, none of your ESPP Shares will be tendered.
Solely for the purpose of allowing participants in the ESPP to participate
in the Offer, the one-year restriction on sales of ESPP Shares acquired through
the end of the purchase period that ended in January 1998 has been temporarily
waived. Shares purchased through the ESPP after such date are not eligible for
the offer. Any ESPP Shares that have not satisfied the one-year sale restriction
and are not purchased in the offer will not be eligible for sale until the
one-year period has been satisfied.
If the number of ESPP Shares purchased by the Company from each participant
in the ESPP who tenders ESPP Shares in the offer must be prorated, as described
in the Section 1 of the Offer to Purchase, the Company will accept first the
ESPP Shares that have been held in your ESPP account the longest.
Cash received from any ESPP Shares tendered and accepted for payment by the
Company will be distributed to participants by check (less applicable federal
witholding taxes). Any ESPP Shares tendered but not accepted by the Company will
remain in your account.
If you are unsure how many Shares you have in your ESPP account that are
eligible to be tendered in the offer, you may contact our Customer Service Unit
at: 1-800-278-4353 before 5:00 p.m., New York City time, on May 29, 1998. Our
operators are available to take your call Monday through Friday between the
hours of 9:00 a.m. and 5:00 p.m., New York City time.
<PAGE>
Your attention is invited to the following:
1. The tender price is $27 per Share, net to you in cash (less applicable
federal withholding taxes).
2. The withdrawal deadline and the proration deadline are on June 1, 1998, at
12:00 Midnight, New York City time, unless the Company extends the Offer.
3. The offer is conditioned upon a minimum of 37,037,037 Shares being tendered.
The offer is also subject to the conditions as set forth in Section 5 of the
Offer to Purchase.
4. Any stock transfer taxes applicable to the sale of ESPP Shares to the
Company pursuant to the offer will be paid by the Company, except as
described in the Letter of Transmittal.
The offer is not being made to, nor will tenders be accepted from or on
behalf of, holders of Shares in any jurisdiction in which the making of the
offer or acceptance thereof would not be in compliance with the laws of such
jurisdiction. In those jurisdictions the laws of which require that the offer be
made by a licensed broker or dealer, the offer shall be deemed to be made on
behalf of the Company by Morgan Stanley & Co. Incorporated, or one or more
registered brokers or dealers licensed under the laws of such jurisdiction.
YOUR INSTRUCTIONS TO US ON THE ATTACHED TENDER INSTRUCTION FORM FOR SHARES
IN THE U.S. OFFICE PRODUCTS COMPANY EMPLOYEE STOCK PURCHASE PLAN MUST BE
FORWARDED TO US PROMPTLY IN ORDER TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF
IN ACCORDANCE WITH THE PROVISIONS OF THE OFFER TO PURCHASE AND LETTER OF
TRANSMITTAL.
Very truly yours,
American Stock Transfer & Trust
Company
Agent, U.S. Office Products Company
Employee Stock Purchase Plan
2
<PAGE>
May 4, 1998
MEMORANDUM TO STOCKHOLDERS WHO OWN PLEDGED SHARES
<TABLE>
<CAPTION>
TO: Stockholders who Pledged Shares of U.S. Office Products Company Common Stock in
Connection with the Sale of a Business
<S> <C>
FROM: U.S. Office Products Company (the "Company")
RE: Tender of Pledged Shares in the Company's Equity Self-Tender Offer
</TABLE>
INTRODUCTION
The Company has announced that it is offering to purchase a total of
37,037,037 shares of its common stock (the "Shares") at a per Share price of $27
in an equity self-tender offer. This number includes Shares that may be tendered
upon the exercise of options with an exercise price of less than $27 per Share
granted under the Company's stock option plans ("Option Shares"). Unless
otherwise noted, the term Shares includes Option Shares.
The Company is permitting you to tender in this offer any Shares that you
pledged to the Company in connection with the sale of a business to the Company
("Pledged Shares"). This memorandum describes how you can tender your Pledged
Shares in this offer. It also describes how any tender proceeds and Pledged
Shares that are not purchased will be handled immediately after the offer.
The terms of the offer are explained in detail in the Offer to Purchase
dated May 4, 1998, and the related Letter of Transmittal enclosed with this
memorandum. In addition, we are providing you with materials printed on purple
paper to assist you in understanding how to participate with respect to your
Pledged Shares. These materials are:
- This memorandum
- A question and answer sheet
- A "Notice of Instructions, Power of Attorney and Agreement (Pledged
Shares)"
You must carefully follow the instructions below and in the Notice of
Instructions, Power of Attorney and Agreement (Pledged Shares) if you want to
tender Pledged Shares. Failure to follow such instructions properly may make you
ineligible to tender your Pledged Shares in the Company's offer.
HOW TO PARTICIPATE
IN ORDER TO TENDER PLEDGED SHARES, YOU MUST FILL OUT THE FORM ON PURPLE
PAPER CALLED "NOTICE OF INSTRUCTIONS, POWER OF ATTORNEY AND AGREEMENT (PLEDGED
SHARES)" AND SEND IT TO FIRST CHICAGO TRUST COMPANY OF NEW YORK ("FIRST
CHICAGO"), AS AGENT FOR HOLDERS OF PLEDGED SHARES (AT THE ADDRESS INDICATED ON
THE FORM), SO IT IS RECEIVED BEFORE 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE
1, 1998.
On this form you will authorize First Chicago, which is holding the Pledged
Shares in connection with the Company's offer, to tender them on your behalf. On
this form, you may direct First Chicago to tender either a specific number, or
all, of your Pledged Shares in the offer.
Pursuant to this authority, First Chicago will complete a Letter of
Transmittal with respect to Pledged Shares that you direct First Chicago to
tender on your behalf. BECAUSE THE TERMS AND CONDITIONS OF THE LETTER OF
TRANSMITTAL WILL GOVERN THE TENDER OF YOUR PLEDGED SHARES, YOU SHOULD READ THE
LETTER OF TRANSMITTAL CAREFULLY. HOWEVER, THE LETTER OF TRANSMITTAL SHOULD NOT
BE COMPLETED AND RETURNED TO FIRST CHICAGO FOR THE TENDERING OF PLEDGED SHARES.
The Notice of Instructions, Power of Attorney and Agreement (Pledged Shares)
also authorizes the Company to enter into an arrangement with American Stock
Tranfer & Trust Company which will govern the terms under which the proceeds of
any Pledged Shares you tender that are purchased by the Company in the offer
will be held. Disbursements will be made from this account only upon the
instructions of the Company. You will not receive the proceeds from the sale of
Pledged Shares until the Company releases
<PAGE>
them in accordance with the terms and conditions under which the Pledged Shares
are pledged to the Company, as provided in the acquisition agreement you signed
at the time your business was sold to the Company.
HOW MANY SHARES WILL BE PURCHASED
In the offer, the Company is offering to purchase a total of 37,037,037
Shares at a per share price of $27. As noted above, this number includes Option
Shares. This number also includes Pledged Shares.
If more than 37,037,037 Shares are tendered, the Company will prorate the
number of Shares it purchases from each person who tenders Shares. This means
that the Company will not purchase all of the Pledged Shares you tender under
these circumstances. If all eligible stockholders and options holders
participate to the fullest extent in the offer, it is possible that only
approximately 22.5% of your Pledged Shares will be purchased. Pledged Shares
that are not purchased will be returned to the Company and remain subject to the
pledge.
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER YOU SHOULD PARTICIPATE IN THE OFFER. YOU
NEED TO MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN ADVISED THAT ITS DIRECTORS
AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS MORGAN,
INTEND TO TENDER SHARES IN THE OFFER.
The Company's offer is explained in detail in the enclosed documents, which
we urge you to read carefully.
If you wish to tender any Pledged Shares, please read and complete the
Notice of Instructions, Power of Attorney and Agreement (Pledged Shares)
carefully.
SHOULD YOU HAVE ANY QUESTIONS, PLEASE CONTACT FIRST CHICAGO AT
1-800-251-4215.
2
<PAGE>
QUESTIONS AND ANSWERS ON
TENDER OFFER AND PROCEDURES FOR
STOCKHOLDERS WHO OWN PLEDGED SHARES
1. WHAT IS THE OFFER?
On May 4, 1998, the Company offered to purchase 37,037,037 shares of its
common stock, par value $.001 per share (the "Shares"), at $27 per share. This
offer will be open until it expires at 12:00 Midnight, New York City time, on
June 1, 1998, unless extended by the Company. The number of Shares includes
Shares that can be tendered upon exercise of options with an exercise price of
less than $27 per Share under the Company's option plans ("Option Shares"), and
unless otherwise noted the term Shares includes Option Shares.
The Company has determined to permit holders of Shares that were pledged to
the Company in connection with the sale of a business to the Company ("Pledged
Shares") to participate in the offer. The procedures for holders of Pledged
Shares are described in these separate materials for holders of Pledged Shares.
The offer, which is subject to a number of conditions, is fully described in
the Offer to Purchase dated May 4, 1998 and the related Letter of Transmittal
provided to you. Please read these documents carefully.
PLEASE REMEMBER THAT NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION AS TO WHETHER STOCKHOLDERS SHOULD PARTICIPATE IN THE
OFFER. YOU MUST MAKE YOUR OWN DECISION. THE COMPANY HAS BEEN ADVISED THAT ITS
DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF EXECUTIVE OFFICER, THOMAS
MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
2. WILL ALL PLEDGED SHARES THAT I TENDER BE PURCHASED IN THE OFFER?
Probably not. If all eligible stockholders and option holders participate to
the fullest extent possible in the Offer, it is possible that only approximately
22.5% of your Pledged Shares will be purchased. The Company currently does not
know how many Shares will be tendered in the offer. However, if more than
37,037,037 Shares are validly tendered, the Company will purchase up to
37,037,037 Shares on a pro rata basis.
3. WHAT WILL HAPPEN TO MY PLEDGED SHARES IF THEY ARE NOT PURCHASED?
If Pledged Shares are not purchased by the Company because of proration or
otherwise, they will be returned to the Company. The Company will continue to
have control of the Pledged Shares pursuant to the terms and conditions under
which they were pledged to the Company, as provided in the acquisition agreement
you signed at the time your business was sold to the Company. However, as a
result of the distributions by the Company of certain of its operating divisions
(print management, corporate travel, technology solutions and school supplies),
which are becoming public companies, Pledged Shares will include shares of these
new public companies. The Pledged Shares and the shares of these new companies
will continue to be retained by the Company (or one of the Spin-Off Companies)
as collateral security, subject to the same terms and conditions as the Pledged
Shares are now.
4. HOW WILL I KNOW IF MY PLEDGED SHARES HAVE BEEN PURCHASED AND WHEN WILL I BE
PAID?
After the offer expires, all tenders submitted in the offer will be
tabulated. This may take up to five business days. Soon thereafter, you will be
advised of the number, if any, of your Pledged Shares that were accepted in the
offer. The proceeds of the purchase price will be retained in an account at
American Stock Tranfer & Trust Company. You will not be sent this money or any
Pledged Shares not purchased in the offer until the Company releases them in
accordance with the terms and conditions under which the Pledged Shares are
pledged to the Company.
5. WILL I BE TAXED ON THE PROCEEDS FROM THE SALE OF PLEDGED SHARES EVEN THOUGH I
WILL NOT RECEIVE THE MONEY RIGHT AWAY?
Yes. You should review the Offer to Purchase and Letter of Transmittal for a
more detailed discussion of tax considerations and, if necessary, consult a tax
advisor.
<PAGE>
6. HOW DO I TENDER MY PLEDGED SHARES IN THE OFFER?
The only way that you can tender Pledged Shares in the Offer is by
completing the Notice of Instructions, Power of Attorney and Agreement (Pledged
Shares) form on purple paper, signing the form and returning it to First Chicago
at the address indicated on the form. Pursuant to the Power of Attorney, First
Chicago will complete a Letter of Transmittal for these Pledged Shares to be
tendered in the offer. The Notice of Instructions, Power of Attorney and
Agreement (Pledged Shares) Form MUST be received by First Chicago before 12:00
Midnight, New York City time, on June 1, 1998.
Please return your instructions PROMPTLY, recognizing the slow delivery time
inherent in the U.S. mail today. If you use U.S. mail, we recommend using
registered mail, return receipt requested. You may mail your Notice of
Instructions, Power of Attorney and Agreement (Pledged Shares) form to First
Chicago in the preaddressed envelope that has been provided for your reply or
send it by an alternate, faster means (such as overnight courier). Hand
deliveries must be made to First Chicago at the New York address only. Please
remember that in all events the materials must be received by First Chicago
before 12:00 Midnight, New York City time, on June 1, 1998.
7. WHAT IF I HOLD SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK IN ADDITION TO
PLEDGED SHARES?
If you have Shares other than Pledged Shares in your possession (or at a
brokerage firm), you may tender the other Shares as well. In this case, you may
receive two or more sets of offer materials. You should be careful to follow the
separate directions that apply to Shares and Pledged Shares. In the event the
Company must prorate the number of Shares it purchases from each stockholder,
the Company will purchase the same percentage of the Shares and the Pledged
Shares that you tender.
8. CAN I CHANGE MY MIND AND WITHDRAW PLEDGED SHARES THAT I DIRECTED TO BE
TENDERED?
Yes, but only if you perform the following steps:
- You must send a signed notice of withdrawal to First Chicago, Attn:
Tenders and Exchanges
- The notice of withdrawal must be in writing. You may fax your notice of
withdrawal to (201) 222-4720 or (201) 222-4721.
- The notice of withdrawal must state your name, social security number and
the amount of Pledged Shares that you wish to withdraw from the Offer.
- The notice of withdrawal must be received by First Chicago before 12:00
Midnight, New York City time, on June 1, 1998.
The withdrawal procedures are described in greater detail in the Notice of
Instructions, Power of Attorney and Agreement (Pledged Shares) Form. You must
follow these instructions carefully. You are entitled to resubmit tender
materials after withdrawal, provided that all resubmitted materials are
completed properly and delivered on time in accordance with the instructions
applicable to the original submission.
9. WHAT DO I DO IF I HAVE ANY QUESTIONS ABOUT THE TENDER OFFER?
If you have questions about the operation of the offer or need help in
properly responding to the offer, you may call First Chicago at 1-800-251-4215.
******
This question and answer sheet is intended to help you understand the offer
and how Pledged Shares will be handled in the offer. The Offer to Purchase and
Letter of Transmittal contain the legal terms of the offer, and are controlling.
2
<PAGE>
NOTICE OF INSTRUCTIONS
POWER OF ATTORNEY AND AGREEMENT
(PLEDGED SHARES)
(NOTE: Before completing this Notice of Instructions, Power of Attorney and
Agreement, you should read the Offer to Purchase, the attached memorandum from
U.S. Office Products Company and the question and answer sheet. THIS FORM SHOULD
BE USED ONLY BY OWNERS OF PLEDGED SHARES WHO DESIRE TO TENDER SOME OR ALL OF
THEIR PLEDGED SHARES TO THE COMPANY.)
THIS NOTICE OF INSTRUCTIONS FORM MUST BE RECEIVED BY FIRST CHICAGO TRUST
COMPANY OF NEW YORK BEFORE 12:00 MIDNIGHT, NEW YORK CITY TIME,
ON JUNE 1, 1998.
YOU MUST SIGN AND COMPLETE THIS FORM FOR
YOUR DIRECTION TO BE VALID.
TO: FIRST CHICAGO TRUST COMPANY OF NEW YORK ("FIRST CHICAGO")
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT COURIER:
First Chicago Trust Company of New York First Chicago Trust Company of New York
Tenders & Exchanges Tenders & Exchanges
P.O. Box 2569 14 Wall Street, 8th Floor
Suite 4660 Suite 4680
Jersey City, New Jersey 07303-2569 New York, New York 10005
</TABLE>
BY HAND:
First Chicago Trust Company of New York
Tenders & Exchanges
c/o The Depository Trust Company
55 Water Street DTC TAD
Vietnam Veterans Memorial Plaza
New York, New York 10041
NOTE: DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
WILL NOT CONSTITUTE A VALID DELIVERY.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED PLEDGED SHARE HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEAR(S) ON
PLEDGED SHARE(S))
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The undersigned desires to tender to U.S. Office Products Company, a
Delaware corporation (the "Company"), shares of common stock, $.001 par value
per share (the "Shares"), pursuant to the Company's offer to purchase 37,037,037
Shares at a price of $27 per Share (the "Offer Price"), upon the terms and
subject to the conditions set forth in the Offer to Purchase dated May 4, 1998
(the "Offer to
<PAGE>
Purchase"), the related Letter of Transmittal and this Notice of Instructions,
Power of Attorney and Agreement (Pledged Shares). The number of Shares the
Company is offering to purchase includes Shares that may be tendered upon the
exercise of options with an exercise price of less than $27 per Share under the
Company's stock option plans ("Option Shares"), and unless otherwise noted, the
term Shares includes Option Shares.
The undersigned hereby appoints First Chicago as the undersigned's
attorney-in-fact to tender, in accordance with the terms and conditions of the
Offer to Purchase and Letter of Transmittal, the number of Shares set forth
below that the undersigned pledged to the Company to secure potential
obligations in connection with the sale of one or more businesses to the Company
("Pledged Shares").
The rights, powers and authority of the undersigned's attorney-in-fact to
exercise any and all of the rights and powers herein granted shall commence and
be in full force and effect as of the date hereof and shall remain in full force
and effect until the earlier of completion or termination of the offer. Such
powers shall terminate upon written notice by the undersigned to the Company as
provided in accordance with the procedures for withdrawal described below.
The undersigned gives and grants to the undersigned's attorney-in-fact full
power and authority to do and perform all and every act and thing requisite or
proper to be done in order to validly tender Pledged Shares in accordance with
the terms and conditions set forth in the Offer to Purchase and Letter of
Transmittal, with full power of substitution or revocation. The undersigned
hereby ratifies and confirms all that the undersigned's attorney-in-fact, or
substitute, shall lawfully do or cause to be done by virtue of the authority
granted herein. The undersigned expressly authorizes the attorney-in-fact to
complete and deliver on the undersigned's behalf a Letter of Transmittal and any
and all other required documentation in connection therewith, to effect the
valid tender of the Pledged Shares owned by the undersigned as instructed below.
This notice instructs you to tender, at the Offer Price, the following
number of Pledged Shares owned by the undersigned:
/ /
------------------- (insert number) Pledged Shares
/ / All Pledged Shares
Instructions: Check one of the boxes. If the first box is checked, insert
the number of Pledged Shares that you desire First Chicago to tender on your
behalf. If neither box is checked and the form is otherwise properly completed,
signed and returned to First Chicago, all of your Pledged Shares will be
tendered.
CONDITIONAL TENDER
/ / Check here if your tender of Pledged Shares is conditioned on the Company
purchasing all or a minimum number of tendered Pledged Shares, and complete
the following:
Minimum Number of Pledged Shares to be Sold ______.
Instructions: As described in the Offer to Purchase, stockholders may
condition their tender of Shares on all or a minimum number of their tendered
Shares being purchased ("Conditional Tenders"). If the Company purchases less
than all Shares tendered before 12:00 Midnight, New York City time, on June 1,
1998, and the Shares are not withdrawn, then any Shares tendered pursuant to a
Conditional Tender for which the condition was not satisfied shall be deemed
withdrawn. All tendered Shares shall be deemed unconditionally tendered unless
the Conditional Tender section is completed. The Conditional Tender alternative
is made available so that stockholders may assure that any gain that they
realize will be capital gain rather than ordinary income for federal income tax
purposes. It is the stockholder's responsibility to calculate the minimum number
of Shares that must be purchased to assure capital gain treatment, and each
stockholder is urged to consult his own tax advisor.
Pledged Shares tendered pursuant to the offer may be withdrawn at any time
prior to 12:00 Midnight, New York City time, on June 1, 1998. After that,
Pledged Shares tendered pursuant to the offer may be withdrawn if they have not
been accepted for payment by the Company as provided in the Offer to
<PAGE>
Purchase by 12:00 Midnight, New York City time, on June 30, 1998. An owner of
Pledged Shares must submit in a written, telegraphic or facsimile transmission
notice of withdrawal so that it is received by First Chicago at the address
indicated above before 12:00 Midnight, New York City time, on June 1, 1998. Any
such notice of withdrawal must specify the name and social security number of
the owner who tendered the Pledged Shares to be withdrawn and the number of
Pledged Shares to be withdrawn. All questions as to the form and validity
(including time of receipt) of notices of withdrawal will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
None of the Company, First Chicago, the Dealer Manager, the Depositary, the
Information Agent or any other person shall be obligated to give any notice of
any defects or irregularities in any notice of withdrawal and none of them shall
incur any liability for failure to give any such notice. Any Pledged Shares
properly withdrawn will thereafter be deemed not tendered for purposes of the
offer. However, withdrawn Pledged Shares may be retendered by the Expiration
Date by again following the procedures for properly tendering Pledged Shares.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS
TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY PLEDGED SHARES. THE COMPANY
HAS BEEN ADVISED THAT ITS DIRECTORS AND EXECUTIVE OFFICERS, EXCEPT FOR THE CHIEF
EXECUTIVE OFFICER, THOMAS MORGAN, INTEND TO TENDER SHARES IN THE OFFER.
By signing this Notice of Instructions, Power of Attorney and Agreement, the
undersigned hereby agrees that the proceeds from the sale of any of the
undersigned's Pledged Shares that are validly tendered and accepted for purchase
by the Company will be retained in an account maintained by American Stock
Tranfer & Trust Company. The undersigned hereby acknowledges and agrees that the
Company (or a Spin-Off Company) will have exclusive authority to direct
disbursements from the account, subject to the terms and conditions under which
the Pledged Shares are pledged to the Company.
THIS NOTICE OF INSTRUCTIONS FORM MUST BE RECEIVED BY FIRST CHICAGO BEFORE
12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 1, 1998. YOU MUST SIGN AND COMPLETE
THIS FORM FOR YOUR DIRECTION TO BE VALID.
ANY TENDERING STOCKHOLDER OR OTHER PAYEE (OTHER THAN A NON-U.S. STOCKHOLDER)
WHO FAILS TO COMPLETE FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE
LETTER OF TRANSMITTAL OR SPECIAL INSTRUCTIONS MAY BE SUBJECT TO U.S. FEDERAL
INCOME TAX BACKUP WITHHOLDING EQUAL TO 31% OF THE GROSS PROCEEDS PAID TO SUCH
STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. THE DEPOSITARY WILL WITHHOLD
30% OF THE GROSS PROCEEDS PAID TO NON-U.S. STOCKHOLDERS UNLESS THE DEPOSITARY
DETERMINES THAT A REDUCED RATE OF WITHHOLDING IS AVAILABLE PURSUANT TO A TAX
TREATY OR THAT AN EXEMPTION FROM WITHHOLDING IS AVAILABLE. AS A RESULT, NON-U.S.
STOCKHOLDERS WILL NOT BE SUBJECT TO U.S. FEDERAL INCOME TAX BACKUP WITHHOLDING.
SEE INSTRUCTION 10 TO THE LETTER OF TRANSMITTAL.
<PAGE>
<TABLE>
<C> <S> <C>
SIGN HERE
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ABOVE)
.......................................................................................
.......................................................................................
SIGNATURE(S) OF OWNER(S)
Name(s)................................................................................
(PLEASE PRINT)
.......................................................................................
Capacity (full title)..................................................................
Address (if different from that shown on cover page)...................................
.......................................................................................
.......................................................................................
(ZIP CODE)
Daytime Telephone Number...............................................................
Dated..................................................................................
(Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
certificate(s) or by person(s) authorized to become registered holder(s) by
certificates and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, agent, officer of a corporation or
other person acting in a fiduciary or representative capacity, please set forth full
title and provide proper evidence to First Chicago satisfactory to the Company of
authority to sign.)
</TABLE>
<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
NUMBER "TIN" (IRS) that I am subject to backup withholding as a result of
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>
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:__________________
Name:
Title:
CHASE SECURITIES INC.
By:__________________
Name:
Title:
BANKERS TRUST COMPANY
By:__________________
Name:
Title:
BT ALEX.BROWN INCORPORATED
By:__________________
Name:
Title:
MERRILL LYNCH CAPITAL CORPORATION
By:__________________
Name:
Title:
<PAGE>
8
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:__________________
Name:
Title:
AGREED AND ACCEPTED
as of the date first above written:
U.S. OFFICE PRODUCTS COMPANY
By:_________________
Name:
Title:
<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
BANK 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:
--------------------------
Name:
Title:
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 Dorocral
--------------------------------
Name: Mark Dorocral
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>
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
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<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
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Companies, except, in the case of clause (B), for violations, breaches,
defaults, rights of cancellation, termination, revocation or acceleration or
Liens that would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations, registrations,
declarations or filings as may be required under, and other applicable
requirements of, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), filings under state securities or "blue sky" laws and filings or consents
referred to in Schedule 3.01(c)(ii), no consent, approval, order or
authorization of, or registration, declaration or filing with, any government or
any court, administrative agency or commission or other governmental authority
or agency, federal, state or local or foreign (a "Governmental Entity"), is
required with respect to the Company, School, Travel, Technology or Print or any
of their respective Subsidiaries, in connection with the execution, delivery or
performance by each of the Company, School, Travel, Technology and Print of each
Transaction Agreement to which any of them is or will be a party or the
consummation by the Company and School, Travel, Technology and Print of the
Transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements would not, individually or in the aggregate,
have a Material Adverse Effect on the Retained Companies, taken as a whole).
(d) CAPITAL STOCK. As of the date hereof, the authorized capital stock of
the Company consists of (i) 500,000,000 shares of Common Stock, of which an
aggregate of 132,958,606 shares of Common Stock were issued and outstanding as
of the close of business on January 9, 1998, and (ii) 500,000 shares of
preferred stock, $.001 par value per share, of which none were issued and
outstanding as of the close of business on January 9, 1998. As of the close of
business on January 9, 1998, there were outstanding under the Company's 1994
Long-Term Incentive Plan, the 1994 Amended and Restated Long-Term Incentive
Plan, the 1996 Non-Employee Directors' Stock Plan, the 1997A Stock Option Plan
for Employees of Mail Boxes Etc., the 1997B Stock Option Plan for Employees of
Mail Boxes Etc. and the 1997 Stock Option Plan for former Non-Employee Directors
of Mail Boxes Etc. (collectively, the "Company Stock Plans") options to acquire
an aggregate of 21,236,778 shares of Common Stock (subject to adjustment on the
terms set forth therein) of which 706,778 are subject to allocation pursuant to
option pools, as set forth on Schedule 3.01(d)(ii). As of the close of business
on January 9, 1998, there were outstanding under the Company Stock Plans no
shares of restricted stock and 3,220 deferred shares had been reserved for
issuance pursuant to the 1996 Non-Employee Directors Stock Plan. As of the close
of business on January 9, 1998, the Company had no shares of Common Stock
reserved for issuance of restricted stock. All of the outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. As of the date hereof the Company has outstanding
$230,000,000 in 5 1/2% Convertible Subordinated Notes Due 2003 issued pursuant
to an Indenture, dated as of May 22, 1996, between the Company and The Chase
Manhattan Bank, N.A. (the "2003 Notes") and $143,750,000 in 2001 Notes,
convertible into shares of Common Stock at any time prior to maturity at a
conversion price of $31.60 and $19.00 per share, respectively. Except as set
forth on Schedule 3.01(d), there are no preemptive or similar rights on the part
of any holders of any class of securities of the Company or of any of the
Retained Subsidiaries. Except for the Common Stock, the 2003 Notes and the 2001
Notes, as set forth above, the Company has outstanding no bonds, debentures,
notes or other obligations or securities the holders of which have the right to
vote (or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
Except as set forth above or on Schedule 3.01(d), as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights, contracts, commitments,
arrangements or understandings of any kind to which the Company or any of its
Subsidiaries is a party or by which any of them is bound obligating the Company
or any of its Subsidiaries contingently or otherwise to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of the Company or of any of the Retained Subsidiaries.
Except (y) with respect to the withholding of
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exercise price or withholding taxes under any Company Stock Plan or (z) pursuant
to the Tender Offer, there are no outstanding Contracts of the Company or any of
its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or of any of the Retained Subsidiaries.
(e) SUBSIDIARIES. (i) Schedule 3.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Retained Companies (other
than the Company). Except for Subsidiaries that will not be Subsidiaries of the
Company after the Distributions, the Company has no equity interests with a
value of $500,000 or more in any Person other than the Retained Companies, and
there are no commitments on the part of the Company or any Material Subsidiary
to contribute additional capital in respect of any equity interest in any
Person. Each of the outstanding shares of capital stock of each of the Retained
Subsidiaries has been duly authorized and validly issued, and is fully paid and
nonassessable. Except as set forth on Schedule 3.01(e)(i), all of the
outstanding shares of capital stock of each Retained Subsidiary are owned,
either directly or indirectly, by the Company free and clear of all Liens.
(ii) Schedule 3.01(e)(ii) contains a complete and correct list of all
Material Subsidiaries of the Company.
(iii) Schedule 3.01(e)(iii) contains a complete and correct list setting
forth the respective Material Subsidiaries of each of the Company, School,
Travel, Technology and Print immediately following the Distributions.
(f) SEC FILINGS. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
SEC under the Securities Act and the Exchange Act since June 30, 1995 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (i) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (ii) did not, at the time it was filed, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(g) RETAINED BUSINESS FINANCIAL STATEMENTS. (i) Attached hereto as
Annex A(i) are a consolidated balance sheet as of April 26, 1997 (the
"Balance Sheet") and a consolidated balance sheet as of April 30, 1996 and
consolidated statements of income, consolidated statements of cash flow and
consolidated statements of stockholders' equity for the years ended April
30, 1995 and 1996 and April 26, 1997, in each case for the Company (such
financial statements, including the notes thereto, the "Company Business
Financial Statements"), together with the report of the Company's
independent accountants thereon. Each of the Balance Sheet and the
consolidated balance sheet as of April 30, 1996 (including any related notes
and schedules) presents fairly in all material respects the consolidated
financial position of the Company as of their respective dates, and each of
the consolidated statements of income, consolidated statements of cash flow
and consolidated statements of stockholders' equity included in the Company
Business Financial Statements (including any related notes and schedules)
fairly presents in all material respects the income, cash flows and
stockholders equity, as the case may be, of the Company for the periods set
forth therein, in each case in accordance with GAAP applied on a consistent
basis throughout the periods presented therein except as indicated in the
notes thereto, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Company Business Financial Statements
will require adjustment to reflect (i) the change in the accounting
treatment of certain acquisitions from the pooling-of-interests method to
the purchase method; (ii) the treatment of certain of the Distributions as
discontinued operations, and (iii) certain footnote disclosure regarding the
Transactions.
(ii) Attached hereto as Annex A (ii) are the unaudited consolidated
balance sheet for the Company as of October 25, 1997 and the unaudited
consolidated statement of income of the Company for the six months then
ended (such financial statements, including the notes thereto, the
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"Unaudited Company Business Financial Statements"). The Unaudited Company
Business Financial Statements have been prepared in all material respects in
accordance with GAAP consistently applied and on that basis fairly present
the consolidated financial condition and results of operations of the
Company as of the date thereof and for the period indicated, except that the
Company Business Financial Statements omit footnote disclosures required by
GAAP and are subject to normal, recurring year-end closing and audit
adjustments, prior to the announcement of the Transactions. Upon
announcement of the Transactions, the Unaudited Company Business Financial
Statements will require adjustment to reflect (i) the change in the
accounting treatment of certain acquisitions from the pooling-of-interests
method to the purchase method; (ii) the treatment of certain of the
Distributions as discontinued operations, and (iii) certain footnote
disclosure regarding the Transactions.
(iii) Attached hereto as Annex A(iii) are the unaudited pro forma
combined balance sheet for the Retained Business as of October 25, 1997 (the
"Pro Forma Balance Sheet"), the unaudited pro forma combined statement of
income for the Retained Business for the fiscal year ended April 26, 1997
and the six month period ended October 25, 1997 (the "Pro Forma Income
Statements"), and the notes to such unaudited pro forma financial statements
(the "Notes to Pro Forma Financial Statements", and, together with the Pro
Forma Balance Sheet and the Pro Forma Income Statements, the "Pro Forma
Retained Business Financial Statements"). The Pro Forma Retained Business
Financial Statements have been prepared in accordance with Article 11 of
Regulation S-X; reflect the adjustments necessary to change accounting
treatment for certain past acquisitions from the pooling of interests method
to the purchase method; and give effect to the Proposed Financings, the
Tender Offer, the Distributions and the purchase of the Shares, Special
Shares and Warrants by Purchaser. The Pro Forma Income Statements have been
prepared as if all such Transactions had occurred at the beginning of fiscal
1997 and the Pro Forma Balance Sheet has been prepared as if all such
transactions had occurred as of October 25, 1997.
(iv) Attached hereto as Annex A(iv) are a consolidated balance sheet for
the Retained Business as of April 26, 1997 (the "Audited Balance Sheet") and
the consolidated statements of income of the Retained Business for the
fiscal year then ended (such financial statements, including the notes
thereto, the "Audited Retained Business Financial Statements"), together
with the report of the Company's independent accountants thereon. The
Audited Retained Business Financial Statements (including any related notes
and schedules) will fairly present in all material respects the consolidated
financial position of the Retained Business as of the date thereof, and
fairly present in all material respects the income of the Retained Business
for the period set forth therein, in accordance with GAAP applied on a
consistent basis throughout the periods presented therein except as
indicated in the notes thereto.
(v) The balance sheets included in the Pro Forma Retained Business
Financial Statements do not include any material assets or liabilities not
intended to constitute a part of the Retained Business after giving effect
to the Transactions. The statements of income, statements of stockholders
equity and statements of cash flows included in the Pro Forma Retained
Business Financial Statements do not reflect the operations of any entity or
business not intended to constitute a part of the Retained Business after
giving effect to all such Transactions. The statements of income included in
the Pro Forma Retained Business Financial Statements reflect all of the
material costs and expenses incurred in connection with the Retained
Business, including those incurred in generating the revenues reflected in
the Pro Forma Retained Business Financial Statements, in each case, for the
periods covered thereby, that would be required to be so reflected under
GAAP in consolidated financial statements of the Retained Business prepared
on a pro forma basis after giving effect to all such transactions.
(h) UNDISCLOSED LIABILITIES. Except (i) for the items listed in Schedule
3.01(h) hereto, (ii) as and to the extent disclosed or reserved against on the
Balance Sheet, the Pro Forma Balance Sheet and the Audited Balance Sheet or in
the footnotes thereto and (iii) as incurred after the date of the Pro Forma
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Balance Sheet in the ordinary course of the Retained Business consistent with
prior practice and not prohibited by this Agreement, the Retained Companies do
not have any liabilities or obligations of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise and whether due or to become due,
that, individually or in the aggregate, are or would be material to the Retained
Companies, taken as a whole.
(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof and any amendments filed with respect thereto prior to the date
hereof (the "Filed Company SEC Documents") or as otherwise contemplated or
permitted by this Agreement or the other Transaction Agreements, and except for
any items referred to in Schedule 3.01(i), since October 25, 1997, the Company
and its Subsidiaries have conducted the Retained Business in the ordinary course
consistent with past practice and there has not been any event, change or
development which, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(j) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in the Filed
Company SEC Documents, each of the Retained Companies is in compliance with all
statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to it that relate to the Retained Business, and
neither the Company nor any of the Retained Companies has received any notice
alleging noncompliance except, with reference to all the foregoing, where the
failure to be in compliance would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole. This
Section 3.01(j) does not relate to employee benefits matters (for which Section
3.01(o) is applicable), environmental matters (for which Section 3.01(p) is
applicable) or tax matters (for which Section 3.01(n) is applicable). Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except where the failure
to have such Permits or rights would not, individually or in the aggregate, have
a Material Adverse Effect on the Retained Companies, taken as a whole. All such
Permits are in full force and effect and the Retained Companies are in
compliance with the terms of such Permits, except where the failure to be in
full force and effect or in compliance would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as a
whole.
(k) TITLE TO ASSETS. (i) Except as set forth in Schedule 3.01(k)(i), each
of the Retained Companies owns and has good and valid title to, or a valid
leasehold interest in, or otherwise has sufficient and legally enforceable
rights to use, all of the properties and assets (real, personal or mixed,
tangible or intangible), used by the Retained Business or held for use by the
Retained Business in connection with the conduct of, or otherwise material to,
the Retained Business (the "Assets"), including Assets reflected on the Balance
Sheet or acquired since the date thereof, except for Assets disposed of in the
ordinary course of business consistent with past practice and in accordance with
this Agreement and except for such defects in title which, individually or in
the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case free and clear of any Liens except for
Permitted Liens. This Section 3.01(k) does not relate to intellectual property
(for which Section 3.01(s) is applicable). A list of all owned real property and
leased real property having an annual base rental of more than $20,000 or having
square footage in excess of 5,000 square feet relating to the Retained Business
is set forth on Schedule 3.01(k) and such owned and leased real property
constitutes all the fee and leasehold interests meeting such description held by
the Retained Companies, except for any such fee or leasehold interests acquired
or disposed of in the ordinary course of business consistent with past practice
after the date hereof and in accordance with this Agreement, and constitutes all
the fee and leasehold interests meeting such description used by the Retained
Business or held for use by the Retained Business in connection with the conduct
of the Retained Business.
(ii) Except as referred to in Schedule 3.01(k)(ii), each Retained
Company has (A) good and insurable title to its owned real properties and
(B) valid and subsisting leasehold interests in its leased real properties,
in each case, free and clear of any Liens, except for (1) Permitted Liens
and (2) easements,
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covenants, rights-of-way, other matters of record and other matters subject
to which the leases of the Retained Companies' real properties are granted.
(l) LITIGATION. Except as disclosed in the Filed Company SEC Documents or
referred to on Schedule 3.01(l), as of the date hereof there are no civil,
criminal or administrative actions, suits or proceedings pending or, to the
knowledge of the Company, threatened, against any of the Retained Companies
that, individually or in the aggregate, are likely to have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as disclosed in the
Company SEC Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against any of the Retained Companies
that, insofar as can reasonably be foreseen, individually or in the aggregate,
in the future would have a Material Adverse Effect on the Retained Companies,
taken as a whole.
(m) CONTRACTS. (i) Schedule 3.01(m) contains a complete and correct list,
as of the date hereof, of all Contracts that are of the types listed in clauses
(A) through (G) below to which any of the Retained Companies is a party (the
"Material Contracts"):
(A) employment, consulting, severance, and other material Contracts
relating to or for the benefit of current, future or former employees,
officers or directors (excluding sales persons) of the Retained Business
requiring annual base payments going forward in excess of $250,000;
(B) Contracts relating to the borrowing of money or obtaining of or
extension of credit (other than in the ordinary course of business),
including letters of credit, guarantees and material security agreements;
(C) joint venture, partnership and similar Contracts (excluding joint
purchasing arrangements with no minimum purchase requirements), involving a
sharing of profits or expenses, that are material or involve any obligation
on the part of the Company to commit capital (excluding commitments not
exceeding $100,000 in the aggregate);
(D) Contracts prohibiting or materially restricting the ability of any
Retained Company to conduct its business, to engage in any business or
operate in any geographical area or to compete with any Person;
(E) Contracts that are material to the business, operations, results of
operations, condition (financial or otherwise), assets or properties of the
Retained Companies taken as a whole;
(F) any employment agreement (and any other agreement involving annual
payments in excess of $150,000) with change of control or "event risk"
provisions relating to the Company; and
(G) any employment agreement or other agreement requiring the Company to
compensate any employee for any tax imposed as a result of any excess
parachute payment under Section 280G of the Code.
(ii) All Material Contracts are legal, valid, binding, in full force and
effect and enforceable against each party thereto, except to the extent that
any failure to be enforceable, individually and in the aggregate, would not
reasonably be expected to have or result in a Material Adverse Effect on the
Retained Companies, taken as a whole, provided that no representation is
made as to the enforceability of any non-competition provision in any
employment agreements. Except as set forth in Schedule 3.01(n), there does
not exist under any Material Contract any violation, breach or event of
default, or event or condition that, after notice or lapse of time or both,
would constitute a violation, breach or event of default thereunder, on the
part of any of the Retained Companies or, to the knowledge of the Company,
any other Person, other than such violations, breaches or events of default
as would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole. Except as set forth in
Schedule 3.01(m), the enforceability of all Material Contracts will not be
adversely affected in any manner by the execution, delivery or performance
of this Agreement or the consummation of the Transactions, and no Material
Contract contains any change in control or other terms or conditions that
will become applicable or inapplicable as a result of the consummation of
the Transactions.
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(n) TAXES. (i) Except as set forth on Schedule 3.01(n), (A) all Tax
Returns required to be filed by or on behalf of each of the Company and the
Retained Subsidiaries have been filed except to the extent that a failure to
file, individually or in the aggregate, would not have a Material Adverse Effect
on the Retained Companies, taken as a whole; (B) all such Tax Returns filed are
complete and accurate in all respects, other than any incompleteness or any
inaccuracy that would not, individually or in the aggregate, have a Material
Adverse Effect on the Retained Companies taken as a whole, and all Taxes shown
to be due on such Tax Returns have been paid; (C) no written claim (other than a
claim that has been finally settled) has been made by a taxing authority that
any of the Company or the Retained Subsidiaries is subject to an obligation to
file Tax Returns or to pay or collect Taxes imposed by any jurisdiction in which
such Retained Company does not file Tax Returns or pay or collect Taxes, other
than any such claim that would not have a Material Adverse Effect on such
Retained Company or for which adequate reserves have been provided on the
balance sheet contained in the Unaudited Company Business Financial Statements
and the Pro Forma Balance Sheet; (D) there is no deficiency with respect to any
Taxes which would, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole, other than any such
deficiency for which adequate reserves have been provided on the balance sheet
contained in the Unaudited Company Business Financial Statements and the Pro
Forma Balance Sheet; and (E) all material assessments for Taxes due with respect
to completed and settled examinations or concluded litigation have been paid
which, individually or in the aggregate (with respect to any Retained Company),
exceed $100,000. As used in this Agreement, "Taxes" shall include all federal,
state, local and foreign income, franchise, property, sales, excise and other
taxes, tariffs or governmental charges of any nature whatsoever, including
interest and penalties, and additions thereto; and "Tax Returns" shall mean all
federal, state, local and foreign tax returns, declarations, statements,
reports, schedules, forms and information returns relating to Taxes.
(ii) Except as set forth in Schedule 3.01(n), each of the Company and
the Retained Subsidiaries has duly and timely withheld all Taxes required to
be withheld in connection with its business and assets, and such withheld
Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose, except to
the extent that any failure to do so would not have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(iii) Except as set forth in Schedule 3.01(n), (A) none of the Company
and the Retained Subsidiaries is a party to or bound by or has any
obligation under any Tax allocation, sharing, indemnification or similar
agreement or arrangement (other than any agreement for the acquisition of
one or more of the Retained Subsidiaries) with any Person other than any of
the Retained Companies, which might result in a Material Adverse Effect to
the Retained Company which entered into such agreement or arrangement; and
(B) none of the Company and the Retained Subsidiaries is or has been at any
time a member of any group of companies filing a consolidated, combined or
unitary income tax return other than any such group (1) the common parent of
which is the Company or any Retained Subsidiary or (2) the common parent of
which has not held any asset other than shares of one or more of the
Retained Subsidiaries.
(iv) Except as set forth in Section 3.01(n) of the Disclosure Schedule,
(A) all taxable periods of each of the Company and the Retained Subsidiaries
ending before December 31, 1993 are closed or no longer subject to audit;
(B) none of the Company and the Retained Subsidiaries is currently under any
audit by any taxing authority as to which such taxing authority has asserted
in writing any claim which, if adversely determined, could have a Material
Adverse Effect on such Retained Company; and (C) no waiver of the statute of
limitations is in effect with respect to any taxable year of the Company or
any of the Retained Subsidiaries.
(o) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS; ERISA. (i) Employee
Benefit Plans. Each Employee Benefit Plan that provides for equity-based
compensation or that has associated costs that are expected to be material to
the Company or the Retained Companies in the aggregate and that is expected to
provide for contributions to be made by any of the Retained Companies or their
Employees after the date hereof or to permit the accrual of additional benefits
by any Employee of the Retained Companies after the date hereof is either listed
on Schedule 3.01(o) or has been filed with the SEC as a material contract
(collectively, the
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"Retained Plans"). Except as set forth on Schedule 3.01(o), neither the Company
nor any of its Subsidiaries has communicated to any Employee any intention or
commitment to modify any Retained Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement which would, if
it existed on the date hereof, be a Retained Plan.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any material
liability as to which adequate reserves have not been established, each Employee
Benefit Plan intended to be qualified under section 401(a) of the Code, and the
trust (if any) forming a part thereof, (A) has received a favorable
determination letter from the IRS as to its qualification under the Code and to
the effect that each such trust is exempt from taxation under section 501(a) of
the Code, and nothing has occurred since the date of such determination letter
that could adversely affect such qualification or tax-exempt status or (B) a
timely application for such a favorable determination letter was filed and the
Company has no reason to believe that such a favorable determination letter will
not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is reasonably
expected to be incurred under or pursuant to Title I or IV of ERISA or the
penalty, excise Tax or joint and several liability provisions of the Code
relating to employee benefit plans that is or would be material to the Company
or, following the Closing, to the Retained Companies in the aggregate.
(B) Each of the Employee Benefit Plans has been operated and
administered in all respects in compliance with its terms, all applicable
laws and all applicable collective bargaining agreements, except for any
failure so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or obligation on
the part of the Retained Companies in the aggregate. There are no pending or
threatened claims by or on behalf of any of the Employee Benefit Plans, by
any Employee or otherwise involving any such Employee Benefit Plan or the
assets of any Employee Benefit Plan (other than routine claims for benefits,
all of which have been fully reserved for on the regularly prepared balance
sheets of the Company) which would reasonably be expected to result in any
material liability to the Retained Companies in the aggregate.
(C) Except to the extent that it would not give rise to a material
liability or obligation on the part of the Company or the Retained
Companies, no Employee is or will become entitled to post-employment
benefits of any kind by reason of employment with the Company or its
Subsidiaries, including, without limitation, death or medical benefits
(whether or not insured), other than (x) coverage mandated by section 4980B
of the Code, (y) retirement benefits payable under any Plan qualified under
section 401(a) of the Code or (z) accrued deferred compensation. The
consummation of the Transactions will not result in an increase in the
amount of compensation or benefits or the acceleration of the vesting or
timing of payment of any compensation or benefits payable to or in respect
of any Employee by any of the Retained Companies.
(iv) Employees, Labor Matters, etc. Except as set forth on Schedule 3.01(o),
neither the Company nor any of its Subsidiaries is a party to or bound by any
collective bargaining agreement, and there are no labor unions or other
organizations representing, purporting to represent or attempting to represent
any employees employed by the Company or any of its Subsidiaries.
Since April 26, 1997, there has not occurred or been threatened any strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of the Company or any of
its Subsidiaries. Except as set forth on Schedule 3.01(o), there are no labor
disputes currently subject to any grievance procedure, arbitration or litigation
and there is no petition pending or threatened with respect to any employee of
any the Company or its Subsidiaries. The Company and its Subsidiaries has
complied with all applicable Laws pertaining to the employment or termination of
employment of their respective employees, including, without limitation, all
such laws relating to labor relations, equal employment opportunities, fair
employment practices, prohibited discrimination or distinction and other similar
employment activities, except for any failure so to comply that, individually
and in the aggregate, could not result in any material liability to the Retained
Companies in the aggregate.
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(p) ENVIRONMENTAL MATTERS. Except as disclosed in the Filed Company SEC
Documents or as set forth on Schedule 3.01(p) and except for such matters that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole, (i) the Retained Companies are in
compliance with all applicable Environmental Laws (as defined below), (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits"), (iii) none of the Retained Companies has received notice from any
Governmental Entity asserting that any of the Retained Companies may be in
violation of, or liable under, any Environmental Law, and (iv) there are no
actions, proceedings or claims pending (or, to the knowledge of the Retained
Companies, threatened) seeking to impose any liability on the Retained Companies
in respect of any Environmental Laws, Environmental Permits or Hazardous
Substances.
For purposes of this Agreement, "Environmental Law" means any federal,
state, local or foreign law, statute, regulation or decree relating to (x) the
protection of the environment or (y) the use, storage, treatment, generation,
transportation, processing, handling, release or disposal of Hazardous
Substances, in each case as in effect on the date hereof. "Hazardous Substance"
means any waste, substance, material, pollutant or contaminant listed, defined,
designated or classified as hazardous, toxic or radioactive, or otherwise
regulated, under any Environmental Law.
(q) DELAWARE LAW. The Company has taken all action necessary to ensure
that the provisions of Section 203 of the Delaware General Corporation Law (the
"DGCL") will not be applicable to Purchaser or its Affiliates as a result of the
transactions contemplated by this Agreement.
(r) STATUS OF SHARES. The Shares being issued at the Closing have been
duly authorized by all necessary corporate action on the part of the Company,
and at Closing such Shares will have been validly issued and, assuming payment
therefor has been made, will be fully paid and nonassessable, and the issuance
of such Shares will not be subject to preemptive rights of any other stockholder
of the Company. The Warrant Shares and the Special Warrant Shares have been duly
authorized by all necessary corporate action on the part of the Company, and
such shares of Common Stock have been validly reserved for issuance, and,
assuming payment therefor has been made, upon issuance and exercise of the
Warrants or the Special Warrants, as the case may be, will be validly issued and
outstanding, fully paid and nonassessable. Assuming the Company Stockholder
Approval has been obtained, the Shares, Warrants and Special Warrants will be
eligible for listing on the Nasdaq Stock Market.
(s) INTELLECTUAL PROPERTY. The Intellectual Property that is owned by the
Retained Companies constitutes all of the Intellectual Property that is material
to the Retained Companies as a whole, except for Intellectual Property subject
to written or oral licenses, agreements or arrangements pursuant to which the
use of Intellectual Property by any Retained Company is permitted by any Person
(the "Company Intellectual Property"). The Company Intellectual Property that is
owned by the Retained Companies is owned free from any Liens (other than
Permitted Liens). Except as set forth in Schedule 3.01(s), all material
Intellectual Property Licenses are in full force and effect in accordance with
their terms, and are free and clear of any Liens (other than Permitted Liens).
Except as set forth in Schedule 3.01(s), immediately after the Closing, the
Retained Companies will own or have the right to use all the Company
Intellectual Property, in each case free from Liens (except for Permitted Liens
incurred in the ordinary course of business) and on the same terms and
conditions as in effect prior to the Closing. Except as set forth in Schedule
3.01(s), the conduct of the Retained Business does not infringe or conflict with
the rights of any third party in respect of any Intellectual Property, except
where such conduct would not materially affect the ability of the Retained
Companies to conduct their business as presently conducted. Except as set forth
in Schedule 3.01(s), to the knowledge of the Company, none of the Company
Intellectual Property is being infringed by any third party except where such
infringement would not have a Material Adverse Effect on the Retained Companies
taken as a whole. Except as set forth in Schedule 3.01(s), there is no claim or
demand of any Person pertaining to, or any proceeding which is pending or, to
the knowledge of the Company, threatened, that challenges the rights of any of
the Retained Companies in respect of any Company Intellectual Property, or that
claims that any default exists under any Intellectual
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Property License, except where such claim, demand or proceeding would not
materially affect the ability of the Retained Companies to conduct their
business as presently conducted. Except as set forth in Schedule 3.01(s), none
of the Company Intellectual Property is subject to any outstanding order,
ruling, decree, judgment or stipulation by or with any court, tribunal,
arbitrator, or other Governmental Entity materially adverse to the Company.
Except as set forth in Schedule 3.01(s), the Intellectual Property owned by the
Retained Companies and material to the Retained Companies taken as a whole has
been duly registered with, filed in or issued by, as the case may be, the
appropriate filing offices, domestic or foreign, to the extent necessary or
desirable to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction under any applicable law, and the same
remain in full force and effect. The Retained Companies have taken all necessary
actions to ensure usual and customary protection for the Company Intellectual
Property in the relevant jurisdiction of the Company Intellectual Property
(including maintaining the secrecy of all confidential Intellectual Property)
under any applicable law.
(t) Guarantees. Except as set forth on Schedule 3.01(t), none of the
obligations or liabilities of any of the Distributed Companies will be
guaranteed by or subject to a contingent obligation of any of the Retained
Companies following the Distributions (excluding lease guarantees involving
obligations in an aggregate amount not to exceed $100,000).
(u) Brokers or Finders. Except as set forth on Schedule 3.01(u), no agent,
broker, investment banker or other firm is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement.
(v) Acquisitions. Schedule 3.01(v) sets forth a true and correct list of the
25 largest acquisitions (in terms of aggregate consideration) of businesses made
by the Company since its inception. The Company has provided Purchaser with
copies of the acquisition agreements and all schedules thereto for each
acquisition listed on Schedule 3.01(v).
(w) Disclosure. No representation or warranty by the Company contained in
this Agreement or in any certificate to be furnished by or on behalf of the
Company pursuant hereto contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein, in light of the circumstances under
which they were made, not misleading with respect to the Retained Business as a
whole or the transactions contemplated by this Agreement.
(x) Fairness Opinion. The Board of Directors of the Company has received a
fairness opinion, customary in form and substance, from Morgan, Stanley & Co.,
Incorporated.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants as of the date hereof as follows:
(a) ORGANIZATION. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) AUTHORITY. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform each Transaction
Agreement to which it is a party and to consummate the Transactions. All
necessary action required to have been taken by or on behalf of Purchaser by
applicable law, its limited liability company agreement or otherwise to
authorize the approval, execution, delivery and performance by Purchaser of
this Agreement and the consummation by it of the Transactions have been duly
authorized, and no other proceedings on its part are or will be necessary to
authorize this Agreement or for it to consummate the Transactions. This
Agreement is a valid and binding agreement of Purchaser, enforceable against
Purchaser in accordance with the terms hereof, assuming that this Agreement
is a valid and binding agreement of the Company.
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(c) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any mortgage, security interest, encumbrance, lien or charge of
any kind upon any of the properties or assets of Purchaser pursuant to, or
require any consent, approval or other action by or any notice to or filing
with any court or administrative or governmental body pursuant to, the
organizational documents or agreements of Purchaser or any agreement,
instrument, order, judgment, decree, statute, law, rule or regulation by
which Purchaser is bound (assuming that the Company shall have made or
obtained all consents, approvals, orders, authorizations, registrations,
declarations or filings referred to in Section 3.01(c)(ii)), except for
filings after the Closing under Section 13(d) of the Exchange Act and
filings under the HSR Act.
(d) ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Shares,
Warrants and Special Warrants being purchased by it for its own account for
the purpose of investment and not with a view to or for sale in connection
with any distribution thereof, and Purchaser has no present intention or
plan to effect any distribution of Shares, Warrants, Special Warrants,
Warrant Shares or Special Warrant Shares; provided that the disposition of
such Purchaser's property shall at all times be and remain within its
control and subject to the provisions of this Agreement and the Registration
Rights Agreement. Purchaser has delivered to the Company a complete and
correct copy of a commitment letter from the Fund for $270 million of common
equity financing. The Fund constitutes a "venture capital operating company"
within the meaning of Section 2510.3-101(d) of the regulations promulgated
under ERISA and the transactions contemplated by this Agreement shall not
adversely affect such status.
(e) OWNERSHIP OF SECURITIES. At the date hereof Purchaser does not
Beneficially Own, directly or, to the knowledge of Purchaser, indirectly (or
have any option or other right to acquire), any securities of the Company
other than the Shares, Warrants and Special Warrants being purchased by it
hereunder.
(f) BROKERS OR FINDERS. Except as set forth in Schedule 3.02(f), no
agent, broker, investment banker or other firm is or will be entitled to any
broker's or finder's fee or any other commission or similar fee from
Purchaser in connection with any of the transactions contemplated by this
Agreement.
(g) FUTURE ACQUISITIONS. Purchaser has no present plan or intention to
acquire, directly or indirectly, shares of capital stock comprising 50% or
more of the Total Voting Power or 50% or more of the total fair market value
of all shares of outstanding capital stock of the Company.
ARTICLE IV
CORPORATE GOVERNANCE
SECTION 4.01 COMPOSITION OF THE BOARD OF DIRECTORS.
(a) At and after the Closing, the Board of Directors of the Company shall
consist of nine directors (subject to the right to increase the Board of
Directors pursuant to Section 4.01(b)(iii)). Three members of the Board of
Directors shall initially be designated by the Purchaser (the "Investor
Directors"). Six members of the Board (the "Non-Investor Directors") shall
initially be designated by the Company, subject to the conditions set forth in
Section 9.03(l), and shall include the chief executive officer of the Company.
So long as Purchaser shall have the right to nominate at least two directors
pursuant to clause (i) below, Purchaser shall be entitled to designate the
Chairman of the Board of Directors, provided that the Chairman of the Board, if
designated by Purchaser, shall be an Investor Director.
(b) Purchaser shall be entitled to nominate three directors for election,
provided:
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(i) if the total number of shares of Common Stock represented by the Shares,
the Special Warrants and the Warrants ("Purchaser's Total Securities") declines
by more than 33 1/3% but less than 66 2/3% from Purchaser's Total Securities at
Closing by reason of sales or other dispositions of Common Stock, Warrants or
Special Warrants by Purchaser, Purchaser shall have the right to nominate two
directors;
(ii) if Purchaser's Total Securities declines by 66 2/3% or more from
Purchaser's Total Securities at Closing, but Purchaser's Percentage Interest
remains at least 5% of the outstanding Voting Securities, by reason of sales or
other dispositions of Common Stock, Warrants or Special Warrants by Purchaser,
Purchaser shall have the right to nominate one director;
(iii) in the event that the size of the Board of Directors shall be
increased, Purchaser shall have the right to at least proportionate
representation on the Board following such increase based on the composition of
the Board as between Investor Directors and Non-Investor Directors immediately
prior to such increase; provided that in no event shall the Board consist of
more than 12 directors; and
(iv) if the chief executive officer of the Company is not then a member of
the Board of Directors or a nominee for membership thereon, the Purchaser shall
be entitled to approve an additional nominee to the Board of Directors.
(c) The Company shall not, and shall not permit its Affiliates to, solicit
proxies (as such terms are used in the proxy rules of the SEC) of the
stockholders of the Company to vote against any of the nominees selected by the
Purchaser or for the approval of any stockholder or other proposals that are
inconsistent with the rights afforded the Purchaser pursuant to this Agreement
and the other Transaction Agreements.
SECTION 4.02 SUPERMAJORITY VOTING PROVISIONS. So long as Purchaser has the
right to designate at least two nominees to the Board of Directors of the
Company pursuant to Section 4.01(b):
(a) neither the Company nor the Board of Directors shall cause or permit to
occur any of the following events without the affirmative vote of not less than
three-fourths of the members of the Board of Directors of the Company:
(i) any issuance of Equity Securities other than (A) issuances pursuant to
employee stock option or incentive compensation plans of Equity Securities
(other than in respect of options outstanding as of the date hereof) in an
aggregate amount not to exceed 5% of the Common Stock outstanding immediately
following the Closing on a fully diluted basis ("Permitted Options"), or (B)
issuances pursuant to acquisitions or in public offerings, such issuances not to
exceed 5% of the Common Stock outstanding immediately following the Closing on a
fully diluted basis in any one issuance or 20% in the aggregate, provided,
however, that no such issuance shall be permitted if as a result thereof any
Person would own 10% of the Common Stock outstanding immediately following such
issuance on a fully diluted basis;
(ii) (A) any merger, consolidation or other business combination to which
the Company is a party or any decision whether to approve a tender offer
involving the Company's Equity Securities, in any case other than a Cash
Transaction (as defined in Section 4.02(b)(i) below) or a Permitted Securities
Transaction (as defined in Section 4.02(b)(ii)) below, or (B) any amendment of
any shareholder rights plan (or "poison pill") maintained by the Company and any
redemption of the rights issued thereunder, except to permit a Cash Transaction
or a Permitted Securities Transaction;
(iii) any sale, lease, transfer or other disposition in one transaction or a
series of related transactions of all or substantially all the assets of the
Company, in any case other than a Cash Transaction or Permitted Securities
Transaction; or
(iv) any major recapitalization or similar transaction or series of
transactions involving the Company;
(v) any dissolution or complete or partial liquidation of the Company; or
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(vi) any amendment or modification of the Company Charter or the Company
By-laws that is inconsistent with the provisions of this Agreement and the
rights afforded to Purchaser hereunder.
(b) For purposes of this Agreement:
(i) "Cash Transaction" means any merger, consolidation or other business
combination or sale of all or substantially all the assets of the Company to
which the Company is a party or any decision whether to approve a tender offer
for all of the Company's Equity Securities, in any case if the consideration
involved in such transaction is all cash;
(ii) "Permitted Securities Transaction" means any merger, consolidation or
other business combination to which the Company is a party or any decision
whether to approve a tender or exchange offer for all of the Company's Equity
Securities, in any case if all consideration involved in such transaction is
cash and/ or shares of a registered, freely tradeable, listed common equity
security for which there was an aggregate public market capitalization equal to
at least the greater of $5 billion or the market capitalization of the Company's
Equity Securities, in each case determined immediately prior to the approval of
such transaction by the Board of Directors of the Company.
SECTION 4.03 COMMITTEES. Subject to any law or stock exchange rule
prohibiting committee membership by Affiliates of the Company, Purchaser shall
be entitled to at least proportionate representation by Investor Directors on
any committee of the Board of Directors, based on the composition of the Board
as between Investor Directors and Non-Investor Directors.
SECTION 4.04 BY-LAWS. The Company and Purchaser shall take or cause to be
taken all lawful action necessary to ensure at all times as of and following the
Closing Date that the Company By-laws are not inconsistent with the provisions
of this Agreement or the transactions contemplated hereby.
SECTION 4.05 TERMINATION OF ARTICLE IV. This Article IV shall terminate and
be of no further force or effect on the earlier to occur of (a) the fifth
anniversary of the Closing and (b) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of this Agreement) is greater than 50%.
ARTICLE V
EQUITY PURCHASES FROM THE COMPANY
SECTION 5.01 SUBSCRIPTION RIGHTS. So long as Purchaser has the right to
nominate an Investor Director pursuant to Section 4.01, if the Company's Board
of Directors shall authorize the issuance of New Securities for cash (other than
any New Securities issued (i) to officers, employees or directors of the Company
or any of its Subsidiaries pursuant to any employee stock offering, plan or
arrangement (x) in effect on the date hereof, (y) which constitutes Permitted
Options or (z) approved by any Investor Director, (ii) in connection with any
acquisition transaction, (iii) in any public offering registered under the
Securities Act or in any financing transaction in which sales or resales are
effected through Rule 144A or Regulation S under the Securities Act or any
successor or comparable provisions thereto and (iv) to Purchaser or its
Affiliates (other than the Company and its Subsidiaries)), then, prior to each
such issuance of New Securities, the Company shall offer to Purchaser a Pro Rata
Share of such New Securities. Any offer of New Securities made to Purchaser
under this Section 5.01 shall be made by notice in writing (the "Subscription
Notice") at least 10 Business Days prior to the date on which the meeting of the
Company's Board of Directors is held to authorize the issuance of such New
Securities. The Subscription Notice shall set forth (i) the number of New
Securities proposed to be issued to Persons other than Purchaser and the terms
of such New Securities, (ii) the consideration (or manner of determining the
consideration), if any, for which such New Securities are proposed to be issued
and the terms of payment, (iii) the number of
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New Securities offered to Purchaser in compliance with the provisions of this
Section 5.01 and (iv) the proposed date of issuance of such New Securities. Not
later than 20 Business Days after its receipt of a Subscription Notice,
Purchaser shall notify the Company in writing whether it elects to purchase all
or any portion of the New Securities offered to Purchaser pursuant to the
Subscription Notice. If Purchaser shall elect to purchase any such New
Securities, the New Securities which it shall have elected to purchase shall be
issued and sold to Purchaser by the Company at the same time and on the same
terms and conditions as the New Securities are issued and sold to third parties.
If, for any reason, the issuance of New Securities to third parties is not
consummated, Purchaser's right to its Pro Rata Share of such issuance shall
lapse, subject to Purchaser's ongoing subscription right with respect to
issuances of New Securities at later dates or times.
SECTION 5.02 ISSUANCE AND DELIVERY OF NEW SECURITIES AND VOTING STOCK. The
Company represents and covenants to Purchaser that (i) upon issuance, all the
shares of New Securities sold to Purchaser pursuant to this Article V shall be
duly authorized, validly issued, fully paid and nonassessable and will be
approved (if outstanding securities of the Company of the same type are at the
time already approved) for listing on the Nasdaq Stock Market or for quotation
or listing on the principal trading market for the securities of the Company at
the time of issuance, (ii) upon delivery of such shares, they shall be free and
clear of all claims, Liens, encumbrances, security interests and charges of any
nature and shall not be subject to any preemptive right of any stockholder of
the Company and (iii) in connection with any such issuance, the Company shall
take such actions as are specified in Section 3.01(q) with respect to such
shares. Each share issued or delivered by the Company hereunder shall bear the
legend set forth in Section 13.11.
ARTICLE VI
LIMITATIONS ON PURCHASES OF ADDITIONAL EQUITY SECURITIES
SECTION 6.01 PURCHASES OF EQUITY SECURITIES. (a) Except as permitted by
Section 6.01(b) or 6.01(c), neither Purchaser nor its Affiliates will directly
or indirectly acquire any securities (including by exercise of the Warrants or
Special Warrants) or take any other action that would cause the percentage of
the Total Voting Power represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 25%.
(b) Nothing herein shall prevent Purchaser from purchasing any Securities
pursuant to the terms of this Agreement (including through exercise of the
Warrants and the Special Warrants in accordance with their respective terms) and
the Purchaser shall not be treated as having breached any covenant in this
Agreement solely as a result of such purchase.
(c) This Section 6.01 shall terminate and be of no further force or effect
on the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
SECTION 6.02 ADDITIONAL LIMITATIONS. Other than in connection with a Buyout
Transaction that is not solicited or proposed by Purchaser or its Affiliates or
as specifically approved by a majority of the Non-Investor Directors, during the
five-year period beginning on the date of this Agreement, Purchaser shall not,
and shall not permit its Affiliates to:
(i) contrary to the recommendation of the Company's Board of Directors, in
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the SEC), vote any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or more
stockholder proposals or induce or attempt to induce any other individual, firm,
corporation, partnership or other entity to initiate any stockholder proposal,
provided, however, that this clause shall be
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inapplicable to any solicitation of proxies, or inducement or attempt to induce
any other entity to initiate any stockholder proposal, in respect of any Cash
Transaction or Permitted Securities Transaction approved by the Board of
Directors of the Company without the approval of at least one Investor Director;
(ii) deposit any Voting Securities into a voting trust or subject any Voting
Securities to any arrangement or agreement with respect to the voting of such
securities or form, join a partnership, limited partnership, syndicate or other
group, or otherwise act in concert with any other Person, for the purpose of
acquiring, holding, voting or disposing of Voting Securities, or otherwise
become a "person" within the meaning of Section 13(d)(3) of the Exchange Act; or
(iii) make a public request to the Company (or its directors, officers,
stockholders, employees or agents) to amend or waive any provisions of this
Section 6.02.
ARTICLE VII
TRANSFER OF COMMON STOCK
SECTION 7.01 TRANSFER OF COMMON STOCK. (a) Other than as specifically
approved by a majority of the Non-Investor Directors, prior to the second
anniversary of the Closing, Purchaser will not, directly or indirectly, sell,
transfer or otherwise dispose of any Shares, Special Warrants or Warrants
(except to any Affiliate of Purchaser).
(b) Other than as specifically approved by a majority of the Non-Investor
Directors, prior to the fifth anniversary of the Closing, Purchaser will not,
directly or indirectly, sell, transfer or otherwise dispose of any Shares except
(i) pursuant to a registered underwritten public offering intended to achieve a
broad distribution in accordance with the Registration Rights Agreement, (ii) in
accordance with the volume and manner-of-sale limitations of Rule 144
promulgated under the Securities Act (regardless of whether such limitations are
applicable), (iii) in a transaction exempt from the registration requirements of
the Securities Act to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) of Persons, if, prior to and after giving effect
to such sale, such Person or group of Persons (A) does not or would not to
Purchaser's knowledge after due inquiry, Beneficially Own (provided that for
purposes of this Section 7.01(a) a Person shall be deemed to Beneficially Own
all shares that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time) 5% or more of the
then outstanding shares of Common Stock or (B) is an investment company
registered under the Investment Company Act of 1940, as amended, or (iv) in
connection with a Buyout Transaction. Purported transfers of shares of Common
Stock that are not in compliance with this Article VII shall be of no force or
effect.
(c) The provisions of clauses (a) and (b) of this Article VII shall
terminate and be of no further force or effect on the earlier to occur of (i)
the fifth anniversary of the Closing and (ii) the date on which the percentage
of the Total Voting Power represented by the aggregate voting power of all
Voting Securities then owned by Purchaser (other than any Voting Securities
acquired in violation of this Agreement) is greater than 50%.
(d) Prior to the seventh anniversary of the Closing, the Purchasers will
not, directly or otherwise dispose of Shares representing 15% or more of the
then outstanding Common Stock to any Person or group (within the meaning of
Section 13(d)(3) of the Exchange Act) without first offering the Company the
right to make an offer to purchase the Shares proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on the date on which the percentage of the
Total Voting Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%.
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ARTICLE VIII
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 8.01 COVENANTS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the Closing, the Company agrees as to itself
and the Retained Subsidiaries that, except as set forth in the Distribution
Agreements or in Schedule 8.01, or to the extent that Purchaser otherwise
consents in writing:
(a) ORDINARY COURSE. The Retained Business will be conducted in the
ordinary course in substantially the same manner as presently conducted and the
Company will use commercially reasonable efforts to keep available the services
of the current officers and employees engaged primarily in the Retained Business
and to preserve the relationships with customers, suppliers and others having
business dealings with the Retained Business.
(b) NO ACQUISITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, acquire or agree to acquire (excluding any non-binding
letters of intent) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets (other
than inventory) involving aggregate consideration having a value in excess of
$25 million in any case or $150 million in the aggregate (in either case whether
payable in cash, stock or a combination thereof); provided that (i) no such
consideration shall be payable in Common Stock or stock of any Retained
Subsidiary and (ii) any such consideration payable in stock of a Distributed
Company shall not be payable prior to completion of the Distributions; and
provided, further, that this paragraph (b) shall not limit the ability of the
Company or the Retained Subsidiaries to make acquisitions in respect of
businesses which will constitute part of a Distributed Company if all
acquisition debt associated therewith is allocated to such Distributed Company.
(c) NO DISPOSITIONS. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any of
the Assets of the Retained Business other than at fair market value in the
ordinary course of business consistent with past practice.
(d) OTHER TRANSACTIONS. The Company will not, nor will it permit any of
the Retained Subsidiaries to, do any of the following (except as otherwise
expressly provided herein or in any other Transaction Agreement):
(i) Amend its Certificate of Incorporation (except to the extent necessary
to implement a shareholder rights plan pursuant to clause (ii) below), By-laws
or other organizational documents (except for immaterial amendments to the
Certificate of Incorporation or By-laws of any Subsidiaries, provided such
amendments in no way adversely affect Purchaser or the rights granted to
Purchaser hereunder);
(ii) declare or pay any non-cash dividend or make any non-cash distribution
with respect to the Assets; provided, however, that the Company shall be
permitted to issue rights under a customary shareholder rights plan or "poison
pill" that (A) expires at Closing and (B) expressly exempts Purchaser and its
Affiliates from its operation;
(iii) redeem or otherwise acquire any shares of its capital stock or issue
any capital stock (except upon exercise of options issued prior to the date
hereof under a Company Stock Plan), or any option, or warrant or right relating
thereto (other than grants under the Company's 1994 Amended and Restated Long
Term Incentive Plan of options to acquire not more than 685,778 shares of Common
Stock in the aggregate from the separate "pools" of options that the Company has
heretofore allocated in connection with certain acquisitions that the Company
has made for award to employees of such acquired companies; provided that each
such option shall (A) have a per share exercise price that is not less than the
fair market value
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per share of Common Stock at the date of grant, (B) vest and become exercisable
no more rapidly than 25% on each of the first four anniversaries of the date of
grant, and (C) shall not vest or become earlier exercisable as a result of the
consummation of the Transactions);
(iv) incur any liabilities, obligations or indebtedness for borrowed money
or guarantee any such liabilities, obligations or indebtedness, other than in
the ordinary course of business consistent with past practice (except as
otherwise provided herein with respect to the Proposed Financings or as incurred
in connection with acquisitions to the extent permitted hereby) and in an
aggregate amount that would not be material to the Company;
(v) permit, allow or suffer any assets of the Retained Business to be
subject to any Lien other than Permitted Liens;
(vi) guarantee or otherwise become contingently liable for any obligation of
any of the Distributed Companies;
(vii) cancel any material indebtedness (individually or in the aggregate)
relating to the Retained Business or waive any claims or rights of substantial
value relating to the Retained Business;
(viii) pay, loan or advance any amount to, or sell, transfer or lease any of
its assets relating to the Retained Business, or enter into any agreement or
arrangement relating to the Retained Business with, any of the Distributed
Companies or any of their respective Affiliates other than in the ordinary
course of business consistent with past practice;
(ix) make any change in any method of accounting or accounting practice or
policy, except as may be required by GAAP;
(x) modify, amend, terminate or permit the lapse of any lease of real
property used in connection with, and which is material to, the Retained
Business (except modifications or amendments associated with renewals of such
leases in the ordinary course of business consistent with past practice of the
Retained Companies with respect to which Purchaser shall have the right to
participate and to approve);
(xi) enter into, terminate, renew or modify any Contract to which the
Company or any Retained Subsidiary is a party or by which any of their assets
are bound and which is material to the Company;
(xii) enter into any agreement or take any action in violation of the terms
of this Agreement or any of the other Transaction Agreements;
(xiii) settle any material tax audit, make or change any tax election or amend
any Tax Returns; or
(xiv) agree, whether in writing or otherwise, to do any of the foregoing.
(e) EMPLOYEE BENEFITS. Except (w) as set forth in Schedule 8.01(e), (x) in
connection with acquisitions to the extent permitted by this Agreement or (y) in
the ordinary course of business and as consistent with past practice (which
shall include normal periodic performance reviews and related benefit increases)
or (z) pursuant to the existing terms of any collective bargaining agreement,
the Company will not, nor will it permit any of the Retained Subsidiaries to (i)
increase in any manner the compensation of any of the officers or other
employees of the Retained Companies; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required by any existing
plan, agreement or arrangement to any such officer or employee, whether past or
present; (iii) enter into, or negotiate, any collective bargaining agreement
with respect to employees of the Retained Companies except as required by law,
in which case the Company or such Retained Subsidiary shall first notify
Purchaser; or (iv) commit itself to any additional pension, profit-sharing,
bonus, incentive, deferred compensation, stock purchase, stock option, equity
purchase (or other equity based plan), stock appreciation right, group
insurance, severance pay, retirement or other employee benefit plan, policy,
program, understanding, agreement or arrangement, or to any employment agreement
or consulting agreement (arising out of prior employment), regardless of the
applicable funding arrangements, with or for the benefit of any officer or
employee of the Retained
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Companies, or amend, renew or extend any of such plan or any of such agreements
in existence on the date hereof in any manner which would, in the case of
clauses (i), (ii), (iii) and (iv) above, result in liabilities that are material
to the Retained Companies taken as a whole.
SECTION 8.02 TRANSACTION PROPOSALS. (a) Subject to Section 8.02(d), the
Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it
authorize or permit any officer, director or employee of, or any investment
banker, attorney, accountant or other advisor, agent or representative of, the
Company or any of its Subsidiaries to, (i) solicit or initiate, or encourage
(including by furnishing non-public information) the submission of, any
Transaction Proposal (as defined below) or (ii) participate in any discussions
or negotiations regarding, or furnish to any Person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Transaction Proposal; provided, however, that prior to the Company Meeting, in
response to an unsolicited written bona fide Transaction Proposal that in the
good faith opinion of the Board of Directors of the Company could reasonably be
expected to result in a Superior Proposal (as defined below), if the Board of
Directors of the Company determines in good faith, after consultation with
outside counsel, that failure to do so could reasonably be expected to result in
a breach of its fiduciary duties to stockholders under applicable law, the
Company may, subject to compliance with Section 8.02(c), (A) furnish information
with respect to the Company to such Person making such proposal pursuant to a
customary confidentiality and standstill agreement with such Person and (B)
participate in negotiations regarding such Transaction Proposal. For purposes of
this Agreement, "Transaction Proposal" means any inquiry, proposal or offer from
any Person relating to (x) any purchase or other acquisition from the Company of
assets representing 25% or more of the net revenues, net income or profits of
the Company and its Subsidiaries, taken as a whole, (y) any purchase or other
acquisition of 10% or more of any class of Equity Securities of the Company, or
(z) any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company (or any
Subsidiary whose business constitutes 25% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole), in each
case other than the transactions contemplated by this Agreement. Immediately
after the execution and delivery of this Agreement, the Company will, and will
cause its Subsidiaries and Affiliates, and their respective officers, directors,
employees, investment bankers, attorneys, accountants and other agents to, cease
and terminate any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any possible Transaction Proposal.
(b) Nothing contained in this Section 8.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act; provided that except as set forth
in this Section 8.02(b) or as permitted by Section 8.02(d), neither the Board of
Directors of the Company nor any committee thereof shall (A) withdraw or modify,
or propose to withdraw or modify, in a manner adverse to Purchaser, the approval
or recommendation by such Board of Directors or any such committee of this
Agreement or the Transactions, (B) approve or recommend, or propose to approve
or recommend, any Transaction Proposal (C) cause or permit the Company or any of
its Subsidiaries to enter into any agreement with respect to any Transaction
Proposal or (D) terminate this Agreement in response to a Transaction Proposal.
Notwithstanding the foregoing, if prior to the Company Meeting the Company has
received a Transaction Proposal that the Board determines in good faith is a
Superior Proposal, then the Board of Directors of the Company, if it determines
in good faith, after consultation with outside counsel, that failure to do so
could reasonably be expected to result in a breach of its fiduciary duties to
stockholders under applicable law, may (subject to the terms of this sentence
and compliance with the following sentence) (i) withdraw or modify its
recommendation of this Agreement, or the transactions contemplated hereby, (ii)
approve or recommend such Superior Proposal, (iii) cause the Company to enter
into an agreement with respect to a Superior Proposal and (iv) terminate this
Agreement, in each case (as contemplated by this Section 8.02(b)) no earlier
than five Business Days following Purchaser's receipt of a written notice from
the Company advising Purchaser that the Board of Directors of the Company has
received a Superior Proposal, specifying the terms and conditions of such
Superior Proposal and identifying the person making such Superior Proposal;
provided, however, that neither the Company nor its Board of Directors shall
take any of the actions specified in such clauses (i),
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(ii), (iii) or (iv) unless the Company shall have furnished Purchaser with
written notice on a date prior to the date any such actions are proposed to be
taken specifying such actions to be taken. In addition, if the Company or the
Board of Directors of the Company proposes to take any of the actions permitted
by the preceding sentence with respect to any Transaction Proposal, then the
Company shall, prior to the taking of any such action, pay, or cause to be paid,
to Purchaser, Purchaser's Expenses and the Termination Fee (each as defined in
Section 12.09). The term "Superior Proposal" shall mean any bona fide written
Transaction Proposal that has the following characteristics: (1) it is a
proposal to acquire, directly or indirectly, for consideration consisting of
cash and/or readily marketable securities, (x) shares of Common Stock
representing at least 20% of the Total Voting Power, or (y) at least 25% of the
assets of the Retained Subsidiaries and (2) the terms of such proposal in the
good faith judgment of the Board of Directors of the Company, based on advice
from the Company's financial adviser, provide consideration to the Company or
the Company's stockholders that is superior to the consideration provided
pursuant to this Agreement (after taking into account any modifications to this
Agreement proposed by Purchaser).
(c) The Company shall immediately advise Purchaser orally and in writing of
(i) any request for information which may relate to a Transaction Proposal, (ii)
any Transaction Proposal, (iii) any inquiry with respect to or that could lead
to any Transaction Proposal or (iv) any action taken in accordance with Section
8.02(a)(A) or (B), and in each case the material terms and conditions of such
request, Transaction Proposal, inquiry or action and the identity of the Person
making any such request, Transaction Proposal or inquiry with respect to which
such action is taken. The Company will keep Purchaser reasonably informed of
material developments concerning the status and details (including amendments or
proposed amendments) of any such request, Transaction Proposal, inquiry or
action.
SECTION 8.03 MODIFICATION OF TRANSACTION AGREEMENTS; ABANDONMENT OF
DISTRIBUTIONS. Notwithstanding anything to the contrary in this Agreement, the
Company may in its sole discretion modify each of the Transaction Agreements
relating to the Distributions and, if the Board of Directors of the Company
determines in good faith that it is in the best interest of the Company to do
so, abandon the Distributions.
SECTION 8.04 TRANSACTION AGREEMENTS AND SCHEDULES. The Company shall use
reasonable best efforts to cause (i) each of the Transaction Agreements to be
entered into by the Company, School, Travel, Technology or Print, as the case
may be, in connection with the Distributions, and each of the Annexes called for
in this Agreement that have not been provided to Purchaser prior to the
execution of this Agreement, to be delivered to Purchaser and its counsel by
7:00 p.m., New York Time, February 13, 1998 (the "Agreement Delivery Cut-Off
Time"); and (ii) each of the Schedules called for in this Agreement that have
not been provided to Purchaser prior to execution of this Agreement (and prior
to the Schedule Review Cut-Off Time (as defined below) may supplement Schedules
that have previously been supplied or may unilaterally amend this Agreement to
add additional Schedules) to be delivered to Purchaser and its counsel by 7:00
p.m., New York time, January 20, 1998 (the "Schedule Delivery Cut-off Time").
Purchaser shall review such Transaction Agreements, Schedules and Annexes in
good faith. Prior to the applicable Review Cut-off Time (as defined below) the
Company shall make available to Purchaser and its counsel at their request all
documentation related to any item set forth on any Schedule or Annex. Purchaser
shall complete its review of the Transaction Agreements, and the Annexes and
notify the Company that such review is complete by 7:00 p.m., New York time, on
February 27, 1998 (the "Agreement Review Cut-off Time") and shall complete its
review of the Schedules and notify the Company that such review is complete by
7:00 p.m., New York time, on February 3, 1998 (the "Schedule Review Cut-Off
Time"); provided, however, that if any Transaction Agreement, Schedule or Annex
is delivered after the applicable Delivery Cut-off Time, the applicable Review
Cut-off Time for all Transaction Agreements and Annexes and for the Schedules,
as the case may be shall be extended by the number of days elapsed (which, in
any case, shall not be less than one) between the date of such Delivery Cut-off
Time and the date of receipt by Purchaser and its counsel of such Transaction
Agreement or Annex or such Schedule, as the case may be; and provided further,
however, that if (A) the Transaction Agreements are not satisfactory to
Purchaser in its good faith reasonable judgment, (B) the Audited Retained
Business Financial Statements reflect
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financial information materially different from that presented in the Pro Forma
Retained Business Financial Statements, or (C) any new Schedule or change or
addition to the Schedules made after the date hereof is not satisfactory to
Purchaser in its good faith reasonable judgment, Purchaser may terminate this
Agreement upon written notice to the Company without further liability on the
part of Purchaser or the Company other than pursuant to Sections 10.02 and
13.09.
SECTION 8.05 COMPANY STOCKHOLDER APPROVAL; PROXY STATEMENT. (a) The Company
shall call a meeting of its stockholders (the "Company Meeting") for the
purpose, among others, of voting upon the issuance (the "Issuance") of the
Shares, the Special Warrants and the Warrants to Purchaser (the "Company Meeting
Proposal").
(b) The Company will prepare and file with the SEC a proxy statement
relating to the Company Meeting (as amended or supplemented and including
documents incorporated by reference therein, the "Proxy Statement") and shall
use its reasonable best efforts to respond to any comments of the SEC or its
staff and to cause the Proxy Statement to be cleared by the SEC. The Company
shall notify Purchaser of the receipt of any comments from the SEC or its staff
and of any request by the SEC or its staff for amendments or supplements to the
Proxy Statement or for additional information and shall supply Purchaser and its
counsel with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement. The Company shall give Purchaser and its
counsel the opportunity to review the Proxy Statement prior to its being filed
with the SEC and shall give Purchaser and its counsel the opportunity to review
all amendments and supplements to the Proxy Statement and all responses to
requests for additional information and replies to comments prior to their being
filed with, or sent to, the SEC. Each of the Company and Purchaser agrees to use
its reasonable best efforts, after consultation with the other party hereto, to
respond promptly to all such comments of and requests by the SEC. After the
Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy
Statement to the stockholders of the Company. If at any time prior to the
Company Meeting there shall occur any event that should be set forth in an
amendment or supplement to the Proxy Statement, the Company will prepare and
mail to its stockholders such an amendment or supplement.
(c) The Proxy Statement will not, at the date mailed to the Company's
stockholders and at the date of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the Proxy
Statement. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
(d) Subject to Section 8.02(b), the Board of Directors of the Company shall
recommend that the Company's stockholders approve the Company Meeting Proposal
and the Company shall use its best efforts to obtain the necessary approvals by
its stockholders of the Company Meeting Proposal.
SECTION 8.06 RETAINED COMPANIES FINANCING. In connection with the Proposed
Financings, the Company and Purchaser shall jointly select all sources of the
Proposed Financings, including determining the respective roles of such sources;
provided, however, that Bankers Trust Company shall have the opportunity to be a
lead in the bank financing with economics at least as favorable as any other
lead in the bank financing if Bankers Trust Company's pricing is competitive. In
addition, (i) Purchaser and its counsel shall have the right to participate in
any discussions or negotiations between the Company and any of its
representatives, on the one hand, and its prospective lenders and their counsel,
on the other, and to comment on draft loan and other documentation in respect of
any such Proposed Financings and (ii) the Company shall provide Purchaser and
its counsel copies of all correspondence between the Company and its lenders
relating thereto. If, prior to the execution of any definitive documentation
with respect to the Proposed Financings, based on its review of such definitive
documentation, Purchaser determines in the
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good faith exercise of its reasonable judgment not to proceed with the
transactions contemplated by this Agreement, Purchaser may terminate this
Agreement upon written notice to the Company.
SECTION 8.07 TENDER OFFER. (a) The Company shall cause the commencement (as
such term is defined in Rule 13e-4(a)(4) under the Exchange Act) of the Tender
Offer to purchase 37,037,037 shares of Common Stock, at a price per share equal
to $27, net to the seller in cash, no later than the date specified in Schedule
8.07. Unless Purchaser shall otherwise agree, the Company's obligation to
complete the Tender Offer shall be subject only to the conditions (the "Offer
Conditions") set forth in Schedule 8.07. Subject to the provisions hereof, the
Tender Offer shall expire on the date set forth in Schedule 8.07; provided that
the Tender Offer shall be extended from time to time if the Offer Conditions
shall not have been satisfied, so long as this Agreement shall remain in effect.
(b) On the date of commencement of the Tender Offer, the Company shall file
with the SEC an Issuer Tender Offer Statement on Schedule 13E-4 with respect to
the Tender Offer (the "Tender Offer Statement"), which shall contain an offer to
purchase and a related letter of transmittal (such Tender Offer Statement and
the documents therein pursuant to which the Tender Offer will be made, together
with any supplements or amendments thereto, are referred to hereinafter as the
"Offer Documents"). After the Offer Documents are filed with the SEC, the
Company shall disseminate the Offer Documents to the stockholders of the
Company. If at any time prior to the expiration of the Tender Offer there shall
occur any event that should be set forth in an amendment or supplement to the
Offer Documents, the Company will prepare and file with the SEC and disseminate
to its stockholders such an amendment or supplement.
(c) The Company shall give Purchaser and its counsel the opportunity to
review the Offer Documents prior to their being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Offer Documents and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. The Company shall notify Purchaser of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Offer Documents or for additional information and shall
supply Purchaser and its counsel with copies of all correspondence between the
Company or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Offer Documents.
(d) The Offer Documents will not, on the date filed with the SEC and as of
the date first published, sent or given to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
except that no representation is made by the Company with respect to statements
made therein based on information concerning Purchaser or its Affiliates
supplied in writing by Purchaser or any of its Affiliates specifically for
inclusion in the Offer Documents. The Offer Documents will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.08 INFORMATION STATEMENTS. (a) The Company shall give Purchaser
and its counsel the opportunity to review the information statements to be
disseminated to stockholders of the Company in connection with the Distributions
(the "Information Statements") prior to its being filed with the SEC and shall
give Purchaser and its counsel the opportunity to review all amendments and
supplements to the Information Statements and all responses to requests for
additional information and replies to comments prior to their being filed with,
or sent to, the SEC. The Company shall notify Purchaser of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Information Statements or for additional
information and shall supply Purchaser and its counsel with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the
Information Statements. If at any time prior to completion of the Distributions
there shall occur any event that should be set forth in an amendment or
supplement to the Information Statement, the Company will prepare and file with
the SEC and disseminate to its stockholders such an amendment or supplement.
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(b) The Information Statements will not, on the date filed with the SEC and
as of the date first disseminated to the Company's stockholders, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading except that
no representation is made by the Company with respect to statements made therein
based on information concerning Purchaser or its Affiliates supplied in writing
by Purchaser or any of its Affiliates specifically for inclusion in the
Information Statements. The Information Statements will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
SECTION 8.09 [INTENTIONALLY OMITTED.]
SECTION 8.10 TAX STANDSTILL. Except as permitted by Section 6.01(b) or
6.01(c), during the period ending two years after the date of the Distributions,
(i) Purchaser shall not acquire any Securities or take any other action that
would cause Purchaser's Percentage Interest to equal or exceed 50%, (ii) none of
Purchaser, the Fund or CD&R shall act in concert with any other Person to
acquire any Securities if aggregating such acquisition with the Purchaser's
holdings would cause the Purchaser's Percentage Interest to equal or exceed 50%,
and (iii) none of Purchaser, the Fund or CD&R shall solicit the acquisition of
any Securities, provided that the provision by the Fund to its limited partners
of customary reports and information, and customary communication with such
limited partners on behalf of the Fund, with respect to the Fund's investment in
the Company that, in either case, do not recommend any such acquisition, shall
not be treated as a solicitation by the Purchaser within the meaning of this
clause (iii).
SECTION 8.11 ACCESS AND INFORMATION. (a) So long as this Agreement remains
in effect, prior to the Closing, the Company will (and will cause each of the
Retained Companies, and each of their respective accountants, counsel,
consultants, officers, directors, employees, agents and representatives of or to
any of the Retained Companies, to) give Purchaser and its Representatives, full
access during reasonable business hours to all of their respective properties,
assets, books, contracts, commitments, reports and records relating to the
Retained Companies, and furnish to them all such documents, records and
information with respect to the properties, assets and business of the Retained
Companies and copies of any work papers relating thereto as Purchaser shall from
time to time reasonably request. The Company will keep Purchaser generally
informed as to the affairs of the Retained Business.
(b) In addition, the Company shall deliver to Purchaser, not later than the
35th day following the end of each fiscal month prior to the Closing, updated
Pro Forma Retained Business Financial Statements as of the end of such fiscal
month.
SECTION 8.12 FURTHER ACTIONS. (a) The Company shall, and shall cause each
of the Retained Companies to, use reasonable best efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for each of the Retained Companies to fulfill and
perform its obligations in respect of this Agreement and the Transaction
Agreements to which it is a party, or otherwise to consummate and make effective
the transactions contemplated hereby and thereby.
(b) The Company shall (and shall cause each of the Retained Companies to),
as promptly as practicable, (i) make, or cause to be made, all filings and
submissions (including but not limited to under the HSR Act and foreign
antitrust filings) required under any law applicable to any of the Retained
Companies, and give such reasonable undertakings as may be required in
connection therewith, and (ii) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
any of the Retained Companies, in each case in connection with this Agreement or
the Transaction Agreements, the sale and transfer of the Shares, the Special
Warrants and the Warrants pursuant hereto, or the consummation of the other
transactions contemplated hereby or thereby.
(c) The Company shall, and shall cause each of the Retained Companies to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may
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be reasonably requested by Purchaser in connection with the filings and other
actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article IX to be satisfied, promptly upon becoming aware of the
same.
SECTION 8.13 FURTHER ASSURANCES. Following the Closing Date, the Company
shall, and shall cause each of the Retained Companies to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and the Transaction Agreements and
render effective the consummation of the transactions contemplated hereby and
thereby, or otherwise to carry out the intent and purposes of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of the
Company and Purchaser to consummate the transactions contemplated to occur at
the Closing shall be subject to the satisfaction prior to the Closing of each of
the following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) HSR AND OTHER APPROVALS. Any applicable waiting period under the HSR
Act relating to the transactions contemplated hereby shall have expired or been
terminated, and all other material authorizations, consents, orders or approvals
of, or regulations, declarations or filings with, or expirations of applicable
waiting periods imposed by, any Governmental Entity (including, without
limitation, any foreign antitrust filing) necessary for the consummation of the
transactions contemplated hereby, shall have been obtained or filed or shall
have occurred.
(b) NO LITIGATION, INJUNCTIONS, OR RESTRAINTS. No statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any Governmental Entity or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
or any of the Transaction Agreements shall be in effect.
(c) STOCKHOLDERS VOTE. The Company Stockholder Approval shall have been
obtained.
(d) NASDAQ LISTING. The Shares shall have been approved for listing on the
Nasdaq Stock Market, subject only to official notice of issuance.
(e) CONSUMMATION OF DISTRIBUTIONS. The distribution of the businesses of
School, Travel, Technology, Print and their respective Subsidiaries shall have
occurred pursuant to the Distribution Agreements, which shall contain
provisions:
(i) effecting the Pre-Distribution Transactions;
(ii) allocating assets and liabilities among the Distributed Companies and
the Retained Companies;
(iii) allocating among the Distributed Companies an aggregate of $130 million
of corporate debt, in addition to acquisition debt incurred in respect of
acquisitions effected after the date hereof;
(iv) allocating among the Distributed Companies and the Company on a pro
rata basis all liabilities of the Distributed Companies not properly allocable
to any specific Distributed Company or to the Company;
(v) with respect to current and planned cross-selling opportunities between
the Distributed Companies and the Retained Companies; and
(vi) allocating on a pro rata basis the transaction costs associated with
the Transactions.
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(f) Tax Allocation Agreement. The Tax Allocation Agreement shall have been
executed and shall contain the following provisions:
(i) a joint and several indemnity from the Distributed Companies in favor of
the Company and the Retained Subsidiaries from and against any Losses with
respect to Taxes resulting from any Adverse Tax Act of any of the Distributed
Companies or their Subsidiaries;
(ii) an indemnity from each of the Distributed Companies in favor of the
Company from and against any Losses with respect to Taxes resulting from the
Pre-Distribution Transactions or the Distributions, as a result of the failure
of the Pre-Distribution Transactions or the Distributions to qualify under
sections 355 or 368 of the Code or otherwise, including, without limitation, by
reason of any stock or securities of any Distributed Company failing to qualify
as "qualified property" within the meaning of section 355(c)(2) of the Code,
except to the extent such Losses result from any Adverse Tax Act by any of the
Company, the Retained Subsidiaries, the Distributed Companies or any of their
Subsidiaries, provided that each Distributed Company shall be only liable for
the portion of such Losses that bears the same ratio to the aggregate amount of
such Losses as the Market Capitalization of such Distributed Company bears to
the aggregate Market Capitalization of the Company and the Distributed Companies
and provided, further, that each Distributed Company shall be liable for 100% of
any such Losses attributable to any "deferred intercompany transaction" to the
extent such Loss is attributable to any "intercompany item" that such
Distributed Company or any of its Subsidiaries is required to take into account
immediately prior to the Distributions pursuant to Treasury Regulations section
1.1502-13;
(iii) customary provisions providing for control and participation rights
with respect to any administrative and judicial proceedings with respect to
Taxes, including the right of the Person primarily responsible for the relevant
indemnification obligation thereunder to control any such proceeding.
Notwithstanding anything to the contrary in the preceding sentence, no
Distributed Company shall be entitled to assume control of any portion of any
administrative or judicial proceeding with respect to Taxes unless such
Distributed Company shall have theretofore acknowledged in writing its liability
for such Taxes pursuant to the Tax Allocation Agreement; and
(iv) Any tax saving or other benefit attributable any compensation deduction
arising from or in connection with the exercise by any Employee of the Company
or any of its Subsidiaries of any option granted under any of the Company Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising from
or in connection with any such exercise on or prior to the Closing Date by any
Employee of any Distributed Company or any of its Subsidiaries shall be
apportioned to such Distributed Company.
SECTION 9.02 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the time of
the Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such
earlier date) and the Company shall have received a certificate signed by an
authorized officer of Purchaser to such effect.
(b) OPINION OF PURCHASER'S COUNSEL. The Company shall have received an
opinion dated as of the Closing of Debevoise & Plimpton, counsel to
Purchaser, in form and substance reasonably satisfactory to the Company.
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(c) REGISTRATION RIGHTS AGREEMENT. Purchaser shall have executed and
delivered the Registration Rights Agreement.
SECTION 9.03 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver thereof prior to the Closing of
each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and Purchaser shall have received a certificate signed by the chief executive
officer and chief financial officer of the Company to such effect.
(b) TRANSACTION AGREEMENTS. Each Transaction Agreement to which the
Company is a party shall have been executed without modification from the forms
as in existence at the Review Cut-off Time or such earlier date as Purchaser
completed its review of such agreement.
(c) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under this
Agreement, and Purchaser shall have received a certificate signed by the chief
executive officer and chief financial officer of the Company to such effect.
(d) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received
opinions dated as of the Closing of the general counsel of the Company, and
Wilmer, Cutler & Pickering, counsel to the Company, in form and substance
reasonably satisfactory to Purchaser.
(e) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and
delivered the Registration Rights Agreement.
(f) FINANCINGS. The Company shall have entered into definitive
documentation for the Proposed Financings and such definitive documentation
shall be satisfactory in form and substance to Purchaser.
(g) TENDER OFFER. The Company shall have consummated the Tender Offer as
provided for herein.
(h) CONSULTING AGREEMENT; TRANSACTION FEE. The Company shall have (A)
entered into a consulting agreement with CD&R providing for an annual fee of
$500,000 (plus reasonable out-of-pocket expenses) in connection with consulting
and advisory services and a related indemnification agreement and (B) authorized
payment to CD&R of the Transaction Fee and the Transaction Fee shall have been
paid to CD&R. The consulting agreement shall terminate at the later of (i) the
fifth anniversary of the Closing Date and (ii) such time as Purchaser is
entitled to nominate only one Investor Director.
(i) OTHER PARTIES. (A) No Person or "group" (as defined in the Exchange
Act), other than Purchaser, shall have acquired beneficial ownership of more
than 15% of the outstanding shares of Voting Securities, and (B) no Person
(other than Purchaser or one or more of its Affiliates) shall have entered into
an agreement in principle or definitive agreement with the Company with respect
to a tender or exchange offer for any shares of Common Stock or a merger,
consolidation or other business combination with or involving the Company.
(j) CORPORATE PROCEEDINGS. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and the
Transaction Agreements, and all documents and instruments incident thereto,
shall be satisfactory in form and substance to Purchaser and its counsel, and
Purchaser and its counsel shall have received all such documents and
instruments, or copies thereof, certified or requested, as may be reasonably
requested.
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(k) MANAGEMENT PLAN. Purchaser shall have completed discussions with
management which satisfactorily confirm to Purchaser that the operating
prospects of the Retained Business (exclusive of acquisitions), are, taken as a
whole, not materially inconsistent with the Company's forecasts (excluding (i)
the impact on the Company's earnings for fiscal quarters ending prior to or
including the Closing caused by the inability of the Company to complete
acquisitions following announcement of the Transactions and/or to account for
acquisitions as poolings of interest and (ii) the effect on the Company of being
required as a result of the Transactions to change accounting treatment for past
acquisitions from poolings of interests to purchases); provided, however, that
this condition shall be deemed satisfied if Purchaser shall not have given
notice to the Company on or prior to February 3, 1998 that Purchaser has
concluded that this condition has not been satisfied.
(l) BOARD OF DIRECTORS. The Board of Directors of the Company shall
consist of 9 persons, including the chief executive officer of the Company,
three designees of Purchaser, three persons selected by the current Board of
Directors and two persons who shall be satisfactory to both Purchaser and the
current Board of Directors of the Company.
(m) MATERIAL ADVERSE EFFECT. No event, change or development shall exist
or have occurred since October 25, 1997 which has had or is reasonably likely to
have a Material Adverse Effect on the Retained Companies, taken as a whole.
(n) DEBT AMOUNTS. The outstanding debt of the Retained Companies shall not
exceed $1.4 billion (after giving effect to the Transactions and assuming
conversion of all issued and outstanding 2001 Notes) and the outstanding debt of
the Distributed Companies shall be at least $130 million plus the expenditures
by the entities comprising such Distributed Companies for acquisitions after the
date hereof.
(o) OPTIONS. The Company's arrangements with respect to Management options
shall be satisfactory to Purchaser in its good faith reasonable judgment.
ARTICLE X
TERMINATION
SECTION 10.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing, whether before or after the Company Stockholder Approval
has been obtained:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company:
(i) if the Closing shall not have occurred prior to September 30, 1998,
provided, that the right to terminate this Agreement pursuant to this clause (i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement results in the failure of the Closing to occur;
(ii) if the Company Stockholder Approval shall not have been obtained by
reason of the failure to obtain the required vote upon a vote held at the
Company Meeting, or such meeting shall not have been held by September 30, 1998;
(iii) if there shall be any statute, law, regulation or rule that makes
consummating the transactions contemplated hereby illegal or if any court or
other Governmental Entity of competent jurisdiction shall have issued a
judgment, order, decree or ruling, or shall have taken such other action
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated hereby and such judgment, order, decree or ruling
shall have become final and non-appealable;
(c) by Purchaser:
(i) if the Company shall have failed to perform in any material respect any
of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or shall
have breached in any material respect any representation or warranty not so
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qualified, and the Company has failed to perform such obligation or cure such
breach, within 30 days of its receipt of written notice thereof from Purchaser,
and such failure to perform shall not have been waived in accordance with the
terms of this Agreement;
(ii) if the Board of Directors of the Company or any committee thereof
withdraws or modifies (or publicly announces its intention to do so, or
resolves to do so) in a manner adverse to Purchaser (as determined by
Purchaser in its reasonable judgment) its approval or recommendation of this
Agreement or the transactions contemplated hereby or approves or recommends
a Transaction Proposal;
(iii) if the Board of Directors of the Company publicly announces its
determination not to effect the Distributions;
(iv) if any of the conditions set forth in Section 9.01 or 9.03 shall
become impossible to fulfill (other than as a result of any breach by
Purchaser of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(v) if permitted pursuant to Section 8.04 or 8.06;
(vi) if the Company shall make any substantive amendment to any
Transaction Agreement after the Review Cut-Off Time without Purchaser's
consent;
(d) by the Company:
(i) if Purchaser shall have failed to perform in any material respect
any of its obligations hereunder or shall have breached in any respect any
representation or warranty contained herein qualified by materiality or
shall have breached in any material respect any representation or warranty
not so qualified, and Purchaser has failed to perform such obligation or
cure such breach, within 30 days of its receipt of written notice thereof
from the Company, and such failure to perform shall not have been waived in
accordance with the terms of this Agreement;
(ii) if any of the conditions set forth in Section 9.01 or 9.02 shall
become impossible to fulfill (other than as a result of any breach by the
Company of the terms of this Agreement) and shall not have been waived in
accordance with the terms of this Agreement;
(iii) if permitted pursuant to Section 8.02(b).
SECTION 10.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either the Company or Purchaser as provided in Section 10.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Purchaser or the Company, other than the provisions
of this Section 10.02, Section 13.09 and Article XI and except to the extent
that such termination results from the wilful and material breach by a party of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01 INDEMNIFICATION OF PURCHASER. The Company covenants and
agrees to defend, indemnify and hold harmless each of Purchaser, its Affiliates
(other than the Company and any Retained Companies), and their respective
officers, directors, partners, employees, agents, advisers and representatives
including, without limitation, the Fund, CD&R Investment Associates, Inc., a
Delaware corporation, and CD&R Associates V Limited Partnership, a Cayman
Islands exempted limited partnership, and CD&R (collectively, the "Purchaser
Indemnitees") from and against, and pay or reimburse the Purchaser Indemnitees
for, any and all claims, demands, liabilities, obligations, losses, costs,
expenses, fines or damages (whether absolute, accrued, conditional or otherwise
and whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and
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reasonable attorneys' and accountants' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of their respective rights hereunder (collectively, "Losses"),
resulting from or based on (or allegedly resulting from or based on):
(i) any actions (including by any shareholders of the Company in
connection with any derivative actions) resulting from or based on (or
allegedly resulting from or based on) any of the Transactions, provided that
the indemnity provided in this clause (i) shall not include (A) actions
brought by any limited partner of the Fund against Purchaser or any of its
Affiliates relating to the transactions contemplated by this Agreement, (B)
Losses resulting from or based on the acts or omissions of a Purchaser
Indemnitee following the Closing, (C) claims resulting from or based on (1)
a breach by Purchaser of its obligations under this Agreement, (2) any
contract, agreement, obligation, commitment, understanding or other
arrangement between the claimant and any Purchaser Indemnitee, (3) any
intentional tort by a Purchaser Indemnitee or (4) any fee, compensation or
other payment to be paid to any Purchaser Indemnitee;
(ii) subject to the limitations set forth in Section 11.03, any breach
by the Company of any representation, warranty, covenant or obligation of
the Company hereunder; and
(iii) any failure of any of the Distributed Companies to satisfy its
stated obligations and liabilities under the Distribution Agreements, the
Tax Allocation Agreement or any of the other Transaction Agreements to which
it is a party, whether by virtue of such agreement's unenforceability, the
Distributed Company's bankruptcy or otherwise.
The Losses described in clauses (i), (ii) and (iii) of this Section 11.01(a)
are herein referred to as "Purchaser Indemnifiable Losses". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
SECTION 11.02 INDEMNIFICATION PROCEDURES. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "Indemnifying
Person"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by a Purchaser Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Purchaser Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (i) constitute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (ii)
relieve it from any liability or obligation that it may otherwise have to such
Purchaser Indemnitee. In case any such action or claim shall be brought or
asserted against any Purchaser Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Purchaser Indemnitee, provided, however, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Purchaser Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
provided further that a Purchaser Indemnitee shall not enter into any settlement
of any such claim without the prior consent of the Company, such consent not to
be unreasonably withheld or delayed.
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SECTION 11.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on the first anniversary of the Closing Date, except for
the representations and warranties contained in Sections 3.01(n), 3.01(o) and
3.01(p), which shall expire for all purposes upon expiration of the applicable
statute of limitations.
ARTICLE XII
INTERPRETATION; DEFINITIONS
SECTION 12.01 INTERPRETATION. As used in this Agreement:
(a) any reference to the Company and its Subsidiaries means the Company and
each of its Subsidiaries;
(b) any reference to the "Retained Company" and its Subsidiaries or the
"Retained Companies" means the Company and those of its Subsidiaries included in
the Retained Business;
(c) any reference to the "Retained Subsidiaries" means the Subsidiaries of
the Company included in the Retained Business;
(d) any reference to School, Travel, Technology or Print and their
Subsidiaries means School, Travel, Technology or Print immediately after
completion of the Distributions and those entities that immediately after the
completion of the Distributions will be Subsidiaries of School, Travel,
Technology or Print.
SECTION 12.02 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
"2001 Notes" is defined in the recitals to this Agreement.
"2003 Notes" is defined in Section 3.01(d).
"Adverse Tax Act" means, for any Person, any action of such Person, or any
omission by such Person of an action reasonably available to it, after the date
of the Distributions, that materially contributes to a Final Determination that
the Pre-Distribution Transactions or any of the Distributions results in the
recognition of gain to the Company by virtue of the Pre-Distribution
Transactions or any of the Distributions failing to qualify under sections 355
or 368 of the Code, including, without limitation, by reason of any stock or
securities of any Distributed Company failing to qualify as "qualified property"
within the meaning of section 355(c)(2) of the Code, or otherwise.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"Agreement" is defined in the recitals to this agreement.
"Assets" is defined in Section 3.01(k).
"Audited Balance Sheet" is defined in Section 3.01(g)(iv).
"Audited Retained Business Financial Statements" is defined in 3.01(g)(iv).
"Balance Sheet" is defined in Section 3.01(g)(i).
"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"Business Day" means any day on which banking institutions are open in the
City of New York.
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"Buyout Transaction" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such holder for the same consideration.
"Cash Transaction" is defined in Section 4.02(b)(i).
"CD&R" means Clayton, Dubilier & Rice, Inc., a Delaware corporation.
"Closing" is defined in Section 1.02.
"Closing Date" is defined in Section 1.02.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" is defined in the recitals to this Agreement.
"Company" is defined in the recitals to this Agreement.
"Company Business Financial Statements" is defined in Section 3.01(g)(i).
"Company By-laws" is defined in Section 3.01(a).
"Company Charter" is defined in Section 3.01(a).
"Company Intellectual Property" is defined in Section 3.01(s).
"Company Meeting" is defined in Section 8.05(a).
"Company Meeting Proposal" is defined in Section 8.05(a).
"Company SEC Documents" is defined in Section 3.01(f).
"Company Stock Plans" is defined in Section 3.01(d).
"Company Stockholder Approval" is defined in Section 3.01(b).
"Contingent Stock" means Common Stock issued after the Closing Date pursuant
to (i) the Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by
and between the Company and Eric Watson or (ii) any security, option, warrant,
call, subscription, right, contract, commitment, arrangement or understanding
required to be disclosed on Schedule 3.01(d) but not disclosed thereon.
"Contract" is defined in Section 3.01(c)(i).
"Delivery Cut-off Time" is defined in Section 8.04.
"DGCL" is defined in Section 3.01(q).
"Distribution Agreements" is defined in the recitals to this Agreement.
"Distributions" is defined in the recitals to this Agreement.
"Distributed Companies" is defined in the recitals to this Agreement.
"Employee" means any employee or former employee of any member of the
Company or any of its Subsidiaries or any beneficiary or dependent of any such
employee or former employee.
"Employee Benefit Plans" means all defined contribution, defined benefit,
welfare benefit, bonus, incentive compensation, stock option, stock purchase,
stock appreciation right, stock bonus, incentive, deferred compensation,
insurance, medical, dental, vision, life, death benefit, fringe benefit or other
employee benefit plans, programs, policies or arrangements, including without
limitation, any employment, consulting, offer, secondment, severance or other
termination agreement, whether or not an employee
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benefit plan within the meaning of section 3(3) of ERISA, maintained by the
Company or any of its Subsidiaries.
"Environmental Law" is defined in Section 3.01(p).
"Environmental Permits" is defined in Section 3.01(p).
"Equity Security" means (i) any Common Stock or other Voting Securities,
(ii) any securities of the Company convertible into or exchangeable for Common
Stock or other Voting Securities or (iii) any options, rights or warrants (or
any similar securities) issued by the Company to acquire Common Stock or other
Voting Securities.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" is defined in Section 3.01(c)(ii).
"Filed Company SEC Documents" is defined in Section 3.01(i).
"Final Determination" means the final resolution of liability for any Tax
for any taxable period, including any related interest or penalties, by or as a
result of: (i) a final and unappealable decision, judgment, decree or other
order of a court of competent jurisdiction; (ii) a closing agreement or accepted
offer in compromise under Section 7121 or 7122 of the Code, or comparable
agreement under the laws of other jurisdictions, which resolves the entire tax
liability for any tax period; (iii) any allowance of a refund or credit in
respect of an overpayment of Tax, but only after the expiration of all periods
during which such refund may be recovered (including by way of offset) by the
applicable taxing jurisdiction; or (iv) any other final disposition, including
by reason of the expiration of the applicable statute of limitations.
"Fund" means Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman
Islands exempted limited partnership.
"GAAP" means United States generally accepted accounting principles.
"Governmental Entity" is defined in Section 3.01(c)(ii).
"Hazardous Substance" is defined in Section 3.01(p).
"HSR Act" is defined in Section 3.01(c)(ii).
"Indemnifying Person" is defined in Section 11.02.
"Information Statement" is defined in Section 8.08(a).
"Intellectual Property" means trademarks, trade names, trade dress, service
marks, copyrights, domain names, and similar rights (including registrations and
applications to register or renew the registration of any of the foregoing),
patents and patent applications, trade secrets, ideas, inventions, improvements,
practices, processes, formulas, designs, know-how, confidential business or
technical information, computer software, firmware, data and documentation,
licenses of or agreements relating to any of the foregoing, rights of privacy
and publicity, moral rights, and any other similar intellectual property rights
and tangible embodiments of any of the foregoing (in any medium including
electronic media).
"Investor Directors" is defined in Section 4.01.
"Issuance" is defined in Section 8.05(a).
"knowledge of the Company" or any like expression means to the knowledge of
the persons listed on Schedule 12.02 after due inquiry.
"Lien" is defined in Section 3.01(c)(i).
"Losses" is defined in Section 11.01(a).
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"Market Capitalization" means, for any entity, the market capitalization of
such entity determined on the basis of the average closing price for the common
stock of such entity for the five-day period ending on the tenth day after the
date of the Distributions.
"Material Adverse Effect" on or with respect to an entity (or group of
entities taken as a whole) means any state of facts, event, change or effect
that has had, or would reasonably be expected to have, a material adverse effect
on the business, properties, results of operations or financial condition of
such entity (or, if with respect thereto, of such group of entities taken as a
whole), or on the ability of such entity (or group of entities) to consummate
the transactions contemplated hereby, including the Pre-Distribution
Transactions and the Distributions, or to perform its obligations under the
Transaction Agreements to which it is or will be a party; provided, however,
that a "Material Adverse Effect" shall exclude (i) the impact on the Company's
earnings for fiscal quarters ending prior to or including the Closing caused by
the inability of the Company to complete acquisitions following the announcement
of the Transactions and/or to account for acquisitions as poolings of interest
and (ii) the effect on the Company of being required as a result of the
Transactions to change accounting treatment for past acquisitions from poolings
of interests to purchases.
"Material Contracts" is defined in Section 3.01(m).
"Material Subsidiary" is defined in Section 3.01(a).
"New Security" means any Equity Security issued by the Company after the
Closing; provided that "New Security" shall not include (i) any securities
issuable upon conversion of any convertible Equity Security, (ii) any securities
issuable upon exercise of any option, warrant or other similar Equity Security
or (iii) any securities issuable in connection with any stock split, stock
dividend or recapitalization of the Company where such securities are issued to
all stockholders of the Company on a pro rata basis.
"Non-Investor Directors" is defined in Section 4.01.
"Notes to Pro Forma Financial Statements" is defined in Section
3.01(g)(iii).
"Offer Conditions" is defined in Section 8.07(a).
"Offer Documents" is defined in Section 8.07(b).
"Other Holders" means the holders of the Other Shares.
"Other Shares" means Voting Securities not Beneficially Owned by Purchaser
or its Affiliates.
"Permit" is defined in Section 3.01(c)(i).
"Permitted Liens" shall mean those Liens (A) securing debt that is reflected
on the Balance Sheet or the notes thereto or securing debt incurred as part of
the Proposed Financings, (B) referred to in Schedule 3.01(l), (C) for Taxes not
yet due or payable or being contested in good faith and for which adequate
reserves have been established in accordance with GAAP, (D) that constitute
mechanics', carriers', workmens' or like liens, liens arising under original
purchase price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course, (E) Liens incurred or deposits made
in the ordinary course of business consistent with past practice in connection
with workers' compensation, unemployment insurance and social security,
retirement and other legislation and (F) easements, covenants, declarations,
rights of way, encumbrances, or similar restrictions in connection with real
property owned by certain of the Retained Subsidiaries that do not materially
impair the use of such real property by such Retained Subsidiaries, and in the
case of Liens described in clauses (B), (C), (D), (E) or (F) that, individually
or in the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole.
"Permitted Options" is defined in Section 4.02(a)(i).
"Permitted Securities Transaction" is defined in Section 4.02(b)(ii).
B-36
<PAGE>
"Person" means any individual, partnership, joint venture, corporation,
limited liability company, trust, unincorporated organization, government or
department or agency of a government.
"Plans" is defined in Section 3.01(o)(ii).
"Pre-Distribution Transactions" means the contribution of certain assets,
the assumption of certain liabilities and other transfers contemplated by the
respective Distribution Agreements, pursuant to which the respective businesses
of School, Travel, Technology and Print will be consolidated under such
corporations prior to the Distributions.
"Print" is defined in the recitals to this Agreement.
"Print Distribution" is defined in the recitals to this Agreement.
"Print Distribution Agreement" is defined in the recitals to this Agreement.
"Pro Forma Balance Sheet" is defined in Section 3.01(g)(iii).
"Pro Forma Income Statements" is defined in Section 3.01(g)(iii).
"Pro Forma Retained Business Financial Statements" is defined in Section
3.01(g)(iii).
"Pro Rata Share" means the fraction of an entire issuance of New Securities,
the numerator of which shall be the number of shares of Common Stock owned or
receivable upon exercise of the Warrant and the Special Warrant by Purchaser and
its Affiliates (other than the Company and its Subsidiaries) immediately prior
to such issuance of such New Securities and the denominator of which shall be
the aggregate number of shares of Common Stock outstanding immediately prior to
such issuance of such New Securities and receivable upon exercise of the Warrant
and the Special Warrant.
"Proposed Charter Amendments" is defined in Section 4.05.
"Proposed Financings" is defined in the recitals to this Agreement.
"Proxy Statement" is defined in Section 8.05(b).
"Purchase Price" is defined in Section 1.01.
"Purchaser" is defined in the recitals to this Agreement.
"Purchaser Indemnifiable Losses" is defined in Section 11.01(a).
"Purchaser Indemnitees" is defined in Section 11.01(a).
"Purchaser's Expenses" is defined in Section 13.09(b).
"Purchaser's Percentage Interest" means the greater of (i) the percentage of
Total Voting Power, determined on the basis of the number of Voting Securities
actually outstanding, that is controlled directly or indirectly by Purchaser or
any Subsidiary or Affiliate of Purchaser (other than the Company and its
Subsidiaries), including by beneficial ownership and (ii) the percentage of the
total Fair Market Value of all classes of outstanding capital stock of the
Company that is owned directly or indirectly by Purchaser or any Subsidiary or
Affiliate of Purchaser (other than the Company and its Subsidiaries), including
by beneficial ownership. For purposes of determining Purchaser's Percentage
Interest, (a) any options, rights, warrants (including the Warrants and the
Special Warrants) and similar securities that entitle the holder thereof to
acquire shares of any class of capital stock of the Company, whether voting or
non-voting, shall be treated as exercised; (b) any debt security that is
convertible into shares of any class of capital stock of the Company, whether
voting or non-voting, shall be treated as converted; and (c) any equity security
that is convertible into shares of any class of capital stock of the Company,
whether voting or non-voting, shall be treated as converted, but only to the
extent that such conversion would result in Purchaser's Percentage Interest
being greater than such interest would be if such conversion had not been deemed
to occur.
"Purchaser's Total Securities" is defined in Section 4.01(b)(i).
"Registration Rights Agreement" is defined in the recitals to this
Agreement.
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<PAGE>
"Retained Business" means the business and operation of the Retained
Companies.
"Retained Companies" is defined in Section 12.01(b).
"Retained Plans" is defined in Section 3.01(O)(i).
"Retained Subsidiaries" is defined in Section 12.01(c).
"Review Cut-off Time" is defined in Section 8.04.
"School" is defined in the recitals to this Agreement.
"School Distribution" is defined in the recitals to this Agreement.
"School Distribution Agreements" is defined in the recitals to this
Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" is defined in Section 3.01(c)(ii).
"Security" means at any time Equity Securities and any shares of any class
of capital stock of the Company.
"Shares" is defined in Section 1.01.
"Special Warrants" is defined in the recitals to this Agreement.
"Special Warrant Shares" means shares of Common Stock issuable upon exercise
of the Special Warrants.
"Subscription Notice" is defined in Section 5.01.
"Subsidiary" means, as to any Person, any corporation at least a majority of
the shares of stock of which having general voting power under ordinary
circumstances to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency) is, at the time as of which the determination is being made, owned
by such Person, or one or more of its Subsidiaries or by such Person and one or
more of its Subsidiaries.
"Superior Proposal" is defined in Section 8.02(b).
"Tax Allocation Agreement" is defined in the recitals to this Agreement.
"Tax Returns" is defined in Section 3.01(n)(i).
"Taxes" is defined in Section 3.01(n)(i).
"Technology" is defined in the recitals to this Agreement.
"Technology Distribution" is defined in the recitals to this Agreement.
"Technology Distribution Agreement" is defined in the recitals to this
Agreement.
"Tender Offer" is defined in the recitals to this Agreement.
"Tender Offer Statement" is defined in Section 8.07(b).
"Termination Fee" is defined in Section 13.09(b).
"Total Voting Power" means at any time the total combined voting power in
the general election of directors of all the Voting Securities then outstanding.
"Transactions" means the execution, delivery and performance of each
Transaction Agreement by the Company and the consummation by the Company of the
Pre-Distribution Transactions, the Distributions,
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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>
B-44
<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
