<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 24, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________ .
Commission File Number 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of September 3, 1999, there were 36,800,087 shares of common stock
outstanding.
<PAGE>
US OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet ..................................... 2
July 24, 1999 (unaudited) and April 24, 1999
Consolidated Statement of Operations ........................... 3
For the three months ended July 24, 1999 (unaudited) and
July 25, 1998 (unaudited)
Consolidated Statement of Cash Flows ........................... 4
For the three months ended July 24, 1999 (unaudited) and
July 25, 1998 (unaudited)
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 31
PART II--OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 32
Item 6. Exhibits and Reports on Form 8-K ............................... 33
Signatures ............................................................. 34
Exhibit Index .......................................................... 35
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 24, APRIL 24,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 44,459 $ 76,102
Accounts receivable, less allowance for doubtful
accounts of $11,086 and $11,720, respectively ....... 303,567 304,374
Inventories, net ..................................... 197,978 206,857
Prepaid expenses and other current assets ............ 127,876 106,771
----------- -----------
Total current assets ............................... 673,880 694,104
Property and equipment, net ............................ 221,229 231,152
Intangible assets, net ................................. 844,569 858,197
Other assets ........................................... 237,252 228,706
----------- -----------
Total assets ....................................... $ 1,976,930 $ 2,012,159
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ...................................... $ 18,442 $ 19,193
Accounts payable ..................................... 178,201 168,976
Accrued compensation ................................. 41,786 46,384
Other accrued liabilities ............................ 90,071 100,688
----------- -----------
Total current liabilities .......................... 328,500 335,241
Long-term debt ......................................... 1,169,396 1,171,429
Other long-term liabilities and minority interests ..... 26,743 25,947
----------- -----------
Total liabilities .................................. 1,524,639 1,532,617
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, 73,262 issued and outstanding
Common stock, $.001 par value, 500,000,000 shares
authorized, 36,941,791 and 36,853,505 shares issued,
36,800,087 and 36,702,778 shares outstanding, 141,704
and 150,727 held in treasury, respectively .......... 37 37
Additional paid-in capital ........................... 727,614 727,614
Accumulated other comprehensive loss ................. (119,665) (119,941)
Accumulated deficit .................................. (155,695) (128,168)
----------- -----------
Total stockholders' equity ......................... 452,291 479,542
----------- -----------
Total liabilities and stockholders' equity ......... $ 1,976,930 $ 2,012,159
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JULY 24, JULY 25,
1999 1998
--------- ---------
<S> <C> <C>
Revenues ........................................................ $ 625,503 $ 651,949
Cost of revenues ................................................ 450,720 474,285
--------- ---------
Gross profit ................................................ 174,783 177,664
Selling, general and administrative expenses .................... 158,610 148,822
Amortization expense ............................................ 5,990 5,959
Operating restructuring costs ................................... 1,909 8,726
Strategic Restructuring Plan costs .............................. 97,503
--------- ---------
Operating income (loss) ..................................... 8,274 (83,346)
Interest expense ................................................ 27,717 18,888
Interest income ................................................. (1,070) (366)
Unrealized foreign currency transaction loss .................... 13,555
Other (income) expense .......................................... 2,451 (410)
--------- ---------
Loss from continuing operations before benefit from income
taxes and extraordinary items .................................. (34,379) (101,458)
Benefit from income taxes ....................................... (6,852) (17,915)
--------- ---------
Loss from continuing operations before extraordinary items ...... (27,527) (83,543)
Loss from discontinued operations, net of income taxes .......... (1,294)
--------- ---------
Loss before extraordinary items ................................. (27,527) (84,837)
Extraordinary items--loss on early termination of debt
facilities, net of income taxes ................................ (269)
--------- ---------
Net loss ........................................................ $ (27,527) $ (85,106)
--------- ---------
--------- ---------
Basic and diluted per share amounts:
Loss from continuing operations before extraordinary items .... $ (0.75) $ (2.38)
Loss from discontinued operations ............................. (0.04)
Extraordinary items ........................................... (0.01)
--------- ---------
Net loss ...................................................... $ (0.75) $ (2.43)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
JULY 24, JULY 25,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (27,527) $ (85,106)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations ....................................... 1,294
Depreciation and amortization ........................................... 16,265 14,618
Unrealized foreign currency transaction loss ............................ 13,555
Strategic Restructuring Plan costs ...................................... 70,379
Deferred income taxes ................................................... (4,086) (152)
Extraordinary loss ...................................................... 269
Equity in net (income) loss of affiliate ................................ 1,027 (860)
Changes in assets and liabilities (net of changes in assets and
liabilities related to business combinations):
Accounts receivable, net .............................................. (5,207) (5,246)
Inventories, net ...................................................... 1,074 (857)
Prepaid expenses and other current assets ............................. (5,281) (13,509)
Accounts payable ...................................................... 14,631 (3,493)
Accrued liabilities ................................................... (14,963) 15,307
----------- -----------
Net cash used in operating activities ............................... (10,512) (7,356)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net of disposals ..................... (12,499) (12,928)
Investments in affiliates ................................................. (4,000)
Cash paid in acquisitions, net of cash received ........................... (11,822)
Other ..................................................................... 1,287 (785)
----------- -----------
Net cash used in investing activities ............................... (15,212) (25,535)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net ............................. 890 1,153,265
Payments of long-term debt ................................................ (212,695)
Payments of short-term debt, net .......................................... (6,516) (359,960)
Proceeds from issuance of common stock, net ............................... 321,745
Repurchase of common stock in Equity Tender ............................... (1,000,000)
Net repayments by discontinued operations ................................. 118,864
----------- -----------
Net cash provided by (used in) financing activities ................ (5,626) 21,219
----------- -----------
Effect of exchange rates on cash and cash equivalents ....................... (293) (384)
Cash used in discontinued operations ........................................ (12,518)
----------- -----------
Net decrease in cash and cash equivalents ................................... (31,643) (24,574)
Cash and cash equivalents, beginning of period .............................. 76,102 52,021
----------- -----------
Cash and cash equivalents, end of period .................................... $ 44,459 $ 27,447
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JULY 24, JULY 25,
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for income taxes ..................... $ 1,044 $19,554
Cash paid for interest ......................... $36,426 $ 879
</TABLE>
Noncash transactions:
- During the three months ended July 25, 1998, the Company issued 2,025,185
shares of common stock in exchange for $130,989 of the 5 1/2% convertible
subordinated notes due 2001.
- During the three months ended July 25, 1998, the Company issued 7,911
shares of common stock upon conversion of $1,000 of the 5 1/2% convertible
subordinated notes due 2003.
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "US Office Products"), and the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates. As a result of the
Company's spin-off of its Technology Solutions, Print Management, Educational
Supplies, and Corporate Travel Services businesses (collectively, the "Spin-Off
Companies"), the accompanying consolidated financial statements reflect the
results of the Spin-Off Companies as discontinued operations through June 9,
1998 (the effective date of the Spin-Off). See Note 2, "Discontinued
Operations." The Company's continuing operations consist of its North American
operations (which include office supplies and coffee services, office furniture,
refreshment (vending) services and a series of non-core businesses), Mail Boxes
Etc. ("MBE"), the Company's international operations in New Zealand and
Australia (referred to herein as the "Blue Star Group"), and the Company's
49% interest in Dudley Stationery Limited ("Dudley"), a U.K. contract
stationer. The North American operations are primarily in the United States;
they include two coffee and beverage businesses located in Canada.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan"). The Strategic Restructuring Plan included three
principal elements: (i) the repurchase by the Company, through a self-tender
offer, of a portion of its outstanding shares (including shares underlying
employee stock options) (the "Equity Tender"); (ii) the Company's distribution
to its stockholders of the shares of the Spin-Off Companies; and (iii) the
purchase by an affiliate of an investment fund managed by Clayton, Dubilier &
Rice, Inc., a private investment fund, of 24.9% of the Company's shares, plus
warrants to purchase additional shares.
In conjunction with the Strategic Restructuring Plan, the Company also
completed several financing transactions (the "Financing Transactions") in June
1998. The Financing Transactions consisted of the following: (i) the Company
repurchased substantially all of its 5 1/2% convertible subordinated notes due
2003; (ii) through an exchange offer, the Company exchanged substantially all of
its 5 1/2% convertible subordinated notes due 2001; (iii) the Company entered
into a new $1,225,000 senior secured bank credit facility and terminated its
former credit facility; and (iv) the Company issued and sold $400,000 of 9
3/4% senior subordinated notes due 2008 (the "2008 Notes") in a private
placement. During fiscal 1999, the Company reached an agreement with its bank
lenders to revise the terms of the credit facility (as amended, the "Credit
Facility"). The revisions included modifications to the financial covenants
and reductions in the amounts available under the revolving credit facility
from $250,000 to $200,000 and the multi-draw term loan facility from $200,000
to $50,000.
For a complete description of the Strategic Restructuring Plan and the
Financing Transactions, see Note 3 of the Notes to the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended April 24, 1999.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended April 24, 1999, included in the Company's Annual Report on Form 10-K.
-6-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 2--DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for the three months ended July 25, 1998 in
the Company's consolidated financial statements. The Spin-Off Companies began
operating as independent companies on June 10,1998.
The loss from discontinued operations included in the consolidated
statement of operations represents the sum of the results of the Spin-Off
Companies for the 45-day period they were included in the Company's fiscal 1999
results and is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended July 25, 1998:
Revenues ............................ $ 41,132 $ 19,346 $ 40,785 $ 30,951 $ 132,214
Operating income (loss) ............. (1,601) 14 1,836 403 652
Income (loss) before provision for
(benefit from) income taxes ....... (2,043) (108) 1,069 381 (701)
Provision for (benefit from) income
taxes ............................. (732) 158 703 464 593
Income (loss) from discontinued
operations, net of income taxes ... (1,311) (266) 366 (83) (1,294)
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at US Office Products' weighted average interest rates, and do not
include any allocations of corporate overhead from US Office Products during the
period presented.
NOTE 3--STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months ended July 24,
1999, were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 24, 1999................................................. $ 479,542
Comprehensive loss:
Other comprehensive income ....................................................... 276
Net loss ......................................................................... (27,527)
----------
Stockholders' equity balance at July 24, 1999................................................. $ 452,291
----------
----------
</TABLE>
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
JULY 24, JULY 25,
1999 1998
--------- ---------
<S> <C> <C>
Net loss .................................. $ (27,527) $ (85,106)
Other comprehensive income (loss):
Cumulative translation adjustment .... 276 (36,777)
--------- ---------
Comprehensive loss ........................ $ (27,251) $(121,883)
--------- ---------
--------- ---------
</TABLE>
-7-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
On June 10, 1998, the Company effected a one-for-four reverse split of its
common stock whereby each four shares of common stock were exchanged for one
share of common stock. All share and per share data appearing in these
consolidated financial statements and notes hereto have been retroactively
adjusted for this split.
NOTE 4--EARNINGS PER SHARE
The following information presents the Company's computations of basic and
diluted earnings per share from continuing operations before extraordinary items
for the periods presented in the consolidated statement of operations.
<TABLE>
<CAPTION>
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Three months ended July 24, 1999:
Basic and diluted loss per share .... $(27,527) 36,735 $ (0.75)
--------
--------
Three months ended July 25, 1998:
Basic and diluted loss per share .... $(83,543) 35,073 $ (2.38)
--------
--------
</TABLE>
As a result of the loss from continuing operations before extraordinary
items for the three months ended July 24, 1999 and July 25, 1998, the basic and
diluted loss per share amounts for such periods were calculated using the same
number of shares outstanding, since all of the Company's employee stock options
and the two series of convertible debt securities outstanding during the periods
were anti-dilutive. In addition, the convertible preferred stock outstanding
during the three month period ended July 24, 1999 was anti-dilutive.
NOTE 5--BUSINESS COMBINATIONS
The Company made no acquisitions and completed three business divestitures
during the three months ended July 24, 1999. In fiscal 1999, the Company
completed a total of 22 acquisitions, all related to continuing operations,
which were accounted for under the purchase method and had an aggregate purchase
price of $34,508. The Company also completed seven business divestitures or
closures during fiscal 1999.
The following presents the unaudited pro forma results of operations of the
Company for the three months ended July 24, 1999, and July 25, 1998. These
results include the Company's consolidated financial statements and the results
of the Purchased Companies and exclude the results of all business divestitures
as if all such purchase acquisitions and business divestitures had been made at
the beginning of fiscal 1999. The results presented below include certain pro
forma adjustments to reflect the amortization of intangible assets and the
inclusion of an appropriate income tax provision or benefit on all earnings and
losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
JULY 24, JULY 25,
1999 1998
-------- --------
<S> <C> <C>
Revenues ....................................................... $ 625,156 $ 642,435
Loss from continuing operations before extraordinary items ..... (25,708) (3,988)
Basic and diluted loss per share from continuing operations .... (0.70) (0.11)
</TABLE>
-8-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
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 purchase acquisitions and business divestitures occurred at the
beginning of fiscal 1999 or the results that may occur in the future.
NOTE 6--SEGMENT REPORTING
BUSINESS SEGMENTS
The Company has five reportable segments, which include:
- NORTH AMERICAN OFFICE SUPPLIES--a direct-to-business contract
stationer that offers items such as desktop accessories, writing
instruments, paper products, computer consumables, business machines,
catalog furniture and coffee services;
- NORTH AMERICAN OFFICE FURNITURE--a group of operating companies that
offer middle-market and contract furniture products and related
services;
- NORTH AMERICAN OTHER--the balance of the Company's North American
operations, which includes a group of operating companies that offer
refreshment (vending) services, a group of non-core operating
businesses and the corporate costs associated with the North American
operations;
- BLUE STAR GROUP--a group of operating companies that include business
supplies, business solutions (technology related products and
services), print and consumer retailing operations that operate in New
Zealand and Australia;
- MBE--a franchisor of retail business, communication and postal
service centers which offers a range of business products and services
for personal and business consumers.
Other consists of costs related to the Company's corporate headquarters and
the Company's equity interest in Dudley. Eliminations consists of the
elimination of the Company's investments in subsidiaries.
Management measures the performance of the business segments based on
several factors, including revenues, gross profit, operating income (loss) and
EBITDA, as defined below. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note 2
of the Notes to the Company's audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended April 24,
1999.
-9-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 24, 1999
----------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
----------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
--------- --------- ------- -------- --------- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $258,458 $94,718 $52,952 $406,128 $201,512 $17,863 $ 625,503
Gross profit.............. 70,845 20,527 12,332 103,704 61,637 9,442 174,783
Depreciation and
amortization........... 3,935 1,638 2,140 7,713 6,486 1,956 $ 110 16,265
Operating income (loss)... 12,778 1,052 (5,363) 8,467 5,876 1,241 (7,310) 8,274
EBITDA (a)................ 17,325 3,354 (3,219) 17,460 12,836 3,250 (7,098) 26,448
Other significant items:
Identifiable assets.... 451,336 165,058 175,208 791,602 720,770 315,444 1,116,198 $ (967,084) 1,976,930
Net capital
expenditures....... 694 325 5,362 6,381 5,491 211 416 12,499
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 25, 1998
--------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
--------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ------- -------- --------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $261,393 $111,641 $67,178 $440,212 $196,291 $15,446 $ 651,949
Gross profit.............. 69,997 24,279 14,814 109,090 60,103 8,471 177,664
Depreciation and
amortization........... 3,995 828 1,742 6,565 6,083 1,873 $ 97 14,618
Operating income (loss)... 12,202 (620) 218 11,800 4,018 1,897 (101,061) (83,346)
EBITDA (a)................ 16,528 5,703 2,038 24,269 12,511 4,738 (4,017) 37,501
Other significant items (b):
Identifiable assets.... 809,719 761,004 316,681 1,098,331 $ (948,723) 2,037,012
Net capital
expenditures....... 5,371 6,410 559 588 12,928
</TABLE>
- - --------------------
(a) EBITDA represents earnings from continuing operations before interest
expense, benefit from income taxes, depreciation expense, amortization
expense, Strategic Restructuring Plan costs, operating restructuring
costs, unrealized foreign currency transaction loss, other (income)
expense and extraordinary items. EBITDA is not a measurement of
performance under generally accepted accounting principles and should
not be considered an alternative to net income (loss) as a measure of
performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other
companies.
(b) The identifiable assets as of July 25, 1998 and the net capital
expenditures for the three months ended July 25, 1998 have not been
presented for the segments of the Company's North American operations
because it was not practicable to obtain such information under the
Company's new product line oriented organizational structure.
-10-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
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>
Three months ended July 24, 1999:
Revenues ...................................................... $ 423,991 $ 201,512 $ 625,503
Operating income .............................................. 2,398 5,876 8,274
Identifiable assets of continuing operations at period-end .... 1,256,160 720,770 1,976,930
Three months ended July 25, 1998:
Revenues ...................................................... $ 455,658 $ 196,291 $ 651,949
Operating income (loss) ....................................... (87,364) 4,018 (83,346)
Identifiable assets of continuing operations at period-end .... 1,276,008 761,004 2,037,012
</TABLE>
NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the new Credit Facility and the 2008 Notes. The guarantor
subsidiaries are wholly owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
separate financial statements would not provide additional meaningful
information to investors.
-11-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 24, 1999
------------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 16,772 $ 12,413 $ 15,274 $ 44,459
Accounts receivable, less allowance for
doubtful accounts .......................... 217,795 85,772 303,567
Inventories, net ............................. 93,015 105,018 $ (55)(b) 197,978
Prepaid expenses and other current assets .... 64,618 5,245 57,786 227 (b) 127,876
----------- ----------- ----------- ---------- -----------
Total current assets ....................... 81,390 328,468 263,850 172 673,880
Property and equipment, net .................... 1,176 115,020 105,443 (410)(b) 221,229
Intangible assets, net ......................... 553,752 290,817 844,569
Investment in subsidiaries ..................... 967,084 (967,084)(a)
Other assets ................................... 130,379 36,168 70,705 237,252
----------- ----------- ----------- ---------- -----------
Total assets ............................... $ 1,180,029 $ 1,033,408 $ 730,815 $ (967,322) $ 1,976,930
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt .............................. $ 16,000 $ 1,294 $ 1,148 $ 18,442
Short-term intercompany balances ............. 275,654 (277,286) 1,632
Accounts payable ............................. 1,687 108,289 68,225 178,201
Accrued compensation ......................... 4,010 20,382 17,394 41,786
Other accrued liabilities .................... 18,789 10,066 61,216 90,071
----------- ----------- ----------- ---------- -----------
Total current liabilities .................. 316,140 (137,255) 149,615 328,500
Long-term debt ................................. 1,161,243 4,039 4,114 1,169,396
Other long-term liabilities and minority
interests ..................................... (703,923) 322,603 408,160 $ (97)(b) 26,743
----------- ----------- ----------- ---------- -----------
Total liabilities .......................... 773,460 189,387 561,889 (97) 1,524,639
----------- ----------- ----------- ---------- -----------
Stockholders' equity:
Preferred stock
Common stock ................................. 37 37
Additional paid-in capital ................... 700,478 727,923 266,297 (967,084)(a) 727,614
Accumulated other comprehensive loss ......... (73,254) (46,411) (119,665)
Retained earnings (accumulated deficit) ...... (220,692) 116,098 (50,960) (141)(b) (155,695)
----------- ----------- ----------- ---------- -----------
Total stockholders' equity ................. 406,569 844,021 168,926 (967,225) 452,291
----------- ----------- ----------- ---------- -----------
Total liabilities and stockholders'
equity .................................... $ 1,180,029 $ 1,033,408 $ 730,815 $ (967,322) $ 1,976,930
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
-12-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
APRIL 24, 1999
---------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 48,094 $ 9,281 $ 18,727 $ 76,102
Accounts receivable, less allowance for
doubtful accounts ........................ 214,826 89,548 304,374
Inventories, net ........................... 98,517 108,396 $ (56)(b) 206,857
Prepaid expenses and other current assets .. 46,988 12,178 47,375 230 (b) 106,771
----------- ----------- ----------- ---------- -----------
Total current assets ..................... 95,082 334,802 264,046 174 694,104
Property and equipment, net ................... 11,224 104,271 116,067 (410)(b) 231,152
Intangible assets, net ........................ 556,468 301,729 858,197
Investment in subsidiaries .................... 972,027 (972,027)(a)
Other assets .................................. 130,615 31,550 66,541 228,706
----------- ----------- ----------- ---------- -----------
Total assets ............................. $ 1,208,948 $ 1,027,091 $ 748,383 $ (972,263) $ 2,012,159
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................ $ 16,500 $ 1,542 $ 1,151 $ 19,193
Short-term intercompany balances ........... 251,459 (252,938) 1,479
Accounts payable ........................... 1,503 100,120 67,353 168,976
Accrued compensation ....................... 4,555 22,751 19,078 46,384
Other accrued liabilities .................. 28,925 17,239 54,524 100,688
----------- ----------- ----------- ---------- -----------
Total current liabilities ................ 302,942 (111,286) 143,585 335,241
Long-term debt ................................ 1,165,196 4,111 2,122 1,171,429
Other long-term liabilities and minority
interests .................................. 22,104 3,526 317 25,947
Long-term intercompany balances ............... (816,154) 398,400 417,851 $ (97)(b)
----------- ----------- ----------- ---------- -----------
Total liabilities ........................ 674,088 294,751 563,875 (97) 1,532,617
----------- ----------- ----------- ---------- -----------
Stockholders' equity:
Preferred stock ............................
Common stock ............................... 37 37
Additional paid-in capital ................. 800,478 627,923 271,240 (972,027)(a) 727,614
Accumulated other comprehensive loss ....... (68,311) (51,630) (119,941)
Retained earnings (accumulated deficit) .... (197,344) 104,417 (35,102) (139)(b (128,168)
----------- ----------- ----------- ---------- -----------
Total stockholders' equity ............... 534,860 732,340 184,508 (972,166) 479,542
----------- ----------- ----------- ---------- -----------
Total liabilities and stockholders'
equity ................................. $ 1,208,948 $ 1,027,091 $ 748,383 $ (972,263) $ 2,012,159
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
-13-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 24, 1999
---------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 428,811 $ 204,850 $ (8,158)(c) $ 625,503
Cost of revenues .............................. 316,809 142,057 (8,146)(c) 450,720
--------- --------- --------- -------- ---------
Gross profit ............................. 112,002 62,793 (12) 174,783
Selling, general and administrative
expenses ................................... $ 12,203 92,335 54,082 (10)(c) 158,610
Amortization expense .......................... 3,923 2,067 5,990
Operating restructuring costs ................. 102 1,333 474 1,909
--------- --------- --------- -------- ---------
Operating income (loss) .................. (12,305) 14,411 6,170 (2) 8,274
Interest expense .............................. 31,961 (14,035) 9,791 27,717
Interest income ............................... (280) (640) (150) (1,070)
Unrealized foreign currency transaction
loss ....................................... 13,555 13,555
Other (income) expense ........................ (4,463) 4,328 2,586 2,451
--------- --------- --------- -------- ---------
Income (loss) before provision for
(benefit from) income taxes ................ (39,523) 24,758 (19,612) (2) (34,379)
Provision for (benefit from) income
taxes ...................................... (16,175) 13,077 (3,754) (6,852)
--------- --------- --------- -------- ---------
Net income (loss) ............................. $ (23,348) $ 11,681 $ (15,858) $ (2) $ (27,527)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
</TABLE>
-14-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 25, 1998
-----------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 460,457 $ 199,334 $ (7,842)(c) $ 651,949
Cost of revenues .............................. $ (773) 344,648 138,226 (7,816)(c) 474,285
--------- --------- --------- -------- ---------
Gross profit ............................. 773 115,809 61,108 (26) 177,664
Selling, general and administrative
expenses ................................... 8,066 88,555 52,238 (37)(c) 148,822
Amortization expense .......................... 3,739 2,220 5,959
Operating restructuring costs ................. 6,316 2,410 8,726
Strategic Restructuring Plan costs ............ 96,948 555 97,503
--------- --------- --------- -------- ---------
Operating income (loss) .................. (104,241) 16,644 4,240 11 (83,346)
Interest expense .............................. 20,905 (10,291) 8,274 18,888
Interest income ............................... (52) (163) (151) (366)
Other (income) expense ........................ 157 (567) (410)
--------- --------- --------- -------- ---------
Income (loss) from continuing
operations before provision for
(benefit from) income taxes and
extraordinary items ........................ (125,094) 26,941 (3,316) 11 (101,458)
Provision for (benefit from) income taxes ..... (32,515) 14,165 430 5 (c) (17,915)
--------- --------- --------- -------- ---------
Income (loss) from continuing
operations before extraordinary items ...... (92,579) 12,776 (3,746) 6 (83,543)
Loss from discontinued operations, net
of income taxes ............................ (1,294) (1,294)
--------- --------- --------- -------- ---------
Income (loss) before extraordinary items ...... (92,579) 12,776 (5,040) 6 (84,837)
Extraordinary items--loss on early
termination of debt facilities, net
of income taxes ............................ (269) (269)
--------- --------- --------- -------- ---------
Net income (loss) ............................. $ (92,848) $ 12,776 (5,040) $ 6 $ (85,106)
--------- --------- --------- -------- ---------
--------- --------- --------- -------- ---------
</TABLE>
-15-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 24, 1999
------------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities ................................. $ (44,908) $ 23,132 $ 11,264 $ $ (10,512)
Cash flows from investing
activities ................................. (416) (10,413) (4,383) (15,212)
Cash flows from financing
activities ................................. 14,002 (9,587) (10,041) (5,626)
Effect of exchange rates on cash and
cash equivalents ........................... (293) (293)
--------- --------- ---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents ........................... (31,322) 3,132 (3,453) (31,643)
Cash and cash equivalents at
beginning of period ........................ 48,094 9,281 18,727 76,102
--------- --------- ---------- ----------- ----------
Cash and cash equivalents at end of ...........
period ..................................... $ 16,772 $ 12,413 $ 15,274 $ $ 44,459
--------- --------- ---------- ----------- ----------
--------- --------- ---------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 25, 1998
------------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities ................................. $ (29,050) $ 14,175 $ 7,574 $ (55)(d) $ (7,356)
Cash flows from investing
activities ................................. (7,499) (6,335) (11,756) 55 (d) (25,535)
Cash flows from financing
activities ................................. 20,522 (12,732) 13,429 21,219
Effect of exchange rates on cash and
cash equivalents ........................... (384) (384)
Cash used in discontinued operations .......... (12,518) (12,518)
--------- --------- ---------- --------- ---------
Net decrease in cash and cash
equivalents ................................ (16,027) (4,892) (3,655) (24,574)
Cash and cash equivalents at
beginning of period ........................ 19,684 15,743 16,594 52,021
--------- --------- ---------- --------- ---------
Cash and cash equivalents at end of
period ..................................... $ 3,657 $ 10,851 $ 12,939 $ $ 27,447
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
-16-
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 24, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
The "US Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
income include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:
(d) Elimination of intercompany profits.
NOTE 8--NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of SOP
98-1 had no impact on the results of operations or financial position of the
Company.
NOTE 9--SUBSEQUENT EVENTS
Subsequent to July 24, 1999, the Company has completed the sale of two
businesses for an aggregate selling price of $2,722. The Company expects to
record a loss of approximately $3,000 on these business divestitures.
Effective September 7, 1999, the Company's Board of Directors named Warren
Feldberg to the offices of President and Chief Executive Officer of the Company.
Charles P. Pieper, who has served as the Company's Chairman of the Board of
Directors and Chief Executive Officer, will retain his position as Chairman.
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE FOLLOWING:
- THE COMPANY'S ABILITY TO IMPLEMENT ITS NEW BUSINESS STRATEGY, INCLUDING:
- ITS ABILITY TO CONSOLIDATE FACILITIES AND INTEGRATE SYSTEMS ON A
TIMELY AND COST-EFFECTIVE BASIS
- THE EFFECTIVENESS OF PROGRAMS TO INCREASE REVENUES, MARGINS, AND CASH
FLOW, TO REDUCE COSTS, TO IMPROVE THE PERFORMANCE OF UNDERPERFORMING
BUSINESS UNITS, AND TO SELL TO LARGER CUSTOMERS
- THE DEVELOPMENT OF E-COMMERCE STRATEGIES
- THE COMPANY'S HIGH LEVEL OF DEBT
- THE IMPACT OF INCREASES IN INTEREST RATES
- CHALLENGES OF COMBINING ACQUIRED BUSINESSES
- THE IMPACT OF CHANGES IN THE EXCHANGE RATES FOR THE NEW ZEALAND AND
AUSTRALIAN DOLLARS
- THE IMPACT OF COMPETITION FROM NATIONAL, REGIONAL AND LOCAL COMPETITORS AND
COMPETITIVE PRESSURES FROM CUSTOMERS
- THE IMPACT OF COMPETITION ON THE INTERNET
- THE COMPANY'S ABILITY TO SELL NON-CORE OPERATIONS AT REASONABLE PRICES
- CHALLENGES OF ONGOING LITIGATION
- UNCERTAINTY ATTENDANT TO MANAGING FOREIGN OPERATIONS
- UNPREDICTABILITY OF MBE REVENUES AND ABILITY TO EXPLOIT A SIGNIFICANT
TECHNOLOGY UPGRADE BY MBE
- POTENTIAL LIABILITY FOR COSTS ARISING FROM 1998 SPIN-OFFS
- CHANGES IN SENIOR MANAGEMENT
PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED APRIL 24, 1999 FOR A DISCUSSION OF THESE AND OTHER IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED BY THESE
FORWARD-LOOKING STATEMENT. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
-18-
<PAGE>
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements, including the related notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's
audited consolidated financial statements for the fiscal year ended April 24,
1999, including the related notes thereto, included in the Company's 1999 Annual
Report on Form 10-K, which was filed with the Securities and Exchange Commission
on July 22, 1999.
Since the completion of the Strategic Restructuring Plan, (see Note 1 of
the notes to the Company's consolidated financial statements included elsewhere
in this Quarterly Report on Form 10-Q), the Company has focused on operational
improvements. The Company significantly reduced its acquisition activity early
in fiscal 1999 and later suspended all acquisitions. The Company may pursue
selected, strategic acquisition opportunities in the future. As a result of the
focus on operational improvements, the Company reorganized the structure of its
North American businesses effective at the beginning of fiscal 2000. In prior
years, these businesses were organized into a series of geographic regions and
districts, all operated within a single management structure as part of the
North American Office Products Group. Under the new structure, the Company has
separated these businesses into three lines of business, North American office
supplies (desktop accessories, writing instruments, paper products, computer
consumables, business machines, catalog furniture, and coffee services), North
American office furniture (middle-market and contract furniture), and North
American refreshment (vending) services, with each group having a distinct
management team. The Company also separately manages a series of non-core
businesses (typically being considered for disposition). The Company's other
businesses include the Blue Star Group, which includes a group of operating
companies that include business supplies, business solutions (technology
products and services), print, and consumer retailing businesses, and Mail
Boxes Etc. ("MBE"), the world's largest franchisor of retail business,
communications, and postal service centers.
Consistent with the Company's announced expectations at the time it adopted
the Strategic Restructuring Plan, the increased interest expense resulting from
the increased debt levels associated with the Strategic Restructuring Plan
significantly reduced the Company's reported earnings in fiscal 1999 and the
first quarter of fiscal 2000. Rather than net income and net income per share,
management believes that a more meaningful indication of the Company's
performance is cash flow from operations and earnings from continuing operations
before interest expense, benefit from income taxes, depreciation expense,
amortization expense, Strategic Restructuring Plan costs, operating
restructuring costs, unrealized foreign currency transaction loss, other
(income) expense and extraordinary items ("EBITDA"). EBITDA is provided because
it is a measure commonly used by analysts and investors to determine a company's
ability to incur and service its debt. EBITDA is not a measurement of
performance under GAAP and should not be considered an alternative to net income
(loss) as a measure of performance or to cash flow as a measure of liquidity.
EBITDA is not necessarily comparable with similarly titled measures for other
companies.
OPERATING REVENUES AND EXPENSES
The Company derives revenues primarily from the sale of a wide variety of
office supplies and other office products, office coffee service and related
products, office furniture, and vending products and services to corporate
customers. MBE derives revenues primarily from royalties and marketing fees,
franchise fees and the sale of supplies and equipment to MBE centers.
Cost of revenues represents the purchase price for a wide variety of office
supplies and other office products, office coffee services and related products,
office furniture, and vending products and services and includes occupancy,
delivery and certain depreciation costs. Rebates and discounts on inventory
reduce these costs when such inventory is sold. MBE's cost of revenues
represents primarily franchise operation expenses and the cost of supplies and
equipment sold to MBE centers.
Selling, general and administrative expenses represent product marketing
and selling costs, customer service and product design costs, warehouse costs,
and other administrative expenses.
-19-
<PAGE>
FACTORS AFFECTING COMPARABILITY
Certain factors should be considered in comparing the Company's financial
condition and results of operations in fiscal 2000 to those in fiscal 1999.
ACQUISITIONS AND DIVESTITURES
The Company completed 22 business combinations during fiscal 1999, all of
which were accounted for under the purchase method. In addition, the Company
completed seven business divestitures or closures during fiscal 1999. In the
first quarter of fiscal 2000, the Company did not complete any acquisitions and
completed three business divestitures. The Company expects to complete
additional business divestitures during fiscal 2000. It also anticipates that it
may pursue selected acquisition opportunities that complement its existing
businesses.
FOREIGN CURRENCY EXCHANGE RATES
Approximately one-third of the Company's revenues are generated by its
operations in New Zealand and Australia. Fluctuations in the exchange rates for
the New Zealand and Australian dollars affect the Company's results.
ACCELERATED CHANGE ACTIVITIES
During the second half of fiscal 1999, the Company organized a series of
Accelerated Change Teams ("ACTs") to realize many of its cost reduction and
revenue enhancement strategies on an accelerated basis. ACTs are teams of
employees (in some cases assisted by outside consultants) dedicated to driving
fundamental business process changes throughout the Company's business units.
The ACTs provide functional experts focused by initiative, enabling business
unit managers to focus on sales, customer service, and overall productivity
issues. Core ACT initiatives focus on the Company's supply chain, including the
consolidation of facilities and support functions and the implementation of
enhanced pricing strategies and inventory management tools. The Company also
formed an ACT focused solely on reducing working capital to improve overall
asset utilization. The ACTs began to implement many of their programs toward the
end of the fourth quarter of fiscal 1999, and they have made progress during the
first quarter of fiscal 2000. The Company expects to begin to see the benefits
of these initiatives during the second half of fiscal 2000, although there can
be no assurance that these strategies will be successful or will have a positive
effect within the anticipated timeframe.
As predicted by the Company's public disclosures made at the end of fiscal
1999, the expenses associated with the Company's accelerated change programs had
a negative effect on its results during the first quarter of fiscal 2000. These
expenses consist primarily of additional selling, general, and administrative
expenses related to outside resources to refine the Company's financial and
operating change management strategies. See "--Consolidated Results of
Operations." In addition, the Company expects that over the near term these
initiatives will continue to produce short-term costs that will offset, all or a
part of, expected reductions in overall expense levels. Accelerated
implementation of the changes also may result in additional charges including
severance costs, facility closure costs, and write-downs or write-offs of
goodwill and other assets.
As part of its accelerated change process, the Company has implemented
a "fix, sell, or close" strategy. This strategy includes two basic components:
(1) Non-core businesses that the Company intends to sell are identified,
placed into an active disposition process, and managed separately from the
Company's core businesses until the disposition is completed. (2) The Company
assigns dedicated groups of employees (sometimes assisted by outside
consultants) to improve the performance of underperforming core businesses,
often involving the intensive application of various ACT initiatives. Where
the Company decides that an underperforming unit cannot be brought to an
acceptable level of performance within a reasonable time and with an
efficient level of investment, that unit may be sold or closed. In the
Company's core North American office supplies business, the Company believes
that this strategy is having a positive effect. Business units accounting for
approximately half of the Company's total office supplies
-20-
<PAGE>
revenue in North America, which have completed significant information system
and facility consolidation activities (and often some management changes),
reported positive revenue and earnings growth (on average) in the first quarter
of fiscal 2000, as compared to the first quarter of the prior fiscal year. The
remaining units, which are either beginning or in the midst of these change
initiatives and which include underperforming office supply operations, reported
revenue declines and more modest earnings levels (on average) in the first
quarter. The Company's experience to date is that once a business unit completes
the intensive operating change activities it moves through the associated
disruptions to sales and service activities and is able to achieve improved
results. The Company's "fix, sell, or close" strategy is intended to get its
business units through the disruptive change process as quickly as possible
(at a cost of near-term negative impact on results) and accelerate the
opportunity for substantial performance improvement. There can be no
assurance that the Company's positive experience to date with this strategy
will continue into the future or will prove effective with all of its
business units.
Because the Company is seeking to effect change at an accelerated pace, it
may recognize certain non-recurring charges more rapidly than would be likely in
the absence of the accelerated change initiatives. For example, because of the
rapid changes the Company is seeking to effect, it may write-down or write-off
assets that it previously had expected to use in continuing operations. In some
cases, charges may relate to businesses that the Company had expected to
continue to operate or to operate on a temporary basis, pending disposition, but
decides instead to close. The Company also expects to make investments that are
expected to drive change on an accelerated basis, and this is likely to cause
expenses to increase in the near term.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 24, 1999, COMPARED TO THREE MONTHS ENDED JULY 25, 1998
Revenues decreased 4.1%, from $651.9 million for the three months ended
July 25, 1998, to $625.5 million for the three months ended July 24, 1999. The
decrease in revenues was due primarily to the anticipated residual effect of the
loss of a number of large office supply accounts in North America during fiscal
1999, a decline in the performance of non-core operations and business units
undergoing substantial operating changes under the "fix, sell or close"
strategy, a decline in contract furniture revenues, and the disposal or
closure of ten businesses subsequent to the first quarter of fiscal 1999. The
decrease was partially offset by the inclusion of revenues from 22 companies
acquired in business combinations accounted for under the purchase method
after the beginning of the first quarter of fiscal 1999 (the "Purchased
Companies"). On a pro forma basis, adjusted for the fluctuation in the New
Zealand and Australian dollars, revenues decreased 3.2%.
Since the beginning of the 1999 calendar year, the Company has devoted
substantial additional personnel and resources to the development of focused
sales and service initiatives for larger regional and national customers. The
Company believes that these initiatives have had positive results. Since January
1999, the Company has gained more than it has lost in the large account segment
(which the Company defines as accounts purchasing at least $180,000 per year
from the Company) in terms of both numbers of accounts and anticipated annual
revenues from such accounts. In view of the highly competitive nature of this
customer segment, there can be no assurance that the Company will continue to be
able to gain market share in the large account segment or that such business can
be maintained on a profitable basis.
Gross profit decreased 1.6%, from $177.7 million for the three months ended
July 25, 1998, to $174.8 million for the three months ended July 24, 1999. The
decrease in gross profit is directly related to the decrease in revenues. As a
percentage of revenues, gross profit increased from 27.3% for the three months
ended July 25, 1998, to 27.9% for the three months ended July 24, 1999. The
increase in gross profit as a percentage of revenues is the result of improved
inventory management and enhanced pricing strategies in the Company's North
American office supplies
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<PAGE>
business and the disposal or closure of certain lower margin businesses since
the beginning of the first quarter of fiscal 1999.
Selling, general and administrative expenses increased 6.6%, from $148.8
million for the three months ended July 25, 1998, to $158.6 million for the
three months ended July 24, 1999. Selling, general and administrative expenses
as a percentage of revenues increased from 22.8% for the three months ended
July 25, 1998, to 25.4% for the three months ended July 24, 1999. The increase
in selling, general and administrative expenses was due to several factors,
including (i) outside consulting fees of approximately $3.1 million associated
with the Company's ACTs (See "-Introduction" for a discussion of ACTs);
(ii) information technology initiatives of approximately $2.1 million at MBE
related to the roll-out of a national point of sale system, a customer data
warehouse and a satellite communication system; (iii) approximately $1.0 million
related to the Company's e-commerce initiatives in North America; and (iv) other
costs related to information technology and strengthening of the Company's
management team. The outside consulting fees of $3.1 million and information
technology initiatives at MBE of $2.1 million qualify as non-recurring charges
under the terms of the Company's bank credit agreement.
The Company recorded operating restructuring costs of $1.9 and $8.7 million
during the three months ended July 24, 1999, and July 25, 1998, respectively,
related to the approval and commencement of restructuring plans at a limited
number of operating locations. These plans relate primarily to the consolidation
of facilities and job functions, which include the costs of exiting such
facilities and severance to employees who have been notified that their jobs
will be eliminated. The Company is continuing to develop and review additional
plans and expects to record additional operating restructuring related costs in
the future.
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of approximately
$97.5 million during the three months ended July 25, 1998, $70.4 million of
which were non-cash. In addition, approximately $11.7 million in such costs were
incurred by the Spin-Off Companies and were included in the results of
discontinued operations. The Strategic Restructuring Plan costs related to
continuing operations consisted of: (i) compensation expense of approximately
$50.8 million ($49.9 million of which was non-cash) related to the difference
between the exercise prices of employee stock options underlying shares that
were accepted in the Company's equity tender offer and the purchase price of
such shares in the equity tender offer; (ii) professional fees (including
accounting, legal, investment banking and printing fees) of approximately
$26.2 million; and (iii) a non-cash expense of approximately $20.5 million
resulting from the issuance of incremental shares of common stock related to
the temporary, effective reduction in the conversion price of the Company's 5
1/2% convertible subordinated notes due 2001 (the "2001 Notes"), which the
Company made as part of an exchange offer for the 2001 Notes.
Interest expense, net of interest income, increased 43.9%, from
$18.5 million for the three months ended July 25, 1998, to $26.6 million for
the three months ended July 24, 1999. This increase is due primarily to the
timing of the completion of the Strategic Restructuring Plan and the related
financing transactions (see Note 1 of the notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on
Form 10-Q), which resulted in a significant increase in both the amount of debt
outstanding and the average interest rate related to such debt. Because these
transactions occurred in June 1998, interest expense related to the increased
debt and higher interest rates was reflected for approximately one-half of
the first quarter of fiscal 1999 and the entire first quarter of fiscal 2000.
The Company recorded an unrealized foreign currency transaction loss of
$13.6 million during the three months ended July 24, 1999. This loss represents
the impact of the devaluation of the New Zealand dollar on approximately
$400 million of USD denominated intercompany loans to the Blue Star Group. The
New Zealand dollar declined from approximately USD $.55 at April 24, 1999 to
approximately USD $.53 at July 24, 1999. The recognition of the loss in the
statement of operations is the result of a change in accounting policy
related to such loans effective the beginning of fiscal 2000. During fiscal
1999, the Company considered its intercompany loans to the Blue Star Group to be
permanent in nature and, therefore, the unrealized currency transaction gains
and losses related to the intercompany loans were recorded as a component of
stockholders' equity on the balance sheet.
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Effective April 25, 1999, the Company changed its perspective on the Blue Star
Group operations and no longer considers the intercompany loans to be permanent
in nature. Accordingly, the Company has recorded the unrealized foreign currency
transaction loss related to its intercompany loans with the Blue Star Group for
the first quarter as a component of the loss from continuing operations in the
statement of operations.
Other (income) expense decreased from income of $0.4 million for the three
months ended July 25, 1998, to expense of $2.5 million for the three months
ended July 24, 1999. Other (income) expense includes the Company's 49% equity
interest in the net income (loss) of Dudley and miscellaneous other income and
expense items. The decrease of $2.9 million is due primarily to two factors:
(i) the Company's share of Dudley's reported net loss of approximately
$1.0 million for the three months ended July 24, 1999, compared to the Company's
share of Dudley's reported net income of approximately $0.9 million for the
three months ended July 25, 1998; and (ii) the recognition by the Blue Star
Group of a loss of approximately $1.5 million on the disposal of various owned
properties during the three months ended July 24, 1999. The loss reported by
Dudley during the three months ended July 24, 1999, is attributable to the
continued impact of a new national distribution facility which has significantly
reduced revenues as a result of lower customer service levels and increased
operating costs during the start-up period, as well as the expenses and
service-level impacts resulting from Dudley's implementation of a new
enterprise resource (information) system.
Benefit from income taxes decreased from $17.9 million for the three months
ended July 25, 1998, to $6.9 million for the three months ended July 24, 1999,
reflecting effective income tax benefit rates of 17.7% and 19.9%, respectively.
The decrease in the income tax benefit is primarily the result of the decrease
in the loss from continuing operations before benefit from income taxes and
extraordinary items from $101.5 million for the three months ended July 25,
1998, to $34.4 million for the three months ended July 24, 1999. The benefit
from income taxes for the three months ended July 24, 1999, reflects the
recording of a tax benefit at the federal statutory rate of 35.0%, plus
appropriate adjustments for state, local and foreign taxes. In addition, the
effective income tax benefit rate was reduced to reflect the incurrence of
non-deductible expenses, which consisted primarily of goodwill amortization
expense.
The benefit from income taxes for the three months ended July 25, 1998,
reflects the net impact of (i) an income tax provision of 65.0% on the results
from continuing operations, excluding the aggregate $106.2 million of Strategic
Restructuring Plan costs and operating restructuring costs; and (ii) an income
tax benefit on approximately half of the aggregate $106.2 million of Strategic
Restructuring Plan costs ($97.5 million) and operating restructuring costs
($8.7 million), as the Company believes that approximately half of such costs
will be deductible for income tax purposes. The 65.0% effective tax rate
discussed above reflects the recording of an income tax provision at the federal
statutory rate of 35.0%, plus appropriate adjustments for state, local and
foreign taxes. The effective income tax rate was also increased to reflect
the incurrence of non-deductible expenses, which consisted primarily of goodwill
amortization expense.
Loss from discontinued operations totaled $1.3 million for the three months
ended July 25, 1998. See Note 2 of the notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The extraordinary loss, net of income taxes, of $269,000 during the three
months ended July 25, 1998, represents the aggregate of several extraordinary
items, all of which involve indebtedness that the Company either repaid or
converted into equity in connection with the Strategic Restructuring Plan and
the related financing transactions. The primary components of this extraordinary
loss are: (i) the pre-tax non-cash write-offs of $5.2 million, $4.7 million and
$2.9 million of debt issue costs incurred in conjunction with the issuance of
the Company's 5 1/2% convertible subordinated notes due 2003 (the "2003 Notes"),
the former credit facility and the issuance of the 2001 Notes, respectively; and
(ii) a pre-tax gain of $12.2 million related to the early extinguishment of
$222.2 million of 2003 Notes at a purchase price of 94.5% of the principal
amount.
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BUSINESS SEGMENT RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 24, 1999, COMPARED TO THREE MONTHS ENDED JULY 25, 1998
The following compares revenues and EBITDA (as defined in "Introduction")
for each of the Company's reportable business segments. For a definition of each
of the reportable business segments, see Note 6 of the notes to the Company's
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
NORTH AMERICAN OFFICE SUPPLIES--Revenues for the three months ended
July 24, 1999 decreased 1.1% on a historical basis and 2.6% on a pro forma basis
versus the three months ended July 25, 1998. The decreases in revenues are due
primarily to the impact of the anticipated residual effect of the loss of a
number of large regional office supply accounts during fiscal 1999. EBITDA for
the three months ended July 24, 1999 increased 4.8% versus the three months
ended July 25, 1998. The increase in EBITDA is due primarily to an increase in
gross margins resulting from the impact of the Company's inventory management
and enhanced pricing ACT strategies.
NORTH AMERICAN OFFICE FURNITURE--Revenues for the three months ended
July 24, 1999 decreased 15.2% on a historical basis and 17.1% on a pro forma
basis versus the three months ended July 25, 1998. The decreases in revenues are
due primarily to the uneven timing of contract furniture projects and
disruptions to sales efforts related to the transition of certain furniture
locations to new product lines or new organizational or managerial structures.
EBITDA for the three months ended July 24, 1999 decreased 41.2% versus the three
months ended July 24, 1998. The significant decrease in EBITDA was driven
primarily by the decline in revenues, as gross margins remained constant. In
addition, selling, general and administrative costs were down only 3.1%, as the
furniture business currently operates with a significant level of fixed type
costs.
OTHER NORTH AMERICAN OPERATIONS--Revenues for the three months ended
July 24, 1999 decreased 21.1% on a historical basis and 11.8% on a pro forma
basis versus the three months ended July 25, 1998. The decrease in historical
revenues is primarily the result of two non-core businesses having significant
revenue declines and the sale of two additional non-core businesses with
aggregate annual revenues of approximately $30 million during the quarter.
EBITDA for the three months ended July 24, 1999 decreased $5.3 million versus
the three months ended July 24, 1998. The decline in EBITDA is due primarily
to the costs associated with (i) the addition of internal and external resources
to assist the Company's ACTs implement initiatives, which have not been
allocated to the office supplies and furniture groups, and (ii) the development
and implementation of an e-commerce strategy for the Company. In addition, the
decline in revenues at the "fix, sell, close" companies contributed to the
decline in EBITDA.
BLUE STAR GROUP--Revenues for the three months ended July 24, 1999
increased 2.7% on a historical basis and 5.2% on a pro forma currency adjusted
basis versus the three months ended July 25, 1998. The increase in pro forma
currency adjusted revenues is due to sales growth in all four of Blue Star
Group's divisions, with particularly strong growth in the print and consumer
retailing groups. EBITDA for the three months ended July 24, 1999 increased
2.6%, primarily due to the revenue growth in the print group and the sale or
closure of certain underperforming units in the technology group since the
first quarter of fiscal 1999. On a pro forma currency adjusted basis, EBITDA
for the three months ended July 24, 1999 declined 4.5% versus the three
months ended July 25, 1998, due primarily to the Company's underperforming
Australian office supply operations.
MBE--Revenues for the three months ended July 24, 1999 increased 15.6% on
both a historical and pro forma basis versus the three months ended July 25,
1998. The increase in revenues is primarily due to growth in royalties and the
sale of products and equipment to franchisees, as MBE continues to grow the
number of MBE franchised centers open around the world. In addition, MBE sold
two master licenses during the quarter ended July 24, 1999; MBE did not sell any
master licenses during the three months ended July 25, 1998. EBITDA for the
three months ended July 24, 1999 decreased approximately $1.5 million, or 31.4%,
versus the three months ended July 25, 1998.
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This decline is the result of the costs associated with the roll-out of MBE's
information technology initiatives, which totaled $2.1 million during the three
months ended July 24, 1999, partially offset by the impact of increased
revenues. MBE's information technology initiatives include the roll-out of a
national point of sale system and a satellite communication system to its
domestic franchisees and the development of a customer data warehouse.
CORPORATE--EBITDA for the three months ended July 24, 1999 decreased
approximately $3.1 million versus the three months ended July 25, 1998. The
decrease is primarily the result of an overall higher level of general and
administrative costs, as the Company has expanded and strengthened its corporate
management team.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At July 24, 1999, the Company had cash of $44.5 million. Cash decreased
$31.6 million from $76.1 million at April 24, 1999 due primarily to the payment
of $36.4 million in interest, $12.5 million of net capital expenditures, and
$4.5 million of debt, partially offset by operating cash flows and working
capital improvements.
At July 24, 1999, the Company had working capital of $345.4 million.
Working capital decreased $13.5 million from $358.9 million at April 24, 1999.
The improvement in working capital was generated primarily through accounts
payable management during the first quarter of fiscal 2000.
LONG-TERM DEBT
The Company's credit facility (the "Credit Facility") provides for an
aggregate principal amount of $1,025.0 million, consisting of (i) a
seven-year multi-draw term loan facility totaling $50.0 million, (ii) a
seven-year revolving credit facility totaling $200.0 million, (iii) a
seven-year term loan facility totaling $100.0 million, and (iv) an eight-year
term loan facility totaling $675.0 million. See Note 1 of the notes to the
Company's consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q. In connection with the completion of the
Strategic Restructuring Plan and the related financing transactions, the
Company borrowed the full amount of the two single-draw term loan facilities.
Interest rates on borrowings bear interest, at the Company's option, at the
lending bank's base rate plus an applicable margin of up to 1.50%, or a
eurodollar rate plus an applicable margin of up to 2.50%. The Company's
obligations under the Credit Facility are guaranteed by its present domestic
subsidiaries; future material domestic subsidiaries will also be required to
guarantee these obligations. The Credit Facility is collateralized by
substantially all of the assets of the Company and its domestic subsidiaries;
future material domestic subsidiaries also will be required to pledge their
assets as collateral. The Company is required to enter into arrangements to
ensure that the effective interest rate paid by the Company on at least 50%
of the aggregate amount outstanding under the Credit Facility and the
Company's 9 3/4% senior subordinated notes due 2008 (the "2008 Notes") was at
a fixed rate of interest. As a result, the Company has entered into interest
rate swap arrangements to limit the LIBOR-based interest rate exposure on
$500.0 million of the outstanding balance under the Credit Facility to rates
ranging from 5.7% to 6.0%. The interest rate swap agreements expire over a
period ranging from 2001 to 2003. As a result of these swap agreements (and
including the fixed-rate 2008 Notes), the Company has fixed the interest
rates on $915.7 million (77.1%) of the total debt outstanding at July 24,
1999. At the Company's current debt levels, a hypothetical 10% increase in the
weighted average interest rate would result in approximately $1.2 million,
net of taxes, of additional interest expense on an annual basis. Subsequent
to July 24, 1999, the 90-day LIBOR rate has increased 0.37%.
At July 24, 1999, the Company had total debt outstanding of
$1,187.8 million and had additional borrowing availability of $200.0 million
under the revolving credit facility and of $50.0 million under the multi-draw
term loan facility. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity, at July 24, 1999, was approximately
$1.6 billion.
The Credit Facility includes, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends, or engage
in certain other transactions, and requirements that the Company
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maintain certain financial ratios, and other provisions customary for loans to
highly leveraged companies, including representations by the Company, conditions
to funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility).
The 2008 Notes are unsecured but are guaranteed by the Company's present
domestic subsidiaries; future material domestic subsidiaries will be required to
guarantee the 2008 Notes. The indenture governing the 2008 Notes places
restrictions on the Company's ability to incur indebtedness, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of its assets to, or merge or consolidate with, another
entity. The eight-year term loan facility contains negative covenants and
default provisions substantially similar to those contained in the indenture
governing the 2008 Notes.
FOREIGN CURRENCY
The New Zealand and Australian dollars weakened against the USD during
the three months ended July 24, 1999. This resulted in an unrealized foreign
currency transaction loss of $13.6 million. See "-Consolidated Results of
Operations." If exchange rates continue to decline, the Company will continue
to record unrealized foreign currency transaction losses resulting from the
further devaluation of the Company's intercompany loans with the Blue Star
Group. Subsequent to July 24, 1999, the New Zealand dollar continued to
weaken against the USD. As of September 3, 1999, the New Zealand dollar
equaled USD $0.52 (down from USD $0.53 at July 24, 1999).
As a result of the Company's 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 may will incur additional costs with
respect to accessing cash flows from international operations including such
items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs.
CASH FLOWS
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Company's Credit Facility will be sufficient to
meet its liquidity requirements for its operations, capital expenditures and
additional debt service obligations for the remainder of the fiscal year. The
Company does not currently anticipate that any future restructuring costs
related to the Company's planned cost reduction measures, coupled with the
expected effects of such cost reduction measures, would have a material adverse
effect on the Company's liquidity or cash flows. See "-Introduction." The
Company had net capital expenditures of $12.5 million during the three months
ended July 24, 1999, and anticipates additional capital expenditures of
approximately $48-$58 million in fiscal 2000. The anticipated capital
expenditures will primarily support the Company's information systems
development, e-commerce initiatives, and the consolidation of certain
administrative functions.
During the three months ended July 24, 1999, net cash used in operating
activities was $10.5 million. This use of cash included the payment of
$36.4 million in interest expenses which became payable during the quarter.
Net cash used in investing activities was $15.2 million, including $12.5 million
used for net additions to property and equipment. Net borrowings decreased
$5.6 million.
During the three months ended July 25, 1998, net cash used in operating
activities was $7.4 million. This use of cash included the payment of
approximately $16.0 million of costs related to the Strategic Restructuring
Plan. If such one-time Strategic Restructuring Plan costs were not included,
net cash provided by operating activities would have been $8.6 million for
the three months ended July 25, 1998. Net cash used in investing activities was
$25.5 million, including $11.8 million used for acquisitions and $12.9 million
used for additions to property and equipment. Net borrowings increased
approximately $450 million during the three months ended July 25, 1998,
primarily to fund the Strategic Restructuring Plan and the related financing
transactions, and also to fund
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acquisitions and additions to property and equipment during the period. In
addition, the Company received an equity investment of $254.0 million, net of
expenses, from an affiliate of an investment firm managed by Clayton, Dubilier &
Rice, Inc. and $118.9 million from discontinued operations in repayment of
intercompany loan balances outstanding at the date of the spin-offs.
Discontinued operations used $12.5 million of cash during the three months ended
July 25, 1998.
YEAR 2000 COMPLIANCE
The Company is carrying out a process to assess Year 2000 compliance of its
systems and the systems of major vendors and third-party service providers, and
to remediate any non-compliance of its systems.
Prior to the Year 2000 readiness project, the Company initiated a common
system project for hardware and software systems. As a result of this project,
the Company has replaced several systems. The Company has not materially
accelerated the replacement of hardware or software systems as a result of
Year 2000 performance and/or compliance issues.
As described below, each of the Company's North American, MBE, Blue Star
Group and Dudley operations is performing its own Year 2000 readiness review.
NORTH AMERICAN OPERATIONS
The Year 2000 compliance process in the Company's North American operations
(excluding MBE) involves three phases, as described below.
PHASE ONE--INVENTORY AND PLANNING
The Company completed this phase in May 1998. In this phase, the Company
inventoried all hardware and software that potentially is susceptible to
Year 2000 problems, prepared plans for assessing compliance and for completing
remediation, and prepared vendor and supplier compliance surveys.
PHASE TWO--ASSESSMENT
In this phase, the Company assessed which of its systems are Year 2000
compliant, obtained compliance statements from hardware and software vendors,
supply manufacturers and service trading partners, and planning for remediation
of non-compliant systems. The Company completed this phase in December 1998.
The Company's assessment plan included assessment of Year 2000 compliance
of non-information technology (non-IT) components, including the Company's
bindery machinery, coffee roasting facilities, office furniture manufacturing
facilities, security systems, credit card processing devices and freight
elevators. The Company believes there are no significant uses of
micro-processing oriented equipment within its manufacturing systems and
completed assessment of these systems in December 1998.
PHASE THREE--REMEDIATION AND TESTING
In this phase, the Company is deploying plans for elimination, upgrade,
replacement or modification of non-compliant systems, and testing compliance.
The Company originally scheduled completion of this phase for the summer of 1999
and has extended the completion date to October 1999. Verification and testing
will continue through December 1999.
The Company's Trinity system, which is the core information management and
processing system for its North American office supplies operations, is
Year 2000 compliant. The Company is installing this system throughout its office
supplies operations, and it expects to complete its Trinity installation plans
for office supplies businesses by
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the end of 1999. Some North American locations (including those in the
furniture, vending, and office coffee businesses) will continue to use operating
systems other than Trinity after the end of 1999. Therefore, the Company is
assessing the compliance of other systems used by its North American operating
subsidiaries. The Company has determined that some of the systems used by its
North American subsidiaries are not currently Year 2000 compliant, but the
Company believes that it is highly likely that these systems will be made
compliant without material expense by the fall of 1999.
The Company has received compliance statements from approximately 90% of
its primary supply vendors. Based on these statements, the Company believes that
most supply vendors who have responded will be Year 2000 compliant by the end of
September 1999. The Company has identified some vendors as fitting a "concerned"
profile due to late compliance dates or because responses indicate some
possibility of poor planning. The Company is communicating with each of these
vendors to remediate these concerns. Failure of these vendors to reach Year 2000
compliance or remediate prior to the century change is not expected to have a
material adverse effect on the Company's performance. With regard to products,
the Company cannot warrant Year 2000 compliance for products sold and
distributed by the Company and its subsidiaries. Product is procured from
vendors and manufacturers' for sale and distribution to our customers. The
Company does not believe it would face material liability from non-compliance
with respect to these products.
If the Company fails to achieve Year 2000 compliance in all its systems,
the Company could lose the ability to process certain of its customer's orders
until compliance is achieved or a means to work around the failure is
implemented. The Company's systems are not now uniform across all operations and
the Company does not expect uniformity by the end of 1999. Therefore, any
failure would not be system wide. The Company believes that in a worst case
scenario, at most 20% of its orders would be affected. A failure to fill orders
would not, however, necessarily result in a complete loss of the order. An order
could be filled through alternative methods within a relatively short period.
Nevertheless, any disruption in order fulfillment could result in some loss of
revenue. If this disruption is the result of noncompliance that is greater than
anticipated, the loss of revenue could be material. The Company is in the
process of establishing contingency plans and anticipates completion during the
fourth calendar quarter of 1999.
For North America, the Company's assessment and remediation of Year 2000
compliance issues has a budget of less than $1.0 million, and expenses have been
less than expected. The Company does not currently expect that future expenses
for assessment or remediation will be material.
MBE, BLUE STAR GROUP AND DUDLEY
The Company has received reports from MBE that address the Year 2000
readiness of software and hardware provided by MBE and used by MBE franchisees,
as well as that used by MBE's corporate operations. MBE is in the process of
assessing and testing mission critical systems, and performing additional
activities as summarized below. These efforts fall within three categories.
First, MBE continues to review Year 2000 compliance as it relates to the
software that MBE writes and provides to its franchisees. Second, MBE continues
to review Year 2000 compliance as it relates to its internal hardware and
software that it uses for the daily operations of its corporate business. Third,
MBE continues to review Year 2000 compliance statements of major vendors of MBE
and its franchisees, including statements of vendors that supply hardware to MBE
that MBE re-sells to its franchisees.
MBE creates proprietary software ("MBE Software") for its franchisees that
are used for a variety of functions to operate an MBE center. Based on MBE's
testing, the majority of this software is currently Year 2000 compliant. For the
remaining MBE Software, MBE plans either (i) to reprogram or otherwise upgrade
such software, or (ii) to no longer support, and no longer require franchisees
to purchase and use, such software. MBE expects any reprogramming to be
completed by the end of September 1999. MBE does not believe that a failure to
complete these upgrades would have a material adverse effect on its franchisees'
or MBE's results of operations.
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MBE's franchisees may also use other software, not provided or recommended
by MBE, and this software and/or its combinations with MBE Software may not be
Year 2000 compliant. The franchisees are responsible for ensuring that software
not provided by MBE is Year 2000 compliant both standing alone and in
combination with MBE Software. MBE does not believe that the failure of
franchisees to obtain Year 2000 compliance would have a material adverse effect
on MBE because franchisees have manual alternatives available. MBE's franchisees
purchase or lease some hardware from MBE, which is provided to MBE by various
manufacturers. MBE has reviewed statements from the vendors of hardware
currently being sold or leased to franchisees by MBE, and such statements
indicate that such hardware is Year 2000 compliant.
With respect to software and hardware used by MBE's corporate operations,
MBE has reported to the Company that some software products used by MBE for
certain accounting and database functions, as well as some desktop computers,
are not currently Year 2000 compliant. MBE and the providers of this software
and hardware are in the process of reprogramming such software and upgrading
such hardware and expect to complete this process by the end of September 1999.
MBE expects to be able to bring its software and hardware that are not currently
Year 2000 compliant into compliance within budgeted limits and without material
expense. MBE does not believe any failure to reprogram or upgrade the software
and hardware used by MBE in its corporate operations would have a material
adverse effect on MBE.
Much of MBE's hardware and software depends upon the proper interaction of
various hardware, software and services furnished by third parties. While MBE is
performing Year 2000 readiness tests on its systems and attempting to obtain
statements from its primary vendors, the vast array of combinations of MBE and
third-party components (including those provided by franchisees), functions and
entry and exit points make it impractical to test every aspect of the systems.
MBE is currently evaluating statements from its mission critical vendors to
develop contingency plans in the event one or more of such vendors experiences a
failure due to Year 2000 non-readiness. MBE currently expects to complete such
contingency plans during the fourth calendar quarter of 1999. However, any such
contingency plans to be developed by MBE will be limited by the fact that there
are only a small number of vendors providing shipping and delivery services on a
national and worldwide scale; accordingly, alternative means of delivery will be
limited in the event one or more of MBE's major vendors experiences a failure
due to Year 2000 non-compliance.
Blue Star's review of compliance is ongoing. Based on reports received to
date by the Company from Blue Star, the majority of systems used in New Zealand
and Australia are currently Year 2000 compliant, and the Company expects that
the majority of non-compliant systems will be Year 2000 compliant by during the
fourth calendar quarter of 1999. Blue Star is continuing to survey its major
vendors to determine such vendor's Year 2000 readiness. Some vendors have failed
to reply, but key vendors have been identified and Blue Star has obtained
assurances, which it believes are reliable, from these vendors where potential
exposure was deemed critical.
Based on reports received to date by the Company from Dudley, an initial
assessment of the systems indicates that there are no significant Year 2000
issues.
The Company's review of Year 2000 compliance issues at MBE, Blue Star and
Dudley to date has been based on reports received from those operations. While
Company personnel speak regularly with employees at MBE, Blue Star, and Dudley
about the status and progress of Year 2000 compliance efforts, Company personnel
responsible for Year 2000 compliance activities within the Company's North
American operations have not conducted their own on-site testing or verification
at these other locations. While the Company's level of assurance regarding the
compliance of systems at MBE, Blue Star, and Dudley might be higher if it were
to conduct such additional on-site reviews to confirm the status of compliance
activities, the Company believes, based upon the compliance programs being
carried out, the content and thoroughness of regular reports transmitted to the
Company, and the involvement of both senior executives and knowledgeable systems
professionals in the compliance activities at all of these operations, that the
compliance process is being handled in a reasonable and responsible manner. MBE,
Blue Star, and Dudley have not segregated their expenses for Year 2000
compliance from other information technology costs, but the Company does not
expect these expenses to exceed $4.0 million. MBE, Blue Star and the
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<PAGE>
Company's interest in Dudley represent approximately one-third of the Company's
consolidated revenues. If the operations of any of these groups are not
materially compliant within a safe time frame, the Company's results of
operations could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
As the Company's mix of businesses evolves through future business combinations,
these seasonal fluctuations may continue to change. Therefore, results for any
quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent fiscal quarter or for a full fiscal year.
Quarterly results also may be affected by the timing and magnitude of
business combinations, the timing and magnitude of costs related to such
business combinations, variations in the prices paid by the Company for the
products it sells, the mix of products sold, and general economic conditions.
Moreover, the operating margins of companies acquired by the Company may differ
substantially from those of the Company, which could contribute to the further
fluctuation in its quarterly operating results. Therefore, results for any
quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent fiscal quarter or for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on
its results of operations during fiscal 1999 or the first quarter of fiscal
2000.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of
SOP 98-1 had no impact on the results of operations or financial position
of the Company.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures arise from changes in interest
rates and fluctuations in the exchange rates related primarily to the New
Zealand, Australian and Canadian dollars. The Company utilizes interest rate
swaps and foreign currency forward contracts to reduce its exposure to adverse
fluctuations in interest rates and exchange rates. The Company does not hold or
issue derivative instruments for trading purposes.
INTEREST RATE RISK
See the disclosure included in the Company's 1999 Annual Report on
Form 10-K. The Company does not believe that the risk it faces related to
interest rate risk is materially different than at the date of the 1999
Annual Report.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts business activities in New Zealand and Australia
(related to the Blue Star Group) and Canada (two coffee businesses) and has a
49% equity interest in a business in the United Kingdom. As a result, the
Company is exposed to foreign currency exchange rate risk primarily due to its
transactions and net assets denominated in New Zealand (NZD), Australian (AUD),
and Canadian (CDN) dollars and the Pound Sterling. The Blue Star Group uses
foreign currency forward contracts to hedge the impact of adverse fluctuations
in the exchange rate on the purchases of goods from overseas markets, as well as
on the interest paid related to intercompany debt obligations denominated in
U.S. dollars. The Company has not entered into any derivative instruments with
respect to the CDN dollar or the Pound Sterling.
The U.S. dollar is the functional currency for the Company's consolidated
results of operations and financial position. For the Company's subsidiaries in
New Zealand, Australia and Canada, the functional currency is the NZD, AUD and
CDN dollar, respectively. The functional currency of the Company's equity
investment in the United Kingdom is the Pound Sterling. The cumulative
transaction effects for the subsidiaries using functional currencies other than
the U.S. dollar are included in accumulated other comprehensive loss in
consolidated stockholders' equity, with the exception of the Company's U.S.
dollar denominated $400 million of intercompany loans with the Blue Star Group.
The impact of the fluctuation in the NZD and AUD dollars on these intercompany
loans is reflected in the recognition of an unrealized foreign currency
transaction gain or loss. The effect of a USD $.01 change in the NZD exchange
rate would result in the recording of an unrealized foreign currency transaction
gain or loss of approximately $7.5 million. In addition, as of July 24, 1999,
the stockholders' equity of the Blue Star Group totaled $169.4 million.
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<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Individuals purporting to represent various classes composed of
stockholders who purchased shares of US Office Products common stock between
June 5, 1997 and November 2, 1998 filed six actions in the United States
District Court for the Southern District of New York and four actions in the
United States District Court of the District of Columbia in late 1998 and early
1999. Each of the actions named the Company and Jonathan J. Ledecky, the
Company's former Chairman and Chief Executive Officer, and, in some cases, Sands
Brothers & Co. Ltd. as defendants. The actions claimed that the defendants made
misstatements, failed to disclose material information, and otherwise violated
Sections 10(b) and/or 14 of the Securities Exchange Act of 1934 and Rules 10b-5
and 14a-9 thereunder in connection with the Company's Strategic Restructuring
Plan. Two of the actions alleged a violation of Sections 11, 12 and/or 15 of the
Securities Act of 1933 and/or breach of contract under California law relating
to the Company's acquisition of MBE. The actions seek declaratory relief,
unspecified money damages and attorney's fees. All of these actions have been
consolidated and transferred to the United States District Court for the
District of Columbia and the Company is awaiting filing of a consolidated
amended complaint. The Company intends to vigorously contest this action.
Sellers of three businesses that the Company acquired in the fall of 1997
and that were spun off in connection with the Company's Strategic Restructuring
Plan also have filed complaints in state court in Michigan, the United States
District Court for the District of Delaware, and the United States District
Court for the District of Connecticut. These lawsuits were filed on January 19,
1999, February 10, 1999 and March 3, 1999, respectively, and name, among others,
the Company as a defendant. All three of these cases have been transferred and
consolidated for pretrial purposes with the purported class-action pending in
the United States District Court for the District of Columbia. The Company also
has entered into a tolling agreement with the sellers of another business
acquired in December 1997. Each of these disputes generally relates to events
surrounding the Strategic Restructuring Plan, and the complaints that have been
filed assert claims of violation of federal and/or state securities and other
laws, fraud, misrepresentation, conspiracy, breach of contract, negligence,
and/or breach of fiduciary duty. The Company believes that these claims may be
subject to indemnification, at least in part, under the terms of the
distribution agreement that was executed in connection with the Strategic
Restructuring Plan between the Company and the companies that were spun off in
the Strategic Restructuring Plan. The Company intends to vigorously contest
these actions.
On April 14, 1998, a stockholder purporting to represent a class composed
of all the Company's stockholders filed an action in the Delaware Chancery
Court. The action names the Company and its directors as defendants, and claims
that the directors breached their fiduciary duty to stockholders of the Company
by changing the terms of the self tender offer for the Company's common stock
that was a part of the Strategic Restructuring Plan to include employee stock
options. The complaint seeks injunctive relief, damages and attorneys' fees. The
directors filed an answer denying the claims against them, and the Company has
moved to dismiss all claims against it. The Company believes that this lawsuit
is without merit and intends to vigorously contest it.
The Company is, from time to time, a party to other legal proceedings
arising in the normal course of its business. Management believes that none of
these legal proceedings will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:
i. Form 8-K dated April 15, 1999, and filed with the Commission on May 7,
1999, reporting information under Item 5.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
US OFFICE PRODUCTS COMPANY
September 3, 1999 By: /s/ Charles P. Pieper
----------------- --------------------------
Date Charles P. Pieper
Chief Executive Officer
September 3, 1999 By: /s/ Joseph T. Doyle
----------------- --------------------------
Date Joseph T. Doyle
Chief Financial Officer
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED
IN THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> APR-25-1999
<PERIOD-END> JUL-24-1999
<CASH> 44,459
<SECURITIES> 0
<RECEIVABLES> 314,653
<ALLOWANCES> (11,086)
<INVENTORY> 197,978
<CURRENT-ASSETS> 673,880
<PP&E> 373,046
<DEPRECIATION> (151,817)
<TOTAL-ASSETS> 1,976,930
<CURRENT-LIABILITIES> 328,500
<BONDS> 1,169,396
0
0
<COMMON> 37
<OTHER-SE> 452,254
<TOTAL-LIABILITY-AND-EQUITY> 1,976,930
<SALES> 625,503
<TOTAL-REVENUES> 625,503
<CGS> 450,720
<TOTAL-COSTS> 166,009<F1>
<OTHER-EXPENSES> 14,936<F2>
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 27,717
<INCOME-PRETAX> (34,379)
<INCOME-TAX> 6,852
<INCOME-CONTINUING> (27,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,527)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
<FN>
<F1>Includes $1,909 of operating restructuring costs.
<F2>Includes $13,555 of foreign currency transaction loss.
</FN>
</TABLE>
