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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED APRIL 24, 1999
COMMISSION FILE NUMBER 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 52-1906050
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
1025 THOMAS JEFFERSON STREET, NW SUITE 600E 20007
WASHINGTON, D.C. (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (202) 339-6700
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of July 13, 1999 was $141,043,062.
As of July 13, 1999, 36,790,874 shares of the Registrant's common stock,
$.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT FOR 1999 ANNUAL MEETING
OF U.S. OFFICE PRODUCTS COMPANY (TO BE FILED).
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PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL" AND "EXPECT" AND SIMILAR
EXPRESSIONS AS THEY RELATE TO U.S. OFFICE PRODUCTS COMPANY ("U.S. OFFICE
PRODUCTS" OR THE "COMPANY") OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS AFFECTING THE
COMPANY'S BUSINESS." THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company is one of the world's leading suppliers of a broad range of
office products and business services to corporate customers. The Company serves
a broad range of business customers, from large corporations to small
businesses. The Company provides office products and business services in North
America, New Zealand and Australia and--through a 49% owned subsidiary--in the
United Kingdom. The Company also franchises retail business, communications and
postal service centers through Mail Boxes Etc. ("MBE")
In North America, the Company operates three business units: office supplies
and office coffee services, office furniture and refreshment (vending) services.
Based on current revenues, the Company is one of the largest contract stationers
in the United States. The Company operates two office coffee service businesses
in Canada.
MBE, the world's largest franchisor of retail business, communications, and
postal service centers, gives the Company a substantial presence in the rapidly
growing small office/home office ("SOHO") market. MBE, which the Company
acquired in November 1997, has approximately 4,000 locations in 29 countries
around the world, with master license agreements signed for 60 countries.
Outside of North America, the Company is a leading supplier of office
products and services in New Zealand and Australia, through its Blue Star Group
Limited (New Zealand) and Blue Star Group Pty. Limited (Australia) subsidiaries
(together, "Blue Star"). Blue Star also owns and operates one of the world's
largest bookstore chains, which includes Whitcoulls stores in New Zealand and
the Angus & Robertson Bookworld chain in Australia. In addition, the Company
owns a 49% interest in Dudley Stationery Limited ("Dudley"), the second largest
contract stationer in the United Kingdom.
Since the completion of a comprehensive restructuring plan in June 1998 (the
"Strategic Restructuring Plan"), 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 ("NAOPG"). Under the new structure, the
Company has separated these businesses into the three line-of-business groups
referred to above--office supplies and office coffee services, office furniture
and refreshment (vending) services--with each group having a distinct management
team. The description of the Company's business in Part I of this Annual Report
follows the new organization. The discussion of the Company's financial results
in Part II of this Annual Report follows the organization that was in place
during the last fiscal year. In the future, the Company will discuss its
financial performance consistent with the new organizational structure.
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From its founding in October 1994, the Company grew primarily through an
aggressive acquisition program, which included the purchase of 260 businesses in
the United States and internationally. In June 1998, the Company completed the
Strategic Restructuring Plan as part of a process of moving from an
acquisition-driven growth strategy to one focused on operational improvement
within a narrower set of core businesses. As part of the Strategic Restructuring
Plan, the Company incurred substantial additional leverage to help fund a
self-tender offer. For details about the elements of the Strategic Restructuring
Plan, see Note 3 of the Notes to the Company's consolidated financial statements
appearing elsewhere in this Annual Report.
MARKET OVERVIEW
NORTH AMERICAN OFFICE PRODUCTS AND BUSINESS SERVICES
The Company competes in the market for office products and business services
in North America, including office supplies, office coffee service, office
furniture, and vending services. Substantially all of the Company's North
American operations (excluding MBE) are in the United States. For a discussion
of MBE, see "--Mail Boxes Etc." The Company owns two coffee service businesses
in Canada.
OFFICE SUPPLIES AND OFFICE COFFEE SERVICES
According to independent research reports, the office supplies market in the
United States generates over $60.0 billion in annual revenues. Office supplies
include a broad array of products including desktop accessories, writing
instruments, paper products, computer consumables, and business machines.
Historically, office supplies have been sold through three distribution
channels: (i) traditional retailers (including discount superstores); (ii) mail
order (or direct mail) marketers; and (iii) direct-to-business suppliers
("contract stationers" such as the Company's North American operations).
Independent estimates indicate that contract stationers generate approximately
$30.0 billion in annual revenues. During the last year, participants in all of
these distribution channels, as well as new competitors, have significantly
increased their use of the Internet to offer products and services directly to
customers. As a result, the Internet has become a meaningful new distribution
channel.
In recent years, as industry participants have sought to take advantage of
economies of scale, the retail and contract stationer distribution channels have
undergone significant consolidation, with several large companies emerging in
each channel. In addition, while most office supplies businesses traditionally
operated in just one of the distribution channels, more recently the Company and
many of its large competitors have sought to enter more than one of these
channels as a way of expanding their revenues and customer bases. Despite recent
consolidation and "cross channel" activity, the office supplies market remains
highly fragmented, with more than 4,300 independent suppliers representing a
significant portion of the U.S. market. With revenues of approximately $1.1
billion in office supplies (which includes the Company's revenues from catalog
furniture and office coffee services), for the fiscal year ended April 24, 1999,
the Company believes it has approximately 4% of the U.S. contract stationer
market.
The Company believes that the office coffee services industry in the United
States generates approximately $3.0 billion in annual revenues and is highly
fragmented. The Company offers office coffee services through both stand-alone
office coffee operations and through a number of its contract stationery
businesses. Effective with the start of fiscal 2000, the Company has organized
its office supplies and office coffee service businesses as a part of a single
unit, although the coffee service companies will have a distinct management team
to focus on the unique challenges and opportunities of those businesses.
OFFICE FURNITURE
The U.S. office furniture market generates approximately $12.0 billion in
annual revenues and can be divided into three segments: catalog, middle-market,
and contract furniture. Catalog furniture items include such office commodities
as low-priced chairs, file cabinets, and computer stands. Contract stationers,
direct marketers, and retailers typically sell such furniture through retail
outlets and catalog
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mailings. Middle-market furniture is of higher quality and functionality than
commodity furniture items and is available through dealers, retailers, and some
contract stationers. Contract furniture is high quality, includes customized
office configurations, often involves a significant service component, and is
usually purchased on a project basis when offices are opened or remodeled.
Contract furniture is typically sold through dealers affiliated with furniture
manufacturers. The Company believes that several thousand companies sell office
furniture to the corporate market.
Effective with the start of fiscal 2000, the Company has separated a
majority of its office furniture operations from its office supplies businesses
and has organized a new Office Furniture Division that includes substantially
all of the Company's contract and middle-market furniture businesses. The
Company will continue to manage its catalog furniture business together with its
office supplies business, because the majority of the Company's contract
stationery operations have historically offered catalog furniture to its
customers. In addition, a small number of the Company's office supplies
locations continue to have some additional furniture business integrated into
their operations. Management of the new Office Furniture Division is working
with these additional furniture operations on certain common business strategies
and tactics. With revenues of approximately $420.0 million in the contract and
middle-market furniture businesses for the fiscal year ended April 24, 1999, the
Company believes that its new Office Furniture Division has approximately a 3.5%
share of the U.S. office furniture market.
REFRESHMENT (VENDING) SERVICES
The Company believes that the vending services industry in the United States
generates approximately $22.0 billion in annual revenues and is highly
fragmented. There are approximately 8,000 vending companies nationwide, and
approximately 75% of these companies have annual revenues of $1.0 million or
less. The Company offers vending services through seven stand-alone vending
businesses. Effective with the start of fiscal 2000, the Company separated its
vending businesses from its other North American operations and created a new
"refreshment services" division. The companies in this division had aggregate
revenues for the fiscal year ended April 24, 1999 of approximately $70.0
million, representing less than a 1% share of the U.S. vending services market.
BUSINESS CUSTOMERS
The Company serves business customers almost exclusively. Business customers
can be generally divided into three segments: (i) large corporate (more than 500
employees), (ii) middle-market (25 to 500 employees) and (iii) SOHO (fewer than
25 employees). Set forth below is an overview of the major business products and
services that the Company supplies and the customer segments for which it
competes.
The Company's North American businesses, and particularly its contract
stationery operations, have historically focused the majority of their sales
efforts on local and regional customers. These customers have included both
middle-market businesses and local and regional offices of large regional or
national businesses. Some large corporate customers, which formerly allowed
their local and regional operations to make separate purchasing decisions, have
implemented centralized procurement and have converted to a national ordering
process. In addition, some of the Company's middle-market business customers
have themselves grown in size through acquisitions. These changes have had an
impact on the mix of the Company's overall customer base.
The Company currently serves business customers in all three market
segments. The Company serves a significantly larger number of middle-market
customers than large corporate customers; however, in dollar terms, the
middle-market and large corporate customer segments, respectively, account for
similar percentages of the Company's overall office supplies revenues. The large
customer segment served by the Company includes a significant number of local
and regional offices of large businesses. The Company historically has developed
a relationship with such customers that is similar to its relationships with
middle-market customers. The Company also serves a large number of SOHO
customers, but their aggregate purchases are a significantly smaller portion of
the Company's office supplies revenues.
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Historically, contract stationers have been the primary providers of office
supplies to middle-market customers, with mail order marketers and traditional
retail dealers playing secondary roles. More recently, superstore chains and
mail order marketers have gained market share in this segment. A number of new
Internet retailers have also sought to reach middle-market and SOHO customers,
stressing the convenience and flexibility of online ordering. It is too early to
judge whether these ventures will be successful in serving the needs of
middle-market corporate customers.
The large corporate segment has historically been served by contract
stationers, and the Company believes that this segment is currently the primary
focus of several of its largest competitors. In the past year, several of the
Company's largest competitors have also announced new sales and marketing
initiatives directed at middle-market customers. See "--Competition."
The Company's local business units have been successful in the past in
providing service to a portion of the large corporate customer market. Over the
past 12 months, the Company lost a significant number of larger local and
regional accounts to competitors, often when the headquarters office of a
customer's business consolidated its office supply purchasing activities and
awarded a contract to a single supplier other than the Company. During the last
few months of fiscal 1999, the Company implemented a series of sales and service
initiatives focused on large corporate customers, especially for those customers
that have significant local or regional offices with historic business ties to
the Company's local contract stationery units. The Company believes that it has
reversed the trend in this customer segment and has gained more business from
large corporate customers than it has lost since January 1999. Because this is a
highly competitive market segment and is at the core of the business of some of
the Company's major competitors, there can be no assurance that the Company will
be able to continue to gain or retain business from large corporate customers.
The SOHO segment consists of home offices, telecommuters, and small
businesses. The SOHO market has grown from 25 million people in 1993 to
approximately 48 million people in 1998. According to the U.S. Bureau of Labor
Statistics, the SOHO market for office supplies and related business services is
currently a $54.0 billion market and is expected to continue to grow. U.S.
Census Bureau statistics indicate that approximately one-half of U.S. households
will be involved in some form of small business by the year 2000. In addition to
office supplies, SOHO customers purchase a variety of business services such as
printing, packaging, fax, and computer services. This market is highly
fragmented, with products and services offered by superstores, mail order
marketers, medium to small independent outlets, Internet retailers, and
specialty service providers such as copy centers and quick print centers. MBE
specifically targets this high-growth customer segment.
MAIL BOXES ETC.
As the world's largest franchisor of retail business, communications, and
postal service centers, MBE offers a range of business products and services for
personal and business consumers. These include copying/document services,
printing, faxing, mailing and mail receiving, packing and shipping, convenience
office supplies, notary, word processing/computer time rental, Internet access,
and telephone messaging. The market for these products and services consists
primarily of mid-sized companies and SOHO customers and is highly fragmented and
growing.
Although MBE serves a broad consumer audience, its target customer includes
several high-growth market segments, such as SOHO business owners, business
people who travel frequently ("road warriors"), employees who work from home or
remotely (in a "virtual office" environment), and other busy professionals. MBE
competes with smaller businesses that offer similar products and services,
office supply superstores, and specialty operations such as copy centers and
quick print centers.
OPERATIONS OUTSIDE OF NORTH AMERICA
The Company has operations in New Zealand and Australia and a 49% ownership
interest in Dudley in the United Kingdom. The business products market is more
consolidated in New Zealand and Australia
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than in the United States. In addition, given the relatively small size of these
economies, suppliers of business products often offer a broader range of
complementary products and services than in the United States. Blue Star's
Business Supplies Group is the largest office products supplier in New Zealand
and the second-largest in Australia. With revenues from its business supplies
operations of approximately $350 million for the fiscal year ended April 24,
1999, Blue Star has a significant share of the office products market in New
Zealand and Australia. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of the impact of declines
in the value of the New Zealand and Australian dollars on the reported results
and financial condition of the Company.
Blue Star's Print Group is a multi-disciplined print provider in New Zealand
with an established presence in Australia, principally the Sydney and Melbourne
markets. The New Zealand print operations cover a broad spectrum and include
sheetfed, web-offset, convenience printing, self-adhesive labels, and print
management services. The Australian operations are predominately sheetfed, but
also include a print management services operation that was established during
the year. The Blue Star Print Group had revenues of approximately $120 million
for the fiscal year ended April 24, 1999.
Blue Star's Retail Group operates one of the largest bookstore chains in the
world, including New Zealand's leading bookseller, Whitcoulls, and Australia's
largest bookstore chain, Angus & Robertson Bookworld. With the entry of new
discount booksellers and U.S. book superstore chains, and with the growth of
Internet book retailers, this has become an increasingly competitive market.
Blue Star's retail operations (which sell primarily books, but also sell office
and school supplies, CDs and videos, and other related merchandise), had
revenues of approximately $180 million for the fiscal year ended April 24, 1999.
In June 1999, the Company announced that it had reached an agreement to sell
60% of Blue Star's Business Solutions Group. This business offers a range of
office automation products, such as personal computers and servers, telephone
systems, fax machines and photocopiers, as well as office-related services such
as systems integration, project management and consulting. For a description of
the transaction, see "Operations Outside of North America--Blue Star--Products
and Services--Technology (Business Solutions)."
In the United Kingdom, contract stationers offer products similar to those
offered by contract stationers in the United States. Office products superstores
in the United Kingdom have a relatively smaller share of the office products
market than do office products superstores in the United States. As a result of
recent acquisitions, Dudley currently has annualized revenues of more than $300
million, and the Company believes that Dudley is the second largest contract
stationer in the United Kingdom. Dudley's business includes office automation,
office furniture, educational supplies, and business services in addition to its
core contract stationery operations.
BUSINESS STRATEGIES
The Company's goal is to be the leading provider of office products and
business services in the United States and select international markets by
delivering a low-cost, high-value product selection and distribution system to
customers. The Company expects to continue to serve customers in all market
segments, although it believes that a substantial portion of both its customers
and its revenues in North America will continue to come from middle-market
businesses and local and regional offices of larger corporate customers. Through
its new initiatives to serve larger customers and its Internet strategies, the
Company expects to continue to develop its business with both larger corporate
customers and SOHO customers.
Key elements of the Company's strategies include the following:
IMPROVE PRODUCTIVITY AND ASSET USE
To achieve greater operating efficiencies, profit margins and asset
utilization, the Company intends to:
- Consolidate and eliminate duplicative or excess facilities, operating
systems, and business functions by scaling facility and inventory size
within local areas to be consistent with the size of each local
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business; rely on expanded wholesaler fulfillment through United
Stationers, Inc. where significant local stocking in Company-owned
facilities is not economical; rationalize overlapping operations; and
combine general and administrative corporate functions.
- Improve overall performance by focusing attention and resources on
underperforming businesses through a "fix, sell, or close" program; take
advantage of focused line of business and functional management teams to
disseminate the business practices of the highest performing business
units (commonly referred to as "best practices") on an accelerated basis.
- Identify and divest operations that are not central to the Company's
business strategy to promote the most efficient use of capital and of
management resources.
- Develop and implement strategic pricing plans and improve systems that
handle selection, control, and distribution of inventory to reduce
handling, storage, and overhead costs.
- Integrate operating, distribution, and information systems among business
entities through continued implementation of the Company's proprietary
Trinity 2.0 software and other information technology improvements.
- Continue to seek additional volume discounts and rebates from third-party
vendors through increased sales volume.
- Develop opportunities to distribute products and serve customers over the
Internet.
- Make a meaningful portion of incentive compensation for managers dependent
upon more efficient use of assets.
- Dispose of or sublease excess or unneeded real estate and fixed assets.
FOCUS ON ORGANIC GROWTH
The Company intends to pursue aggressively the following initiatives to
increase revenues of its existing businesses (commonly referred to as "organic
growth"):
- Develop targeted catalogs and other marketing programs to promote overall
revenue growth and the sale of higher margin products; work closely with
selected vendors to promote new and high-growth product offerings.
- Take advantage of the expertise of a new national sales team to focus
attention and resources on large corporate customer accounts that the
Company can serve profitably.
- Implement aggressive new sales reward and incentive programs for the
Company's sales force; commit to ongoing expansion of the sales force;
offer progressive sales training and the introduction of the most
contemporary tools and techniques.
- Develop individualized sales and marketing strategies within each of the
Company's business lines, to drive growth for particular product and
customer segments.
- Promote wide-spread use of the Company's trade name, both exclusively and
in conjunction with its subsidiaries' local and regional trade names, to
realize the full benefits of a national identity and reputation.
INVEST IN TECHNOLOGY AND OTHER GROWTH OPPORTUNITIES
The Company has committed itself to an aggressive technology investment
program, including e-commerce opportunities, such as the following:
- Fund an estimated $15 million program at MBE to install a satellite-based
communications network and a point-of-sale computer system to connect
franchisees and thereby increase the MBE system's ability to offer
national account and Internet customers a wide range of high-value
services; enter into strategic alliances with e-commerce leaders eBay and
iShip.com (including a 17% equity investment in iShip.com) as part of
MBE's e-commerce initiative.
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- Introduce USOPNET-TM- version 2.0 to provide the Company's customers with
a contemporary on-line ordering system that includes functionality and
customization options competitive with existing Internet products in the
industry; expand USOPNET's availability to include any Internet user (and
not just existing Company customers); develop e-commerce partnerships and
alliances for the Company's core North American businesses.
- Establish relationships with significant systems partners supplying demand
chain solutions to larger customers (such as Commerce One and Ariba) to
provide integrated procurement solutions for national customers.
- Develop Internet procurement software for smaller customers to enable them
to procure products for themselves and their offices through Internet
ordering systems.
During the second half of fiscal 1999, the Company organized a series of
Accelerated Change Teams ("ACTs") to realize many of these 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 are organized functional
experts focused by initiative, enabling the Company's 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 expect to make substantial progress during
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors Affecting The
Company's Business--Uncertainty of New Business Strategy."
The Company expects to consider selective acquisition opportunities of
businesses that it believes can be consolidated efficiently with an existing
operation or that will allow the Company to expand into a new geographic area.
The Company does not anticipate significant growth from acquisitions during
fiscal 2000. The Company's high level of indebtedness and certain tax-related
limitations on its ability to use its stock to fund acquisitions may limit its
ability to fund acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting The Company's
Business--High Level of Debt."
In certain geographic markets where the Company does not have significant
operations and cannot find a suitable acquisition candidate, it will consider
establishing a start-up business. The Company has followed this approach in
several markets, including San Francisco, Phoenix, and Dallas.
NORTH AMERICAN OPERATIONS
PRODUCTS AND SERVICES
The Company offers the following categories of products and services in
North America:
OFFICE SUPPLIES AND OFFICE COFFEE SERVICES
In the contract stationer market, the Company offers over 35,000 different
items such as desktop accessories, writing instruments, paper products, and
computer consumables. The Company also operates approximately 35 retail outlets,
primarily in Northern California under the McWhorter's name, that sell office
supplies, gifts and related products, primarily to consumers and to the SOHO
market. The Company does not consider retail distribution as a core business in
North America.
The Company generally provides next-day delivery of ordered items and, on
request, same-day delivery. This "just in time" service enables customers to
reduce overhead cost by reducing inventory and
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associated personnel and space requirements. The Company obtains office supplies
from many sources, including manufacturers and wholesalers, and maintains and
warehouses certain frequently ordered items.
The Company operates stand-alone office coffee service businesses and sells
coffee and related products and services through a number of its contract
stationery units. In addition to selling these products, the Company provides,
installs, and services coffee brewing equipment in a customer's office. In
addition to coffee, the Company offers a wide assortment of related products,
including creamers, sugar, stirrers, teas, sodas, juices, and bottled waters, as
well as snack items and all other items that are likely to be found in an
employee "breakroom" or lunch room, including plastic flatware, napkins, paper
cups, straws, and similar items.
Since September 1996, the Company has been an authorized distributor of
Starbucks-Registered Trademark- coffee to offices throughout North America. In
addition, under an agreement with Starbucks, the Company has had an exclusive
distribution arrangement in certain North American markets, in exchange for
meeting certain volume purchasing commitments to Starbucks. In light of changes
that the Company has made to its strategy for serving the office coffee market
in North America, as well as changes in Starbucks' marketing strategy, the
Company and Starbucks will end the exclusivity and volume purchasing
requirements effective October 1, 1999. The Company will continue to operate as
an authorized Starbucks distributor to the office coffee market in North
America.
OFFICE FURNITURE
The Company sells catalog, middle-market, and contract furniture. Both
contract stationers and specialized furniture dealers serve the office furniture
market. Effective with the beginning of fiscal 2000, the Company reorganized its
furniture operations to group its dedicated middle-market and contract furniture
dealers into a distinct office furniture business unit. The Office Furniture
Division is organized into three units: Haworth contract furniture dealers (who
sell primarily high-end furniture manufactured by Haworth Co.), Herman Miller
contract furniture dealers (who sell primarily high-end furniture manufactured
by Herman Miller, Inc.), and middle-market dealers (who sell middle-market
furniture manufactured by various companies and contract furniture manufactured
by manufacturers other than Haworth and Herman Miller). Each of these units has
a distinct management team made up of the leaders of the Company's highest
performing businesses in each category. One goal of this organization is to
promote improved strategic relationships between the Company and its leading
furniture manufacturers. The Company's Haworth and Herman Miller operations
include two of the largest and most profitable Haworth and Herman Miller
locations in the United States.
The Company's contract stationers sell catalog furniture along with office
supplies, and the Company is managing its catalog furniture business together
with its office supplies business. In addition, a small number of the Company's
office supplies locations continue to have some additional furniture business
integrated into their operations. See "Business--Market Overview--North American
Office Products and Business Services--Office Furniture." A number of the
Company's furniture businesses also rent office furniture and sell used office
furniture.
REFRESHMENT (VENDING) SERVICES
The Company installs, stocks, and maintains a variety of food and beverage
vending machines for business customers. The Company serves primarily businesses
with 75 or more employees. The Company's focus is on snack, beverage, and fresh
food distribution through coin operated machines. The Refreshment Services
Division has more than 15,000 machines currently in service.
SALES AND MARKETING
The Company's North American operations sell products and services primarily
through direct contact with customers through its sales associates. The Company
generally establishes and maintains its
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relationships with customers by assigning a sales associate to each customer.
Many of the Company's representatives conduct targeted, business
segment-specific marketing in their respective sales areas.
Historically, the Company has used a large, general line catalog as the
primary marketing tool for its sales representatives. The general line catalog
includes office supplies, catalog furniture, and certain coffee and related
products. The Company distributed approximately 900,000 general line catalogs in
fiscal 1999. During fiscal 1999, the Company began to make greater use of
nationally produced and distributed supplemental sales material, including
promotional flyers, targeted catalogs, and product-line specific catalogs (such
as a catalog for middle-market furniture products). The Company plans to expand
the use of these additional sales and marketing materials during fiscal 2000,
and it also intends to introduce periodic catalogs and other sales and marketing
materials targeted to industries in which the Company serves numerous clients,
including the professional services and health care industries. The Company does
not conduct significant mass-market advertising.
The Company's sales and marketing professionals work with each of the
Company's three North American business units to develop sales and marketing
strategies and materials designed for each business unit's products and
customers.
The Company's sales personnel generally receive customer orders primarily by
telephone or facsimile. In addition, the Company uses an electronic data
interchange ("EDI") system between the Company and certain of its customers. The
Company also operates USOPNET, which is an Internet-based ordering system.
Through USOPNET, the Company's customers are able to place orders directly into
the Company's computer systems, determine the availability of inventory, review
order status and order history, and generate customized reports. Orders to be
filled are routed electronically to either the Company's local warehouse or, if
the ordered item is not stocked by the Company at its local warehouse, to a
wholesaler. In the summer of 1999 the Company introduced version 2.0 of USOPNET,
which includes enhanced functionality and customization features. In the fall of
1999, the Company expects that USOPNET will begin to accept orders from anyone
having access to the Internet, rather than just from the Company's existing
customer base.
OPERATING AND GROWTH STRATEGIES
The Company's operating and growth strategies in North America include: (1)
integrating and consolidating facilities and operations to yield a competitive,
low-cost distribution system (the "supply chain"); (2) adhering to a rigorous
"fix, sell, or close" program for underperforming and non-core operations; (3)
continuing to integrate and upgrade technology systems to improve its operations
and to expand the use of e-commerce distribution; (4) expanding its sales force
and increasing the use of targeted sales and marketing materials and promotions;
and (5) developing "greenfield" (or start-up) operations in selected markets.
The Company is currently seeking to implement substantial operational and
strategic changes on an accelerated basis, and there can be no assurance that
the changes will be successful or will have the intended effect on the Company's
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting the Company's Business."
SUPPLY CHAIN
In fiscal 1999, the Company reviewed the economics and the performance of
its distribution system and tested the assumptions of its strategy to build a
significant number of new distribution centers ("DCs," which the Company
previously referred to as District Fulfillment Centers or "DFCs"). (DCs are
large, centralized warehouses that service entire geographic territories
previously served by multiple smaller business operations.) In fiscal 1999, the
Company built five new DCs. While it found that these DCs were, in most cases,
producing productivity gains, the Company concluded that DCs were not the
appropriate solution for all markets and might not yield rapid enough
improvements in some markets. Instead, the Company determined, it should adopt a
flexible supply chain model in which the size of local facilities and local
inventories would be scaled up or down to reflect the volume of business in a
particular area. In certain high-volume areas, where DCs have been most
successful, the Company may in the future open
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additional DCs. In many other areas, however, the Company concluded that it
could reduce costs and improve productivity more rapidly by using a combination
of smaller warehouses, cross-docks, and an expanded wholesaler relationship.
The Company has formed several ACTs to focus on various parts of the supply
chain model, particularly including facility consolidation, backroom service
consolidation, and enhanced inventory management. Where the Company maintains
inventory, it will continue to follow the strategy used in its DCs of reducing
low turnover products and adjusting its stocking selection to include only those
high-turnover items that are most profitably shipped from inventory, instead of
through a wholesaler.
FIX, SELL, OR CLOSE STRATEGY
During the fourth quarter of fiscal 1999, the Company reviewed the
performance of all of its business units. It developed a list of those local
operations that were performing substantially below Company-wide performance
benchmark averages. The Company concluded that these underperforming business
units were having a significant negative impact on the Company's overall
reported results and were offsetting the revenue growth and productivity
improvements at the Company's better performing units. To address this
situation, the Company implemented a "fix, sell, or close" strategy. Under this
strategy, the Company has assigned dedicated groups of employees (in some cases
assisted by outside consultants) to work to improve the performance of
underperforming units. These "fix" teams will seek to address specific operating
problems and to implement the best practices of the Company's highest performing
locations on an intensive accelerated basis. If the Company determines that it
cannot improve the performance of certain units quickly enough, or to an
acceptable level, it will seek to sell or close those operations.
As of the end of fiscal 1999, the Company had identified six businesses in
North America, with aggregate annualized revenues of approximately $180 million,
as non-core operations that it would seek to sell. Since that time, the Company
has sold one of these businesses (a reprographics business with $2 million of
annualized revenue) and has identified seven additional non-core North American
businesses, with aggregate annualized revenues of approximately $44 million,
that it will seek to sell. The Company is actively negotiating for the sale of
all of these businesses. The majority of these operations do not contribute
significantly to the Company's overall profitability and would be considered to
be "underperforming" units. The Company cannot predict whether it will be able
to sell these businesses or whether the terms of any such sale will be favorable
to the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting the Company's Business-- Ability to
Sell Businesses."
TECHNOLOGY AND E-COMMERCE
The Systems House, Inc. a subsidiary of the Company, has developed
proprietary operating and technology systems including computerized inventory
management and order processing systems, computerized quotation and job costing
systems and computerized logistics and distribution systems. The Company is
currently installing Trinity 2.0, an operating system developed by The Systems
House, and management expects that by the end of calendar year 1999
substantially all of the North American office supplies locations will have been
converted to Trinity.
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During fiscal 1999, the Company completed various enhancements to its
Trinity systems in operation around the United States. These enhancements
included expanding the use of radio frequency technology in certain warehouses,
integrating a coffee subsystem into Trinity and supporting Level III credit card
processing. The Company also brought online a data warehouse that allows it to
consolidate all transaction-based activities and produce a broad range of
reports and analyses. The Company also completed the installation of its wide
area network and is developing an Operations Center in Chicago, coordinating
Internet access and e-mail capabilities throughout its U.S. locations. Finally,
the Company successfully installed the beta site of its new client-server
Microsoft-based system for large contract furniture operations.
In fiscal 2000, the Company plans to implement a new and broader e-commerce
strategy to strengthen existing business offerings and expand into new market
segments. The Company expects this strategy to include both its existing USOPNET
offering and new offerings. The Company also will work with major Operating
Resource Management ("ORM") providers, such as Ariba and CommerceOne, to serve
customers that make use of ORM capabilities. In the second or third quarter of
fiscal 2000, the Company expects to release a new, targeted e-commerce offering
designed to appeal to businesses that wish to reduce their cost of procurement.
The e-commerce arena is highly competitive, and there can be no assurance that
the Company's strategies and offerings will be successful. See "Management's
Discussion Analysis of Financial Condition and Results of Operations--Factors
Affecting the Company's Business-- Competition on the Internet."
SALES GROWTH PROGRAMS
In fiscal 2000, the Company plans to implement a range of new programs
designed to promote sales growth. The Company has formed a new national sales
team that will focus on gaining market share with multi-location and national
customers, as well as expanding the Company's business relationships with
existing large account customers. The Company also plans to introduce several
segmented catalogs (supplementing its main general line catalog) to focus new
sales and marketing efforts on selected market segments in which the Company has
substantial experience (such as professional services and health care). New
marketing programs and the use of incentives for customers, including both
strategic pricing plans and new offerings through USOPNET, also will be used to
pursue increased business with both new and existing customers. Finally, the
Company has introduced a new national sales incentive program for its sales
force that provides rewards for exceeding both top-line growth and profitability
targets on a quarterly and annual basis.
GREENFIELD OPERATIONS
The Company expects to continue to develop "greenfield" operations where
management believes an attractive acquisition target does not exist to enter a
strategic geographic market or where management believes it can consolidate an
acquired operation into an existing operation and realize substantial
productivity gains.
MAIL BOXES ETC.
MBE is the world's largest franchisor of retail business, communication and
postal service locations ("MBE locations"). With approximately 4,000 MBE
locations in 29 countries, MBE's network is approximately nine times larger than
the network of its next largest franchise competitor. MBE's primary sources of
revenues are (1) royalty and marketing fees paid by existing franchisees, (2)
fees paid by buyers of new franchises and of international development licenses,
and (3) sales of supplies and equipment to MBE locations.
There are approximately 3,300 MBE locations operating throughout the United
States and nearly 700 MBE locations serving customers outside the United States.
MBE has granted master licenses for 60
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countries abroad, which allow the licensee to control the development of MBE
franchises in those countries. MBE's global network sold a total of
approximately $1.5 billion of products and services during fiscal 1999, a
substantial amount of which was generated by SOHO customers. While MBE's
revenues include only a small percentage of this amount (in the form of royalty
and marketing fees paid to MBE on the sale of products and services), the
Company believes that the volume of business which MBE transacts and its
extensive distribution network make it an important supplier to the SOHO market.
TECHNOLOGY/E-COMMERCE STRATEGIES
MBE has developed a series of technology initiatives intended to improve
communications among its network of franchisees, as well as offer new services
to consumers making purchases over the Internet. During the first half of fiscal
2000, MBE will be installing satellite communications and point-of-sale ("POS")
computer systems in more than 2,500 participating U.S. locations. This
technology is designed to help MBE franchisees improve customer service,
streamline accounting functions, and deliver products and services to Internet
consumers.
In the fourth quarter of fiscal 1999, MBE announced a strategic alliance
with eBay, the world's largest person-to-person online trading community. eBay
has designated MBE as the "preferred shipping solution" for eBay buyers and
sellers. The agreement with eBay calls for the development of a co-branded
shipping interface to be integrated into the eBay web site. MBE also is teaming
with iShip.com to develop a web-based shipping manifest system and is working
with eBay to develop a "hold for inspection" program that will enable eBay
buyers to accept or refuse delivery of an item upon inspection at a
participating MBE location.
FRANCHISE ARRANGEMENTS
MBE offers both individual franchises and area franchises in the United
States and master licenses in foreign countries. U.S. area franchisees are
granted the exclusive right to sell individual MBE franchises in their
respective areas. They also provide start-up assistance and continuing support
for such individual franchisees. Master licenses in foreign countries provide
the licensee with the exclusive right to develop and operate MBE locations in
those countries and the right to sell individual MBE franchises to others within
the country or territory. MBE provides its franchisees and licensees with
valuable services including, among other things, instruction at MBE University,
operational guidance, assistance in site selection, marketing, and advertising
programs.
PRODUCTS AND SERVICES
A typical MBE location offers mail and parcel receiving, packaging, and
shipping services through a number of carriers and provides small businesses
with a wide range of products and services. These products and services
generally include copying and document services, office supplies, and
communication services. Communication services typically include fax, voice
mail, and wire transfers of funds. In addition, MBE locations usually offer
convenience items such as stamps, packaging supplies, stationery supplies,
notary, and passport photos. Large corporations that need a national
distribution system use MBE locations as communication centers for their
field-based employees.
SALES AND MARKETING
MBE conducts national advertising and public relations campaigns that are
designed to market the MBE brand, including televised ad campaigns during four
consecutive Super Bowls (1996-1999). MBE's marketing strategies are based upon
extensive market research and include campaigns directed at both the consumer
and business-to-business markets. MBE also is developing programs to encourage
existing MBE franchisees to acquire additional MBE franchise units.
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OPERATING AND GROWTH STRATEGIES
MBE's operating and growth strategies include: (1) broadening its product
and services offerings; (2) using technology to offer additional products and
services and to leverage e-commerce business opportunities; (3) growing
organically through additional strategically located express service centers;
and (4) increasing its franchise base both domestically and internationally.
PRODUCTS AND SERVICES
MBE is pursuing several new programs to increase same-store revenues.
Currently, the Company is deploying system-wide technologies that will provide a
platform for the development of new products and services keyed into the rapidly
growing e-commerce arena. Among these offerings is "mbebiz.com," a virtual MBE
location that will provide online services to Internet consumers. MBE's
strategic alliances with eBay and iShip.com will further enhance its e-commerce
opportunities. This same technology will support national account initiatives
and improve overall customer service. At the same time, MBE has entered into a
major shipping agreement with Federal Express and also has formed a national
retail pilot program with the U.S. Postal Service.
EXPRESS SERVICE CENTERS
MBE also offers MBE Express-TM- business kiosk sites, which are 24-hour
self-serve, credit card-activated business centers designed to serve customers
in hotels and hospitality centers, airports, convention centers, military retail
outlets, and academic settings. These sites include computer (including
Internet) access, copying, printing, and facsimile services. The sites also
enable users to connect with MBE locations via direct-dial telephone to order or
arrange for additional services such as package receipt or delivery or document
reproduction.
FRANCHISE BASE
The global network of MBE locations has grown dramatically, with the number
of MBE locations in the United States increasing by 250 to 300 each year since
1991. MBE has implemented several new programs to market its franchises. These
programs include the Conversion Store Program, which targets potential
independent operators in the industry to convert to an MBE franchise; the Host
Store concept, which locates MBE franchises within another retail environment;
the Corporate Tour Program, in which potential franchise owners are invited to
attend a tour of MBE's headquarters in San Diego and receive formal
presentations by key departments; and a Multiple Center Ownership Program which
is designed to encourage existing successful MBE franchisees to purchase
additional locations.
INTERNATIONAL EXPANSION
MBE plans to continue to expand the number of master licensees outside of
the United States, and to continue to explore opportunities for new
relationships in other countries. MBE expects that international growth will
account for an increasingly significant proportion of the total growth of MBE
locations. Approximately 700 MBE locations are currently open outside the United
States.
OPERATIONS OUTSIDE OF NORTH AMERICA
The Company sells office products and business services and certain other
products and services in New Zealand and Australia through Blue Star and its
subsidiaries. Blue Star has organized its business into three divisions:
business supplies (office products), print, and retail. In June 1999, the
Company reached an agreement to sell a 60% interest in its technology business,
which had been operated as a fourth divisional unit. In fiscal 1999, Blue Star
had total revenues of approximately $800 million, which represents approximately
30% of the Company's total revenues.
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The Company also owns a 49% interest in Dudley, a contract stationer based
in the U.K.
BLUE STAR--PRODUCTS AND SERVICES
BUSINESS SUPPLIES
Blue Star's Business Supplies Group sells office supplies, office furniture,
packaging supplies, and similar products to corporate, commercial and SOHO
customers in New Zealand and Australia. This portion of Blue Star's business is
similar to the Company's core business in North America.
PRINT
Blue Star's Print Group has a large commercial print operation in New
Zealand. It offers a range of printed products and related services, including
commercial sheet-fed and offset printing, label manufacturing, and digital and
reprographic printing. The Group also provides specialized products and services
for certain large customers, such as printing all of New Zealand's telephone
directories and handling the pre-press printing and distribution of bills, acts
and other legislative materials for the New Zealand Parliament. The Group also
has a smaller printing operation in Australia, focused primarily on the
sheet-fed color markets.
RETAIL OPERATIONS
Blue Star's Retail Group operates approximately 270 retail book and
stationery stores throughout New Zealand and Australia (76 of which are
franchises). These stores operate primarily under the Whitcoulls name in New
Zealand and the Angus & Robertson Bookworld name in Australia. Whitcoulls is New
Zealand's leading bookseller, and Angus & Robertson Bookworld is Australia's
largest bookstore chain. Blue Star also operates the high-end Bennett's shops
and has operated the specialized London Bookshops, although it is gradually
phasing out this brand. Recently, Blue Star entered into a joint venture with
New Zealand Post to open a series of stores throughout the country that will
offer books and full postal services. These shops, known as "Books & More," will
replace some of the London Bookshops, as well as many existing New Zealand Post
retail operations.
TECHNOLOGY (BUSINESS SOLUTIONS)
Blue Star's Business Solutions Group offers a range of office automation
products, such as personal computers and servers, telephone systems, fax
machines and photocopiers, as well as office-related services such as systems
integration, project management and consulting. In fiscal 1999, the Business
Solutions Group had total revenues of approximately $150 million.
In June 1999, the Company announced that Blue Star had entered into an
agreement to sell 60% of the Business Solutions Group to an investment group led
by Eric Watson, Blue Star's executive chairman, and senior management of the
Business Solutions Group. Under the terms of the agreement, Blue Star will
receive approximately $55.5 million in cash at closing and a six-year promissory
note with a face value of $11.0 million. (Amounts are approximate, based upon a
New Zealand dollar conversion rate of $0.55.) Blue Star also will retain a 40%
equity interest in the business, subject to dilution under certain
circumstances. The transaction is subject to receipt by the buyers of necessary
commercial financing. The Company expects the transaction to be completed in the
fall of 1999. For a discussion of certain financial matters related to the
anticipated completion of this transaction, see Note 18 of the Notes to the
consolidated financial statements.
BLUE STAR--OPERATING AND GROWTH STRATEGIES
As the leading office products company in New Zealand, Blue Star's Business
Supplies Group is focused on maintaining its leadership position through
continuing to offer customers competitively priced
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products and high value services. During fiscal 1999, the Group continued to
implement a facilities consolidation program to reduce its warehousing and
distribution costs. In fiscal 2000, the Company will implement an accelerated
change program in New Zealand, similar to the program being carried out in North
America, to promote increased productivity within the New Zealand supply chain
at a faster rate.
In Australia, where Blue Star is the second-largest office products
business, the Company experienced disappointing financial performance in fiscal
1999, as competition for large corporate customers increased. The Company put in
place new management in Australia in the fourth quarter of fiscal 1999, began to
install a new information and operating system throughout Australia, and
significantly restructured its operations in Sydney, where the integration of
two acquired businesses had failed to achieve the anticipated synergies and cost
savings. The Company also implemented new sales initiatives to win back former
customers and gain new business. There can be no assurance that the Company's
strategies will prove successful. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting the Company's
Business."
Blue Star's Print Group is seeking to use its broad range of services and
capabilities to increase revenues and fill existing press capacity. A majority
of the Print Group's installed sheet-fed and label presses are relatively new
and can accommodate new revenues without the need for expansion. However, the
Print Group's growth in the web offset market in New Zealand and generally in
Australia is reliant on new capacity. Relative to the size of the market, the
Group has a small presence in Australia and is considering potential growth
opportunities involving selected acquisitions. The Group's print management
business focuses on selling to customer requirements, either by managing total
projects or providing a "total solution" across all printed products and
associated processes for large business customers. After consolidating the
majority of its acquired businesses during fiscal 1999, the Print Group believes
it is well positioned for growth. The Group intends to complete one additional
consolidation during fiscal 2000, combining two existing label businesses into a
single operation, which it expects to produce cost savings.
Blue Star also expects to continue to expand its retail store business
through a variety of strategies, including opening new stores in selected
locations, re-branding certain businesses, refurbishing certain outlets,
expanding product offerings, and introducing coffee shops in selected store
locations. In response to the entry of certain U.S. book superstores, the Retail
Group also may consider introducing a larger store format in selected markets.
DUDLEY
Dudley sells office supplies and related products and business services
throughout the United Kingdom. With annualized revenues of more than $300
million, Dudley is the second largest contract stationer in the United Kingdom.
Dudley serves as stationer to Her Majesty the Queen and the Prince of Wales.
Since the Company invested in Dudley in 1996, Dudley has more than doubled
its size through acquisitions and has opened a large, automated warehouse to
serve all of the United Kingdom. During fiscal 2000, Dudley will be installing a
common enterprise system across all of its operations.
During fiscal 2000, Dudley expects to focus on revenue growth to take
advantage of the capacity available in its new warehouse facility and
productivity improvement initiatives throughout its local operations.
COMPETITION
NORTH AMERICAN OPERATIONS
The Company's North American businesses operate in highly competitive
markets. The Company estimates that its North American contract stationer
operations have attained approximately a 4% share of the approximately $30.0
billion of annual revenues of all contract stationers in the United States. The
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Company believes that it has five major competitors, and that the combined
market share of all five of these competitors is less than 35%. The Company's
five major competitors include: Boise Cascade Office Products Corporation;
Corporate Express, Inc.; Office Depot; BT Office Products International, Inc.;
and Staples, Inc. Two of these five competitors are divisions of discount
superstore chains, and two others are primarily owned by large manufacturers of
office products. As the office products industry has undergone rapid
consolidation, many smaller office supply companies have been acquired by larger
companies or have closed. In July 1999, the parent company of BT Office Products
announced an agreement to acquire Corporate Express in a transaction the
companies expect to complete before the end of 1999. Nevertheless, the market
remains highly fragmented, with more than 4,300 independent suppliers
representing more than 50% of the U.S. market.
During fiscal 1999, several of the Company's major competitors announced
initiatives to focus additional resources on serving middle-market businesses,
which make up the Company's core customer base. The Company also decided to
devote additional resources to retaining existing large corporate customers and
gaining new ones that it can serve profitably. The Company's major competitors
have historically focused their efforts on serving large corporate customers.
The Company expects that as a result of these developments, competition among
the major contract stationers could become even more vigorous than it has been
in the past. Competition with independent contract stationers continues to be
vigorous at the local and regional levels. During fiscal 1999, the Company did
not notice substantial changes in price-based competition within the middle
market; there has historically been significant price competition in bids to
serve large corporate customers, and such competition has continued. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting the Company's Business--Ability to Compete."
During fiscal 1999, the volume of office products sales through the Internet
increased significantly, as both existing contract stationers and new market
entrants introduced new Web sites seeking to attract both consumers and business
customers. The Company anticipates that the continued growth of e-commerce could
have two noticeable effects on the market: increased competition and an
expansion of market opportunities for all participants, as e-commerce makes it
possible for a business to serve large, middle-market, and SOHO customers that
have traditionally been served primarily through separate distribution channels.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Factors Affecting the Company's Business--Competition on the
Internet."
The Company's office coffee service operations compete primarily with
independent local and regional companies. The Company faces only two national
competitors in this segment of its business.
The Company's office furniture businesses operate in a highly fragmented and
competitive market. The Company's Haworth and Herman Miller office furniture
businesses compete primarily with local, independently owned dealerships
authorized by the manufacturers to serve as distributors. The Company's
middle-market office furniture operators also compete primarily with local,
independently owned businesses, although a small number of large, national
competitors also operate in this segment of the business.
Refreshment (vending) services has several large regional competitors who
continue on an aggressive acquisition pace. The Company has true national
competition from only one competitor. The majority of the competition continues
to come from small independent market companies.
In all of the markets that the Company serves or may in the future seek to
serve, the Company believes that customers not only are concerned with the
overall reduction of their office products costs, but also place an emphasis on
dependability, superior levels of service, and flexible delivery capabilities.
The Company believes that it competes favorably with its largest competitors on
the basis of service and price. However, some of these companies have greater
financial resources than the Company.
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MAIL BOXES ETC.
The market for ancillary services and products served by MBE, including
copying and document services, office supplies, faxing, and similar services, is
highly fragmented. Currently, national/regional chains, small to medium
independent outlets, as well as specialty service providers such as copy
centers, quick print centers, and office supply companies, offer these products
and services. In addition, approximately 10,000 other independent or franchised
postal and business service centers operate in the United States and compete
with MBE.
OPERATIONS OUTSIDE OF NORTH AMERICA
The office products markets in which Blue Star operates are extremely
competitive and highly fragmented. In New Zealand, Blue Star has a leading
market position but is facing increasing competition from its three main
competitors--Corporate Express, Warehouse Stationery and Office Products Depot.
Together with Blue Star, these businesses serve the vast majority of the
corporate office products' market. Independent operators and retail bookstore
chains are the primary outlets serving the remainder of the market.
In Australia, Corporate Express, Boise Cascade and Viking Office Products
are Blue Star's major competitors in the office products business. Together,
these businesses possess less than a 50% market share, and the market remains
highly fragmented with a large number of regionally based independent contract
stationers.
In both Australia and New Zealand, Blue Star operates the leading retail
bookstore chains in competition with national brands such as Dymocks in
Australia and New Zealand and Collins in Australia, as well as various
independent regionally based retailers. One U.S. book superstore chain has
recently entered the Australian market, and other U.S. and international
superstore operators have expressed an interest in Australia. U.S. superstore
entry into New Zealand is expected before the end of calendar year 1999.
The print market in both Australia and New Zealand is very competitive and
highly fragmented. Across the various sectors of the print market Blue Star
operates in both Australia and New Zealand, Blue Star has a number of major
competitors, most of which are independent regionally based organizations. Blue
Star is New Zealand's largest commercial printing organization.
EMPLOYEES
The Company currently has approximately 14,700 full-time employees, a small
number of whom are members of labor unions. In general, the Company considers
its relations with its employees to be satisfactory. Few of the Company's
operations have any organized labor. Of the operations where organized labor
exists, two subsidiaries in North America have labor union contracts (governing
the employment of a total of 85 employees), which are subject to renegotiation
in fiscal 2000. In view of the Company's current operating strategy, certain
aspects of these North American renegotiations may be difficult. Additional
collective bargaining agreements covering a small number of the Company's
employees at certain locations in New Zealand and Australia also are subject to
renegotation in fiscal 2000. There can be no assurances that these negotiations
will be completed successfully or that difficulties will not result in adverse
effects on the Company's operations.
ITEM 2. PROPERTIES
The Company operates more than 780 facilities in various states and in New
Zealand, Australia and Canada, including one facility located in Washington,
D.C. for its corporate headquarters. Of these facilities, more than 90% are
leased and the rest are owned. The facilities are used for retail, warehouse and
office purposes, or a combination of these functions. The aggregate square
footage for all facilities is
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approximately 10.1 million square feet. The Company leases approximately 8.4
million square feet and owns approximately 1.7 million square feet. The
aggregate square footage consists of approximately 2.4 million square feet for
retail use, approximately 5.6 million square feet for warehouse use, and
approximately 2.1 million square feet for office use.
The terms on the Company's leases are from one month to 20 years, with the
majority of the terms ranging from five to ten years. The Company generally pays
market rates for its leases.
Approximately 156 leases, representing approximately 21% of the Company's
total leased space, will expire in the next twelve months. Several of these
leases contain renewal options. Where necessary, the Company intends to seek to
renew or extend such expiring leases, and the Company believes that it will be
able to do so on terms that are acceptable to it. When no renewal option exists
or the property is no longer a desirable location for operational purposes, the
Company will evaluate the local real estate market and seek to identify
alternative space in sufficient time to negotiate an acceptable lease agreement
prior to the expiration of the existing lease. The Company has generally been
able to renew or extend its expiring leases, and enter into new leases where
necessary, on acceptable terms.
The Company is evaluating its properties and consolidating and disposing of
redundant or inefficient facilities that have resulted from acquisitions of
businesses in the same geographic area, closure of certain operations, and a
shift in the business strategy involving the Company's plans for warehousing and
distribution. See "Business--Business Strategies."
The Company believes that its facilities are and will be suitable for their
respective purposes, and will be of the type and capacity to meet the Company's
present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Individuals purporting to represent various classes composed of stockholders
who purchased shares of U.S. 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. The Delaware and Connecticut 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.
A motion to transfer and consolidate the Michigan case is pending. The Company
also has entered into a tolling agreement with the seller 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
19
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the quarter ended April 24, 1999.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth for the periods indicated the high bid and
low ask sales prices for the Common Stock, as reported on the Nasdaq National
Market for each fiscal quarter during the last two fiscal years. On November 6,
1997, the Company effected a three-for-two split of the common stock, and on
June 10, 1998, the Company effected a one-for-four reverse stock split of the
common stock. The prices given below are adjusted retroactively to reflect these
actions. As described in Note 3 of the Notes to the Company's audited
consolidated financial statements included elsewhere in this Annual Report, on
June 10, 1998, the Company completed the Strategic Restructuring Plan and the
Financing Transactions (as those terms are defined in Note 3). At that time, the
Company distributed approximately $934.6 million of cash to its stockholders and
optionholders in a self-tender and distributed the stock of four of its
operating divisions to its stockholders in four tax-free spin-offs. The Company
also substantially increased its indebtedness. As a result of these actions, the
trading price of the stock after June 10, 1998 (the first quarter of fiscal
1999) is not comparable to the trading price in earlier periods. The stock
prices appearing
20
<PAGE>
below do not adjust retroactively for the effects of the Strategic Restructuring
Plan and the Financing Transactions. Since June 10, 1998, the highest bid price
of the Company's Common Stock is $28.38.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED APRIL 25, 1998
First fiscal quarter......................................................................... $ 82.33 $ 58.68
Second fiscal quarter........................................................................ $ 103.67 $ 68.84
Third fiscal quarter......................................................................... $ 99.32 $ 58.75
Fourth fiscal quarter........................................................................ $ 79.25 $ 67.00
FISCAL YEAR ENDED APRIL 24, 1999
First fiscal quarter......................................................................... $ 74.00 $ 12.56
Second fiscal quarter........................................................................ $ 13.88 $ 6.00
Third fiscal quarter......................................................................... $ 8.81 $ 3.88
Fourth fiscal quarter........................................................................ $ 6.81 $ 3.25
</TABLE>
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of the Company's common stock as of June 30,
1999 was 649. The Company believes that a substantially larger number of
beneficial owners hold such shares of common stock in depository or nominee
form.
DIVIDENDS
The Company has not declared or paid any cash dividends on the Company's
common stock to date and does not anticipate paying any cash dividends on its
shares of common stock in the foreseeable future because it intends to retain
its earnings, if any, to finance the expansion of its business and for general
corporate purposes. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant. Further, the
Company's credit facility restricts the Company's ability to pay dividends,
permitting the payment of dividends only (i) in the form of Common Stock (or
rights to purchase Common Stock) or (ii) in the event the Company makes a public
offering of its Common Stock, up to 6% of the aggregate gross proceeds from such
public offering.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the five years ended April 24, 1999. The selected statement of operations data
and selected statement of cash flows data for the fiscal years ended April 24,
1999, April 25, 1998, and April 26, 1997 and the selected balance sheet data as
of April 24, 1999 and April 25, 1998, have been derived from the Company's
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP and that appear elsewhere in this Annual Report. The
PricewaterhouseCoopers LLP report on such financial statements appears elsewhere
in this Annual Report. The selected statement of operations data and selected
statement of cash flows data for the fiscal years ended April 30, 1996 and 1995
and the selected balance sheet data as of April 30, 1996, have been derived from
the Company's consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, whose report was based in part on the reports of
other independent accountants, not included elsewhere in this Annual Report. The
selected balance sheet data as of April 30, 1995 have been derived from
unaudited combined financial statements of the Company not included elsewhere in
this Annual Report.
21
<PAGE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26, APRIL 30, APRIL 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ----------
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 2,664,589 $ 2,611,740 $ 2,115,954 $ 1,061,528 $ 658,494
Cost of revenues............................. 1,933,796 1,884,892 1,518,287 789,436 485,955
------------ ------------ ------------ ------------ ----------
Gross profit............................... 730,793 726,848 597,667 272,092 172,539
Selling, general and administrative
expenses................................... 635,181 591,463 488,215 231,569 152,176
Amortization expense......................... 25,834 19,938 12,416 2,711 801
Strategic Restructuring Plan costs........... 97,505
Impaired asset write-offs.................... 58,735
Operating restructuring costs................ 24,042 6,187 4,201 682
Non-recurring acquisition costs.............. 8,001 8,057
------------ ------------ ------------ ------------ ----------
Operating income (loss).................... (110,504) 109,260 84,834 29,073 19,562
Interest expense............................. 106,291 37,837 36,047 8,132 3,401
Interest income.............................. (2,070) (1,853) (6,857) (3,506) (675)
Loss on sale and closure of businesses....... 10,199
Other expense (income)....................... 2,980 (7,146) (4,233) (684) (1,456)
------------ ------------ ------------ ------------ ----------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and extraordinary items.............. (227,904) 80,422 59,877 25,131 18,292
Provision for (benefit from) income taxes.... (30,402) 36,946 27,939 6,032 2,800
------------ ------------ ------------ ------------ ----------
Income (loss) from continuing operations
before extraordinary items................. (197,502) 43,476 31,938 19,099 15,492
Income (loss) from discontinued operations,
net of income taxes (2).................... (1,294) 23,712 26,800 15,778 15,675
------------ ------------ ------------ ------------ ----------
Income (loss) before extraordinary items..... (198,796) 67,188 58,738 34,877 31,167
Extraordinary items--losses on early
terminations of debt facilities, net of
income taxes............................... 269 1,450 701
------------ ------------ ------------ ------------ ----------
Net income (loss)............................ $ (199,065) $ 67,188 $ 57,288 $ 34,176 $ 31,167
------------ ------------ ------------ ------------ ----------
------------ ------------ ------------ ------------ ----------
</TABLE>
22
<PAGE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
<S> <C> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26, APRIL 30,
1999 1998 1997 1996
----------- ----------- ----------- -----------
Per share amounts(3):
Basic:
Income (loss) from continuing operations before extraordinary
items............................................................ $ (5.45) $ 1.45 $ 1.42 $ 1.13
Income (loss) from discontinued operations......................... (0.03) 0.80 1.19 0.93
Extraordinary items................................................ (0.01) (0.06) (0.04)
----------- ----------- ----------- -----------
Net income (loss).................................................. $ (5.49) $ 2.25 $ 2.55 $ 2.02
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted:
Income (loss) from continuing operations before extraordinary
items............................................................ $ (5.45) $ 1.43 $ 1.39 $ 1.12
Income (loss) from discontinued operations......................... (0.03) 0.77 1.17 0.92
Extraordinary items................................................ (0.01) (0.06) (0.04)
----------- ----------- ----------- -----------
Net income (loss).................................................. $ (5.49) $ 2.20 $ 2.50 $ 2.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
<S> <C>
APRIL 30,
1995
-----------
Per share amounts(3):
Basic:
Income (loss) from continuing operations before extraordinary
items............................................................ $ 1.36
Income (loss) from discontinued operations......................... 1.38
Extraordinary items................................................
-----------
Net income (loss).................................................. $ 2.74
-----------
-----------
Diluted:
Income (loss) from continuing operations before extraordinary
items............................................................ $ 1.36
Income (loss) from discontinued operations......................... 1.37
Extraordinary items................................................
-----------
Net income (loss).................................................. $ 2.73
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26, APRIL 30, APRIL 30,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
STATEMENT OF CASH FLOWS DATA:
EBITDA (4) (5)........................................ $ 137,351 $ 172,614 $ 133,138 $ 48,811 $ 26,083
Net cash provided by operating activities............. 61,547 83,562 15,812 19,246 7,741
Net cash used in investing activities................. (74,667) (150,389) (423,955) (120,061) (26,175)
Net cash provided by financing activities............. 49,383 76,418 277,420 257,766 22,255
Net increase (decrease) in cash and cash
equivalents......................................... 24,081 7,995 (139,457) 158,537 7,190
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26, APRIL 30, APRIL 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (6)........................... $ 358,863 $ 53,000 $ 233,986 $ 274,124 $ 70,153
Total assets.................................. 2,012,159 2,541,427 1,711,873 805,978 259,904
Long-term debt, less current portion.......... 1,171,429 382,174 380,209 176,230 18,841
Stockholders' equity.......................... 479,542 1,486,131 921,148 394,746 128,512
</TABLE>
- ------------------------
(1) As a result of the completion of the Strategic Restructuring Plan in June
1998, the Company expects that future results will differ significantly from
historical results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(2) The results of the Spin-Off Companies are reflected as discontinued
operations for all periods presented in the Company's consolidated statement
of operations. For a description of the Spin-Off Companies see Note 2 of the
Notes to the Company's consolidated financial statements.
23
<PAGE>
(3) The per share amounts give effect to the three-for-two stock split effective
November 6, 1997 and the one-for-four reverse stock split completed by the
Company in June 1998 in conjunction with the Strategic Restructuring Plan.
(4) EBITDA represents income from continuing operations before interest expense,
provision for income taxes, depreciation expense, amortization expense,
Strategic Restructuring Plan costs, operating restructuring costs, impaired
asset write-offs, non-recurring acquisition costs, loss on sale and closure
of businesses, other (income) expense and extraordinary items. EBITDA is
provided because it is a measure commonly used by analysts and investors to
determine a company's ability to incur and service 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.
(5) In accordance with the definitions contained in the Company's bank credit
agreement, certain non-recurring charges totaling $24.4 million and certain
pro-forma adjustments totaling $4.2 million are added back to the $137.4
million of EBITDA for the year ended April 24, 1999 for the purpose of
calculating "Consolidated EBITDA," (as defined in the bank credit agreement)
and determining compliance with the underlying debt covenants. The
non-recurring charges relate primarily to inventory and receivable reserves
and strategic consulting fees. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction." The pro-forma
adjustments represent the net addition of the results for the period from
the beginning of fiscal 1999 to the date of acquisition of the 22 companies
acquired in purchase acquisitions during fiscal 1999 and the net removal of
results for the period from the beginning of fiscal 1999 to the date of sale
or closure for the three businesses sold or closed during fiscal 1999.
(6) Working capital as of April 25, 1998 includes $365.0 million of short-term
debt due under the Former Credit Facility. For a description of the Former
Credit Facility, see Note 9 of the Notes to the Company's consolidated
financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements, including the related notes thereto,
appearing elsewhere in this Annual Report. Capitalized terms used in the
following discussion without separate definitions have the respective meanings
given to them in Note 3 of the Notes to the Company's audited consolidated
financial statements included elsewhere in the Annual Report.
Except where specifically noted, the discussion of financial condition and
results of operations that appears below covers only the Company's continuing
operations. For additional information about the results of discontinued
operations, see Note 3 of the Notes to the Company's consolidated financial
statements included elsewhere in this Annual Report.
INTRODUCTION
OPERATING ORGANIZATION
During fiscal 1999, the Company was organized into three operating
divisions: the North American Office Products Group, which included office
supplies, office furniture, and breakroom products and services (office coffee,
beverage, and vending services) ("NAOPG"); Mail Boxes Etc. ("MBE"); and the
Company's international operations in New Zealand and Australia owned
principally through Blue Star Group Limited ("Blue Star"). The Company also
holds a 49% equity interest in Dudley Stationery Limited
24
<PAGE>
("Dudley"), a UK contract stationer. The NAOPG operates primarily in the United
States; it also includes two coffee and beverage businesses located in Canada.
At the start of fiscal 2000, the Company made changes to its organizational
structure. These changes are described in "Business--Company Overview."
OPERATING REVENUES AND EXPENSES
The Company derives revenues primarily from the sale of a wide variety of
office supplies and other office products, office furniture, office coffee
service and related products, 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 locations.
Cost of revenues represents the purchase price for a wide variety of office
supplies and other office products, office furniture, office coffee services and
related products, 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 locations.
Selling, general and administrative expenses represent product marketing and
selling costs, customer service and product design costs, warehouse costs, and
other administrative expenses.
FACTORS AFFECTING COMPARABILITY
The Company's financial condition and results of operations have changed
dramatically in fiscal 1999 as compared to fiscal 1998 and earlier years. The
results of operations in fiscal 1999 were affected by the Company's Strategic
Restructuring Plan and Financing Transactions, which were completed in June
1998, the Company's shift away from acquisitions, operating restructuring costs
and accelerated change activities. Results in fiscal 1998 were affected by
acquisition activity during and before that year. Results were affected in both
years by fluctuating exchange rates.
STRATEGIC RESTRUCTURING PLAN AND FINANCING TRANSACTIONS
In June 1998, the Company completed the Strategic Restructuring Plan and the
Financing Transactions. The Strategic Restructuring Plan and Financing
Transactions included the spin-off to the Company's stockholders of four of the
Company's divisions, the repurchase (in a self-tender) of approximately $934.6
million of the Company's common stock (including shares underlying stock
options), borrowings under a new bank debt facility and the issuance of $400.0
million of senior subordinated notes, which increased debt to a total of
approximately $1.2 billion, and an equity investment by a fund managed by
Clayton, Dubilier & Rice, Inc. ("CD&R") of approximately $270.0 million. For a
complete description of the Strategic Restructuring Plan and the Financing
Transactions, see Note 3 of the Notes to the Company's consolidated financial
statements appearing elsewhere in this Annual Report.
As a result of the Strategic Restructuring Plan and the Financing
Transactions, the Company's reported results reflect substantially higher
interest expense and substantially different effective income tax rates than in
prior periods. Consistent with the Company's announced expectations at the time
it adopted the Strategic Restructuring Plan, the increased interest expense
significantly reduced the Company's reported earnings in fiscal 1999, as
compared to prior periods. See "--Consolidated Results of Operations." Rather
than net income and net income per share, management believes that a more
meaningful indication of the Company's performance is cash flows from operations
and earnings from continuing operations before interest expense, provision for
income taxes, depreciation expense, amortization
25
<PAGE>
expense, Strategic Restructuring Plan costs, operating restructuring costs,
impaired asset write-offs, non-recurring acquisition costs, loss on sale and
closure of businesses, other (income) expense and extraordinary items
("EBITDA"). For information regarding EBITDA, see "Selected Financial Data."
ACQUISITIONS
From its inception in 1994 through the end of the 1997 calendar year, the
Company grew primarily through acquisitions. The Company completed 238 business
combinations (195 related to continuing operations and 43 related to
discontinued operations) from its inception through the end of fiscal 1998. The
Company accounted for 54 of these acquisitions under the pooling-of-interests
method (39 related to continuing operations and 15 related to discontinued
operations). The Company accounted for all 73 business combinations completed
during fiscal 1998 under the purchase method.
The Company completed 22 business combinations during fiscal 1999, all of
which were accounted for under the purchase method. Consistent with the
Company's announced expectations, acquisitions have involved smaller businesses
and have accounted for a much smaller percentage of the Company's revenue growth
than in the past. In November 1998, the Company indicated that it intended to
reduce future acquisitions even further than originally expected, in order to
devote substantially all of its management attention and capital resources to
the operation of its existing businesses. The Company did not complete any
acquisitions after November 1998.
The Company's consolidated financial statements give retroactive effect to
the business combinations accounted for under the pooling-of-interests method
during fiscal 1997. They also include the results of companies acquired in
business combinations accounted for under the purchase method from their
respective acquisition dates.
As previously announced, the Company's strategy is to focus on operational
improvements and significantly reduce its acquisition activity. The Company
expects that the impact of acquisitions on its future results will decrease
because the number and size of companies that it acquires are likely to be much
smaller, and the Company's existing operations are much larger, than in prior
years.
EFFECTS OF FLUCTUATING EXCHANGE RATES
The Company derives approximately one-third of its revenues from operations
in New Zealand and Australia. Consequently, the Company's results of operations,
cash flows, and financial position will continue to be affected by fluctuations
in foreign currency exchange rates. The exchange rates for the New Zealand and
Australian dollars, as compared to the U.S. dollar, have declined significantly
since the beginning of fiscal 1998. See "--Liquidity and Capital Resources" and
"--Factors Affecting the Company's Business--Declines in Foreign Currencies." As
a result, the U.S. dollar value of revenues from operations in New Zealand and
Australia have declined.
OPERATING RESTRUCTURING CHARGES
Consistent with the objectives of the Strategic Restructuring Plan and as
part of the Company's increased focus on operational matters, the Company
instituted cost reduction measures following completion of the Strategic
Restructuring Plan. These measures included reductions in headcount, the
elimination of duplicative facilities, the consolidation of certain operating
functions, and the elimination of multiple information systems to move the
Company to common information systems. In implementing these cost reduction
measures, the Company has incurred, and in the future expects to incur, certain
operating restructuring costs. The Company recorded operating restructuring
charges of $24.0 million in fiscal 1999, reflecting the costs of these measures
actually being implemented. Approximately $4.2 million of these charges
reflected non-cash items. A majority of these charges reflected severance costs
relating to employees who were notified that their positions were being
eliminated. The remainder of the charges
26
<PAGE>
reflected costs associated with facility consolidations and asset write-downs
(including elimination of certain information systems).
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 are organized functional experts focused by initiative, enabling the
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 expect to
make substantial progress during 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. See "--Factors
Affecting the Company's Business-- Uncertainty of New Business Strategy."
As previously highlighted in the disclosures made at the end of the third
fiscal quarter, the expenses associated with the Company's accelerated change
programs had a significant negative effect on its results in the fourth quarter
of fiscal 1999. These expenses consisted primarily of (1) additional SG&A
expense related to outside resources to refine the Company's financial and
operating change management strategies; (2) inventory and receivable related
charges (including those discussed below); and (3) impaired asset write-offs
related to under-performing businesses in North America and Australia, as
discussed in Note 8 of the Notes to the Company's consolidated financial
statements. Management expects expenses to remain elevated during the first half
of fiscal 2000 as it continues to implement accelerated change programs. See
"--Results of Operations."
The Company's operational changes have included consolidation of warehouse
and distribution facilities, and the Company plans to complete significant
additional consolidations in the near future. In a number of consolidations that
the Company completed later in fiscal 1999, it found that inventory losses
realized in the consolidation process were greater than reserves previously
established to cover slow moving and obsolete inventory. As a result of this
experience, and in connection with the Company's accelerated change initiatives,
the Company developed new methodologies to calculate the estimated reserve for
obsolete and slow moving inventory in NAOPG, which resulted in the recognition
of additional inventory reserves of approximately $7.0 million in the fourth
quarter of fiscal 1999.
In connection with the Company's operational changes and accelerated change
initiatives, the Company also determined that uniform accounts receivable
reserve guidelines were appropriate for its operating units. Implementation of
the new guidelines resulted in the recording of an additional allowance for
doubtful accounts of approximately $1.2 million.
The Company is in the early stages of developing these initiatives, and
there is no assurance that they will be successful. 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 may also
result in additional charges including severance costs, facility closure costs,
and write-downs or write-offs of goodwill and other assets. See "--Liquidity and
Capital Resources" and "--Factors Affecting the Company's Business."
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
27
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the fiscal years ended April 24, 1999, April 25, 1998 and April 26, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- ----------- -----------
Revenues........................................................................... 100.0% 100.0% 100.0%
Cost of revenues................................................................... 72.6 72.2 71.8
----- ----- -----
Gross profit................................................................... 27.4 27.8 28.2
Selling, general and administrative expenses....................................... 23.8 22.6 23.1
Amortization expense............................................................... 1.0 0.8 0.6
Strategic Restructuring Plan costs................................................. 3.7
Impaired asset write-offs.......................................................... 2.2
Operating restructuring costs...................................................... 0.8 0.2 0.1
Non-recurring acquisition costs.................................................... 0.4
----- ----- -----
Operating income (loss)........................................................ (4.1) 4.2 4.0
Interest expense, net.............................................................. 3.9 1.4 1.4
Loss on sale and closure of businesses............................................. 0.4
Other (income) expense............................................................. 0.1 (0.3) (0.2)
----- ----- -----
Income (loss) from continuing operations before provision for (benefit from) income
taxes and extraordinary items.................................................... (8.5) 3.1 2.8
Provision for (benefit from) income taxes.......................................... (1.1) 1.4 1.3
----- ----- -----
Income (loss) from continuing operations before extraordinary items................ (7.4) 1.7 1.5
Income (loss) from discontinued operations, net of income taxes.................... (0.1) 0.9 1.3
----- ----- -----
Income (loss) before extraordinary items........................................... (7.5) 2.6 2.8
Extraordinary items, net of income taxes........................................... 0.1
----- ----- -----
Net income (loss).................................................................. (7.5)% 2.6% 2.7%
----- ----- -----
----- ----- -----
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
YEAR ENDED APRIL 24, 1999 COMPARED TO THE YEAR ENDED APRIL 25, 1998
CONSOLIDATED REVENUES
Consolidated revenues increased 2.0%, from $2.61 billion for the fiscal year
ended April 25, 1998, to $2.66 billion for the fiscal year ended April 24, 1999.
This increase was primarily due to acquisitions. Revenues for fiscal 1999
include revenues from 73 companies acquired in business combinations accounted
for under the purchase method after the beginning of fiscal 1998 (the "Purchased
Companies"). Revenues from 51 such companies were included in revenues for a
portion of fiscal 1998. This increase was partially offset by a decline in
international revenues as a result of the devaluation of the New Zealand and
Australian dollars against the U.S. dollar (the "USD"). Because revenues
generated in New Zealand and Australia contributed approximately one-third of
the Company's consolidated revenues during this period, management estimates
that currency devaluation had the effect of reducing the Company's increase in
28
<PAGE>
reported consolidated revenues (in U.S. dollar terms) by approximately 5.5%. On
a pro forma basis, giving effect to the Strategic Restructuring Plan, and the
purchase acquisitions and business closures and divestitures completed after the
beginning of fiscal 1998, as if such transactions were completed as of the
beginning of fiscal 1998, and assuming that the average exchange rates for the
New Zealand and Australian dollars in fiscal 1998 were equal to the average
exchange rates in fiscal 1999, revenues increased 1.0%.
NAOPG REVENUES
NAOPG revenues increased 4.8% from $1.71 billion or 65.4% of consolidated
revenues for the fiscal year ended April 25, 1998, to $1.79 billion or 67.2% of
consolidated revenues for the fiscal year ended April 24, 1999. This increase
was primarily due to the completion of 42 acquisitions since the beginning of
fiscal 1998. On a pro forma basis, assuming all acquisitions were completed at
the beginning of fiscal 1998, NAOPG revenues in fiscal 1999 increased only 0.1%.
This slight increase was primarily due to the impact of losing a number of
larger local and regional accounts to competitors, often when the headquarters
office of a customer's business consolidated its office supply purchasing
activities and awarded a contract to a single supplier other than the Company.
In addition, the Company had weak sales volume in a number of underperforming
local business units particularly within the contract furniture operations.
These businesses are now being managed aggressively through the Company's "fix,
sell or close" strategy. See "Business--Business Strategies." Although the
Company has been successful in adding a substantial number of mid-sized and
smaller accounts, the loss of larger customer business more than offset the
increase in business from such mid-sized and smaller accounts. To address the
loss of larger customers, the Company has instituted a national accounts system
that allows it to handle such customers' order, pricing, billing and delivery
requirements. The Company has also created a national sales team to help support
sales initiatives intended to gain large account business.
BLUE STAR REVENUES
Blue Star revenues decreased 8.2%, from $872.9 million, or 33.4% of
consolidated revenues, for the fiscal year ended April 25, 1998, to $801.4
million, or 30.1% of consolidated revenues, for the fiscal year ended April 24,
1999. This decrease is due primarily to the devaluation of the New Zealand and
Australian dollars against the USD since the beginning of fiscal 1998. The
following table details the declines in the average exchange rates of the New
Zealand and Australian dollars versus the USD for the fiscal year ended April
24, 1999 and April 25, 1998:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES
FOR THE FISCAL YEAR ENDED
--------------------------------
<S> <C> <C> <C>
APRIL 24, 1999 APRIL 25, 1998 DECLINE
--------------- --------------- -----------
New Zealand dollar.................................... $ .53 $ .62 $ (.09)
Australian dollar..................................... $ .63 $ .71 $ (.08)
</TABLE>
On a pro forma basis, assuming that the average exchange rates for the New
Zealand and Australian dollars in fiscal 1998 were equal to the average exchange
rates in fiscal 1999, Blue Star revenues in New Zealand and Australia,
calculated in local currencies, increased 2.8% for the fiscal year ended April
24, 1999, as compared to the fiscal year ended April 25, 1998. This increase was
primarily the result of continuing revenue improvements in the Print and Retail
Groups, and moderate revenue growth in the New Zealand portion of the Business
Supplies Group.
MAIL BOXES ETC. REVENUES
MBE revenues increased 136.7%, from $30.5 million, or 1.2% of consolidated
revenues, for the fiscal year ended April 25, 1998, to $72.2 million, or 2.7% of
consolidated revenues, for the fiscal year ended April 24, 1999. This increase
was primarily the result of MBE only being consolidated for five months in
fiscal 1998 since MBE was acquired in November 1997. On a pro forma basis, MBE
revenues increased
29
<PAGE>
3.8% primarily due to the fact that same store sales increased 11.4% over the
last year, offset partially by reduced franchise fees because fewer domestic
area franchises were sold.
GROSS PROFIT
Consolidated gross profit increased 0.5%, from $726.8 million for the fiscal
year ended April 25, 1998, to $730.8 million for the fiscal year ended April 24,
1999. The increase in gross profit is in part related to the increase in
revenues. However, as a percentage of revenues, gross profit decreased from
27.8% for the fiscal year ended April 25, 1998, to 27.4% for the fiscal year
ended April 24, 1999. The Company believes that the decrease in gross profit as
a percentage of revenues reflects disappointing margins at certain
under-performing units at NAOPG and Blue Star. In addition, as part of the
Company's working capital initiatives commenced in the fourth quarter of fiscal
1999 as well as a detailed analysis of all businesses, the Company determined it
appropriate to record additional provisions for slow moving and obsolete
inventory in NAOPG and Blue Star. The resulting charges also reduced gross
profit.
A number of the Company's ACT initiatives discussed above in
"--Introduction" are designed to address factors that management believes are
adversely affecting gross margins, but there can be no assurances of the timing
or magnitude of such improvements, or whether they will be realized at all.
Other factors also may affect gross margins. See "--Factors Affecting the
Company's Business."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 7.4%, from $591.5
million for the fiscal year ended April 25, 1998, to $635.2 million for the
fiscal year ended April 24, 1999, due to the increase in revenues and a higher
level of corporate costs. Selling, general and administrative expenses as a
percentage of revenues increased from 22.6% for the fiscal year ended April 25,
1998, to 23.8% for the fiscal year ended April 24, 1999. The increase in
selling, general and administrative expenses as a percentage of revenues was the
net result of a number of factors, including: (i) the disposal or closure of
several under performing technology businesses in New Zealand and Australia
which operated with low overhead structures; and (ii) increased corporate
expenses, including approximately $7.0 million of consulting fees in connection
with the Company's ACT initiatives. In addition, the $1.2 million increase in
the allowance for doubtful accounts in fiscal 1999 discussed above in
"--Introduction," increased selling, general and administrative expenses.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interest in the
Company, which the Company believes has the effect of more closely aligning
their interests with the interests of stockholders of the Company. For
discussion of these stock options, see Note 14 of the Notes to the Company's
consolidated financial statements.
AMORTIZATION EXPENSE
Amortization expense increased 29.6%, from $19.9 million for the fiscal year
ended January 24, 1998, to $25.8 million for the fiscal year ended April 24,
1999. This increase was due primarily to the amortization of intangible assets
recorded in conjunction with the acquisition of the Purchased Companies.
STRATEGIC RESTRUCTURING COSTS
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of $97.5
million, $70.4 million of which were non-cash. An additional $11.7 million of
such costs were incurred by the Spin-Off Companies and were included in results
of discontinued operations. The Strategic Restructuring Plan costs related to
continuing operations consisted of: (i) compensation expense of $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
30
<PAGE>
in the Equity Tender and the $108.00 per share ($27.00 per share prior to the
Reverse Stock Split) purchase price in the Equity Tender; (ii) professional fees
(including accounting, legal, investment banking, and printing fees) of $26.2
million; and (iii) a non-cash expense of $20.5 million resulting from the
issuance of 301,646 incremental shares of common stock (with a market value of
$67.75 per share on the date of issuance) related to the temporary, effective
reduction in the conversion price of the 2001 Notes from $76.00 to $64.68 per
share ($19.00 and $16.17 per share prior to the Reverse Stock Split) on $131.0
million, principal amount, of the 2001 Notes, which the Company made as part of
the exchange offer for the 2001 Notes. For a description of the Strategic
Restructuring Plan and the Financing Transactions, see Note 3 of the Notes to
the Company's consolidated financial statements.
OPERATING RESTRUCTURING COSTS
The Company recorded operating restructuring costs of approximately $24.0
million during the fiscal year ended April 24, 1999. See "--Introduction" for a
discussion of operating restructuring costs.
IMPAIRED ASSET WRITE-OFFS
During the Company's evaluation of the recoverability of goodwill, certain
operating companies were identified as having future undiscounted cash flow
projections less than the carrying value of the unamortized goodwill related to
such companies, thus indicating impairment. As a result, in fiscal 1999 an
impairment loss of $58.7 million was recorded as a reduction to goodwill in an
amount equal to the excess of the carrying value over the future discounted cash
flows of the entities. See Note 8 of the Notes to the Company's consolidated
financial statements.
INTEREST EXPENSE
Interest expense, net of interest income, increased 189.4%, from $36.0
million for the fiscal year ended April 25, 1998, to $104.2 million for the
fiscal year ended April 24, 1999. This increase was due primarily to the
completion of the Strategic Restructuring Plan and the Financing Transactions in
June 1998, which resulted in a significant increase in both the amount of debt
outstanding and the average interest rate related to such debt. Interest expense
in fiscal 2000 is expected to be higher than fiscal 1999 because both the
increased amount of debt outstanding and related higher average interest rate
will be in place for the entire fiscal year, versus approximately ten and
one-half months in fiscal 1999.
LOSS ON SALE AND CLOSURE OF BUSINESS
The Company recorded a $10.2 million pre-tax loss on the sale and closure of
businesses during the fiscal year ended April 24, 1999. The loss was primarily
the result of the sale and closure of under-performing technology businesses in
New Zealand and Australia.
OTHER INCOME
Other income decreased by $10.1 million from $7.1 million of income for the
fiscal year ended April 25, 1998, to an expense of $3.0 million for the fiscal
year ended April 24, 1999. Other expenses include the Company's share of the net
income or loss of Dudley, in which the Company has a 49% equity investment, and
miscellaneous other income and expense items. The decrease was due primarily to
two factors. First, Dudley reported a net loss in fiscal 1999, of which the
Company's share was $0.9 million, compared to net income in fiscal 1998, of
which the Company's share amounted to $1.3 million. The loss reported by Dudley
in fiscal 1999 was primarily due to the impact of a new national distribution
facility, which increased operating costs and affected customer service levels
in the start-up period. Second, in fiscal 1998 other income included a marketing
fee of $4.7 million earned in conjunction with providing a license to use a list
of the Company's customers in the United States. The Company did not earn
similar fees in fiscal 1999.
31
<PAGE>
INCOME TAXES
The benefit from income taxes of $30.4 million for the fiscal year ended
April 24, 1999, represents an effective income tax benefit rate of 13.3%. The
13.3% effective income tax benefit rate reflects the recording of an income tax
benefit at the federal statutory rate of 35.0%, plus appropriate state, local
and foreign taxes. The effective income tax benefit rate was reduced to reflect
non-deductible goodwill amortization expense. The benefit from income taxes
gives effect to the net impact of (i) an income tax benefit of 10.3% on the
results from continuing operations, excluding the Strategic Restructuring Plan
costs, operating restructuring costs, impaired asset write-offs and loss on sale
and closure of businesses; (ii) an income tax benefit on the operating
restructuring costs ($24.0 million), a portion of the Strategic Restructuring
Plan costs ($47.0 million) and the loss on the sale and closure of businesses
($10.2 million), that are deductible for income tax purposes, and (iii) the
non-deductible nature of $58.7 million of impaired asset write-offs and $50.5
million of Strategic Restructuring Plan costs.
Provision for income taxes of $36.9 million for the fiscal year ended April
25, 1998 represents an effective income tax rate of 45.9%. The provision for
income taxes reflects the recording of an income tax provision at the federal
statutory rate of 35.0%, plus appropriate state, local and foreign taxes. The
effective tax rate was increased to reflect non-deductible goodwill amortization
expense. The effective tax benefit rate in fiscal 1999 is not comparable to the
effective tax rate in fiscal 1998 due to the combined effect of (i) the pre-tax
losses in fiscal 1999, (ii) the increase in non-deductible goodwill amortization
expense and the incurrence of significant impaired asset write-offs in fiscal
1999 and (iii) the incurrence of significant non-deductible Strategic
Restructuring Plan costs in fiscal 1999.
DISCONTINUED OPERATIONS
Discontinued operations contributed $23.7 million of income for the fiscal
year ended April 25, 1998 and a loss of $1.3 million for the fiscal year ended
April 24, 1999. There was no income from discontinued operations included in the
Company's consolidated financial statements subsequent to the Distribution,
which was completed on June 9, 1998. See Note 3 of the Notes to the Company's
consolidated financial statements included elsewhere in this Annual Report.
YEAR ENDED APRIL 25, 1998 COMPARED TO THE YEAR ENDED APRIL 26, 1997
CONSOLIDATED REVENUES
Consolidated revenues increased 23.4%, from $2.12 billion in fiscal 1997, to
$2.61 billion in fiscal 1998. This increase was primarily due to acquisitions.
Revenues for fiscal 1998 include revenues from 122 companies acquired in
business combinations accounted for under the purchase method after the
beginning of fiscal 1997 (the "Fiscal 1997 and 1998 Purchased Companies").
Revenues for fiscal 1997 include revenues from 71 of the Fiscal 1997 and 1998
Purchased Companies for a portion of such period. The increase in revenues was
partially offset by the effect on international revenues of the devaluation of
the New Zealand and Australian dollars versus the USD. Because revenues
generated in New Zealand and Australia contributed approximately one-third of
the Company's consolidated revenues in fiscal 1998, management estimates that
the currency devaluation had the effect of reducing the Company's increase in
reported consolidated revenues (in USD terms) by approximately 4.8%.
INTERNATIONAL REVENUES
International revenues increased 24.7%, from $708.4 million, or 33.5% of
consolidated revenues in fiscal 1997, to $883.0 million, or 33.8% of
consolidated revenues in fiscal 1998. International revenues consisted primarily
of revenues from New Zealand and Australia, with the balance from Canada. The
increase in international revenues was primarily due to the inclusion, in the
revenues for fiscal 1998, of revenues from 39 companies that were acquired in
business combinations accounted for under the purchase method after the
beginning of fiscal 1997, the most significant of which was Whitcoulls Group
32
<PAGE>
Limited, which the Company's wholly-owned subsidiary Blue Star Group Limited
acquired in July 1996. Revenues from 16 of such companies were included in
international revenues for a portion of fiscal 1997. The growth in international
revenues was partially reduced by a decline in the exchange rates of the New
Zealand and Australian dollars against the USD. International revenues in New
Zealand and Australia, calculated in their local currencies, increased 40.0% in
fiscal 1998, as compared to fiscal 1997. See "--Liquidity and Capital Resources"
and "--Factors Affecting the Company's Business--Operations Outside of the
United States." The following table illustrates the declines in the average
exchange rates of the New Zealand and Australian dollars versus the USD in
fiscal 1998 and 1997:
<TABLE>
<CAPTION>
AVERAGE EXCHANGE RATES
FOR THE FISCAL YEAR ENDED
--------------------------------
<S> <C> <C> <C>
APRIL 25, 1998 APRIL 26, 1997 DECLINE
--------------- --------------- -----------
New Zealand dollar.................................... $ .62 $ .70 $ (.08)
Australian dollar..................................... $ .71 $ .79 $ (.08)
</TABLE>
GROSS PROFIT
Gross profit increased 21.6%, from $597.7 million in fiscal 1997, to $726.8
million in fiscal 1998. Gross profit as a percentage of revenues decreased from
28.2% in fiscal 1997 to 27.8% in fiscal 1998. The decrease in gross profit as a
percentage of revenues was due primarily to a shift in revenue mix, primarily as
a result of acquisitions, to revenues from traditionally lower margin products
and services. In addition, the Company experienced a slight decline in gross
profit as a percentage of revenues in the fourth quarter of fiscal 1998. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors. The Company expects to continue to negotiate favorable
purchasing and rebate programs with vendors. However, the Company does not
believe that it will be able to continue to improve these programs at the same
rates as in the past, as significant progress has already been made with
vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 21.1%, from $488.2
million in fiscal 1997, to $591.5 million in fiscal 1998, primarily due to the
inclusion of the results of the Fiscal 1997 and 1998 Purchased Companies.
Selling, general and administrative expenses as a percentage of revenues
decreased from 23.1% in fiscal 1997 to 22.6% in fiscal 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues was due
to several factors, including (i) a shift in revenue mix, primarily as a result
of acquisitions, to revenues from products and services traditionally having
lower selling, general and administrative expenses; (ii) reductions in selling,
general and administrative expenses by the Company through the consolidation of
certain redundant facilities and job functions; and (iii) reductions in the
level of many general and administrative expenses incurred by the Company
through the negotiation of national or other large-scale contracts with the
providers of certain services affecting these general and administrative
expenses.
AMORTIZATION EXPENSE
Amortization expense increased 60.6%, from $12.4 million in fiscal 1997, to
$19.9 million in fiscal 1998. This increase is due exclusively to the increase
in the number of purchase acquisitions, including 12 acquisitions related to
continuing operations included in the results for fiscal 1998 versus fiscal
1997. See "--Factors Affecting the Company's Business--Intangible Assets."
NON-RECURRING ACQUISITION COSTS
The Company incurred non-recurring acquisition costs of approximately $8.0
million during fiscal 1997, in conjunction with business combinations that were
accounted for under the pooling-of-interests method. The Company did not incur
any non-recurring acquisition costs in fiscal 1998 because all of the
33
<PAGE>
Company's acquisitions in fiscal 1998 were accounted for under the purchase
method. These non-recurring acquisition costs included accounting, legal and
investment banking fees, real estate and environmental assessments and
appraisals, various regulatory fees and recognition of transaction related
obligations. Generally accepted accounting principles require the Company to
expense all acquisition costs (both those paid by the Company and those paid by
the sellers of the acquired companies) related to business combinations
accounted for under the pooling-of-interests method.
OPERATING RESTRUCTURING COSTS
The Company incurred restructuring costs of approximately $6.2 million
during fiscal 1998 and $4.2 million during fiscal 1997. These costs represent
the external costs and liabilities to close redundant Company facilities,
severance costs related to the Company's employees and other costs associated
with the Company's restructuring plans.
INTEREST EXPENSE
Interest expense, net of interest income, increased 23.3% from $29.2 million
in fiscal 1997, to $36.0 million in fiscal 1998. This was due primarily to a
reduction in interest income during fiscal 1998. The Company earned interest
income on the proceeds from the issuance of an aggregate of $230.0 million of
the 2003 Notes in May and June of 1996 (the first quarter of fiscal 1997). These
proceeds were subsequently used to fund a portion of the cash consideration used
in business combinations. Interest expense remained relatively consistent, as
steadily increasing borrowings and a declining cash position were offset by the
repayment of debt from the proceeds of a stock offering in January 1997 and
declining interest rates. As a result of the completion of the Strategic
Restructuring Plan and the Financing Transactions, the amount of debt
outstanding and the interest rates related to such debt increased significantly,
as compared to April 25, 1998. See "--Liquidity and Capital Resources" and
"--Factors Affecting the Company's Business--High Level of Debt."
OTHER INCOME
Other income increased 68.8%, from $4.2 million in fiscal 1997, to $7.1
million in fiscal 1998. Other income for fiscal 1998 of $7.1 million consisted
primarily of a $4.7 million marketing fee, a gain on the sale of an investment
and the Company's 49% share of the net income from Dudley. The Company acquired
its interest in Dudley in November 1996. Other income for fiscal 1997 of $4.2
million consisted primarily of a foreign currency gain of $3.4 million.
INCOME TAXES
Provision for income taxes increased from $27.9 million in fiscal 1997 to
$36.9 million in fiscal 1998, reflecting effective income tax rates of 46.7% and
45.9%, respectively. During both fiscal years, the effective income tax rates
reflect the recording of income tax provisions at the federal statutory rate of
35.0%, plus applicable state and local taxes. In addition, the effective income
tax rates were increased in both periods to reflect the incurrence of
non-deductible goodwill amortization expense. The provision for income taxes for
fiscal 1997 also reflects the incurrence of non-deductible, non-recurring
acquisition costs offset by the effect of several business combinations in such
period accounted for under the pooling-of-interests method, where the acquired
companies were not subject to federal income taxes on a corporate level as they
had elected to be treated as subchapter S corporations prior to being acquired
by the Company.
DISCONTINUED OPERATIONS
Income from discontinued operations decreased 11.5% from $26.8 million in
fiscal 1997 to $23.7 million in fiscal 1998. See Note 3 of the Notes to the
Company's consolidated financial statements.
34
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At April 24, 1999, the Company had cash of $76.1 million and working capital
of $358.9 million. The Company believes working capital initiatives implemented
during the fourth quarter contributed approximately $35.0 million to the
Company's improved cash position by reducing accounts receivable and managing
inventory levels, offset by an increased level of vendor payments. The
additional investment of $51.0 million in April 1999 by CD&R also contributed to
the Company's improved cash position. The Company's capitalization, defined as
the sum of long-term debt and stockholders' equity, at April 24, 1999, was
approximately $1.7 billion.
LONG-TERM DEBT
In June 1998, the Company completed the Strategic Restructuring Plan. See
Note 3 of the Notes to the Company's consolidated financial statements included
elsewhere in this Annual Report. The Company financed the aggregate cost of
purchasing shares in the Equity Tender, repurchasing $222.2 million of the 2003
Notes, and repaying its former credit facility with the proceeds of the Equity
Investment, with the net proceeds from the sale and issuance of the 2008 Notes
and borrowings under the New Credit Facility. The Company also incurred
significant transaction (including financing) costs and expenses. See
"--Consolidated Results of Operations." In connection with the completion of the
Strategic Restructuring Plan, the Company incurred approximately $400.0 million
of additional indebtedness, and the weighted average annual interest rate,
including the amortization of debt issue costs, on all outstanding indebtedness
increased from approximately 6.8% prior to completion of the Strategic
Restructuring Plan to approximately 9.2% after completion of the Strategic
Restructuring Plan.
Upon completion of the Strategic Restructuring Plan, the Company terminated
and repaid the balance outstanding under its former $500.0 million credit
facility and entered into the New Credit Facility. The New Credit Facility was
revised in April 1999. The New Credit Facility, after being revised, 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. In connection with the completion of the
Strategic Restructuring Plan and the Financing Transactions, the Company
borrowed the full amount of the two single-draw term loan facilities. 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
New Credit Facility are guaranteed by its present domestic subsidiaries; future
material domestic subsidiaries will also be required to guarantee these
obligations. The New 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 was required to enter into arrangements to ensure that
the effective interest rate paid by the Company on at least 50% of the aggregate
amount outstanding under the New Credit Facility and the 2008 Notes was at a
fixed rate of interest. As a result, the Company has entered into interest rate
swap arrangements to limit the LIBOR-based interest rate exposure on $500.0
million of the outstanding balance under the New Credit Facility to rates
ranging from 5.7% to 6.0%. The interest rate swap agreements expire over a
period ranging from 2001 to 2003. As a result of these swap agreements (and
including the fixed-rate 2008 Notes), the Company has fixed the interest rates
on $900.0 million (75.6%) of the total debt outstanding at April 24, 1999. At
April 24, 1999, the Company had total debt outstanding of approximately $1,190.6
million at a weighted average interest rate, excluding amortization of debt
issue costs, of approximately 8.6%.
In April 1999, the Company reached an agreement with its bank lenders to
revise the financial covenants and other key terms of its bank credit facility.
In addition to revising the financial covenants, the
35
<PAGE>
modifications included a reduction in the amount of the multi-draw term loan
facility from $200.0 million to $50.0 million (none of which is currently
outstanding). (The revolving credit facility previously had been reduced from
$250.0 million to $200.0 million.) The Company paid amendment fees of $2.9
million in connection with the modifications to the New Credit Facility. There
was no change to the interest rate the Company pays on borrowings under the bank
credit facility.
At April 24, 1999, the Company had $766.0 million outstanding under the New
Credit Facility and had additional borrowing availability of $200.0 million
under the revolving credit facility and of $50.0 million under the multi-term
term loan facility.
The New Credit Facility includes, among others, restrictions on the
Company's ability to incur additional indebtedness, sell assets, pay dividends,
or engage in certain other transactions, and requirements that the Company
maintain certain financial ratios, and other provisions customary for loans to
highly leveraged companies, including representations by the Company, conditions
to funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The New 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 New 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.
STOCKHOLDERS' EQUITY
In April 1999, a fund managed by CD&R, the Company's largest shareholder,
made an investment of an additional $49.3 million, net of fees of $1.7 million.
In exchange for the equity contribution, the CD&R-led fund received a new class
of non-voting preferred stock that is convertible into 7.3 million shares of the
Company's common stock. The preferred stock converts into common stock upon
transfer to anyone other than CD&R or its affiliates. The preferred stock
carries no voting rights, but where stockholder approval is required for a
merger, consolidation, or sale of all or substantially all of the Company's
assets, the preferred stock will vote together with the common stock. The
preferred stock carries no dividend right other than the right to receive the
same level of dividends as the common stock, and it has a nominal liquidation
preference. As part of the new investment, the Company amended warrants that the
CD&R-led fund acquired as a part of its original investment in the Company in
June 1998 to reduce the exercise price to $5.625 per share. The warrants cover
approximately 9.2 million shares of common stock of the Company and are
exerciseable at any time after June 10, 2000 until June 10, 2010. The Company
intends to use the proceeds for debt repayment, funding future growth
initiatives and general corporate purposes, including accelerated change
initiatives to achieve rapid improvements in key operating areas.
FOREIGN CURRENCY
During fiscal 1999, there was a net reduction in stockholders' equity,
through a cumulative translation adjustment of approximately $8.1 million,
reflecting primarily the impact of the declining exchange rate on the Company's
investments in its New Zealand subsidiaries. In addition, the devaluation
throughout the year has adversely affected the return on the Company's
investment in its New Zealand and Australian operations. The Company cannot
predict whether exchange rates will increase or decline in the future. If
36
<PAGE>
the exchange rates were to decline further, the Company's return on assets and
equity from its New Zealand and Australian operations would be further
depressed.
During fiscal 1999, the Company considered its intercompany loans to Blue
Star to be a long-term investment. As a result of the strategic review of
operations conducted during the fourth quarter of the fiscal 1999, the Company
changed its perspective on Blue Star operations and no longer considers the
intercompany loans to be long-term in nature. Accordingly, effective April 25,
1999, the Company will record the currency transaction gain (loss) related to
its intercompany loans with Blue Star as a component of income from continuing
operations.
As a result of the Company's increased indebtedness during fiscal 1999, a
portion of the cash flows from the Company's international operations is
required to service debt and interest payments. The Company incurred 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. As of April 24, 1999, the Company had remaining
outstanding foreign currency forward contracts with an aggregate notional amount
of approximately $14.0 million against the New Zealand dollar. See "--Factors
Affecting the Company's Business--Declines in Foreign Currencies."
CASH FLOWS
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the New Credit Facility will be sufficient to meet its
liquidity requirements for its operations, capital expenditures and debt service
obligations for fiscal 2000. The Company had net capital expenditures of
approximately $41.6 million in fiscal 1999 and anticipates capital expenditures
of approximately $60-$70 million in fiscal 2000 relating primarily to systems
development, e-commerce initiatives and consolidation of certain administrative
functions.
During the fiscal year ended April 24, 1999, net cash provided by operating
activities was $61.5 million. This included the payment of approximately $27.1
million of costs related to the Strategic Restructuring Plan, the payment of
approximately $15.8 million of operating restructuring costs, and decreases in
accounts receivable and inventory in the fourth quarter primarily as a result of
the Company's recent working capital initiatives. Net cash used in investing
activities for the fiscal year ended April 24, 1999, was $74.7 million,
including $34.5 million used for acquisitions and $41.6 million used for net
additions to property and equipment. Net borrowings of $556.6 million during the
fiscal year ended April 24, 1999, were used primarily to fund the Strategic
Restructuring Plan and Financing Transactions, and also to fund the purchase
prices of acquisitions and additions to property and equipment during the
period. In addition, the Company received $254.2 million related to the Equity
Investment, net of expenses, and $49.3 million in proceeds from the issuance of
preferred stock, net of expenses, from CD&R. The Company received $123.6 million
from discontinued operations to repay intercompany loan balances outstanding at
the date of the Distributions. Discontinued operations used $12.5 million of
cash during the fiscal year ended April 24, 1999.
In fiscal 2000, the Company will be required to repay $19.2 million of
outstanding debt under the New Credit Facility and other long-term debt
instuments.
During the fiscal year ended April 25, 1998, net cash provided by operating
activities was $83.6 million. Net cash used in investing activities was $150.4
million, including $40.8 million paid to Dudley to satisfy the remaining
commitment related to the Company's 49% equity investment in Dudley, $69.3
million used for acquisitions and $46.7 million used for net additions to
property and equipment, partially offset by $5.7 million received on the sale of
an investment. Net borrowings decreased $13.3 million during the fiscal year
ended April 25, 1998, primarily to fund the purchase prices of acquisitions and
to repay higher-cost debt assumed in acquisitions. The Company advanced $132.7
million to the discontinued operations during the fiscal year ended April 25,
1998 and the discontinued operations provided $2.4 million of cash during such
period.
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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 USOP group (NAOPG, MBE, Blue Star Group and Dudley)
is performing its own Year 2000 readiness review.
NAOPG
NAOPG's Year 2000 compliance process 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 planned 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 the end of 1999. Some NAOPG 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
NAOPG operating subsidiaries. The Company has determined that some of the
systems used by its NAOPG subsidiaries are not currently Year 2000 compliant,
but the Company believes that it is highly likely that these systems will be
made compliant without material expense by the 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
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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 by October 1999.
With respect to NAOPG, 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 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.
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.
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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 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 by September 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 September
30, 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, and no
on-site review or testing has been conducted to date by Company personnel. These
operations also 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. The Company's level of assurance regarding the
compliance of systems of MBE, Blue Star and Dudley is lower than if it had
conducted on-site testing. The Company plans to schedule an on-site review of
Blue Star by Company personnel in the second quarter of fiscal 2000
(August-October), to improve its level of assurance regarding these systems.
MBE, Blue Star and the Company's interest in Dudley represent approximately
one-third of the Company's consolidated revenues. If the operations of any of
these groups is 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
typically 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.
Quarterly results also may be affected by the timing and magnitude of
acquisitions and dispositions, the timing and magnitude of costs related to such
acquisitions and dispositions, variations in the prices
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paid by the Company for the products it sells, the mix of products sold, and
general economic conditions. Results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following tables set forth certain unaudited consolidated quarterly
financial data for the fiscal years ended April 24, 1999 and April 25, 1998 (in
thousands, except per share amounts). The information has been derived from
unaudited consolidated financial statements that in the opinion of management
reflect all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of such quarterly information.
<TABLE>
<CAPTION>
FISCAL 1999 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues........................................... $ 651,949 $ 677,205 $ 676,622 $ 658,813 $ 2,664,589
Gross profit....................................... 177,664 185,039 194,073 174,017 730,793
Operating income (loss)............................ (83,346) 24,763 25,782 (77,703) (110,504)
Loss from continuing operations before
extraordinary items.............................. (83,543) (3,982) (12,463) (97,514) (197,502)
Loss from discontinued operations.................. (1,294) (1,294)
Extraordinary items................................ 269 269
Net loss........................................... (85,106) (3,982) (12,463) (97,514) (199,065)
Per share amounts:
Basic and diluted:
Loss from continuing operations................ (2.38) (0.11) (0.34) (2.66) (5.45)
Loss from discontinued operations.............. (0.04) (0.03)
Extraordinary items............................ (0.01) (0.01)
Net loss....................................... (2.43) (0.11) (0.34) (2.66) (5.49)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 681,627 $ 2,611,740
Gross profit....................................... 170,782 179,256 189,220 187,590 726,848
Operating income................................... 23,802 28,300 37,289 19,869 109,260
Income from continuing operations.................. 9,035 12,770 15,431 6,240 43,476
Income (loss) from discontinued operations......... 10,951 11,428 3,085 (1,752) 23,712
Net income......................................... 19,986 24,198 18,516 4,488 67,188
Per share amounts:
Basic:
Income from continuing operations.............. 0.34 0.46 0.48 0.18 1.45
Income (loss) from discontinued operations..... 0.41 0.42 0.10 (0.05) 0.80
Net income..................................... 0.75 0.88 0.58 0.13 2.25
Diluted:
Income from continuing operations.............. 0.33 0.45 0.47 0.18 1.43
Income (loss) from discontinued operations..... 0.41 0.40 0.09 (0.05) 0.77
Net income..................................... 0.74 0.85 0.56 0.13 2.20
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 1997, 1998 or 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of
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comprehensive income (loss) and its components. Comprehensive income (loss)
consists of net income (loss) and foreign currency translation adjustments as
presented in the consolidated statement of stockholders' equity. The adoption of
SFAS No. 130 had no impact on total stockholders' equity or net income (loss).
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14. SFAS No. 131 requires the Company to report segment information based on the
"management," or operating segment, approach rather than the "industry segment"
approach required under SFAS No. 14. Additionally, SFAS No. 131 requires
disclosures about the Company's products and services, geographic areas and
major customers. The adoption of SFAS No. 131 had no impact on the results of
operations or financial position of the Company, but did affect the disclosure
of segment information.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (fiscal 2002 for the Company). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998 (fiscal 2000 for
the Company). SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. Management of the
Company anticipates that the adoption of SOP 98-1 will not have a significant
effect on the Company's results of operations or its financial position.
FACTORS AFFECTING THE COMPANY'S BUSINESS
A number of factors, including those discussed below, may affect the
Company's future operating results.
UNCERTAINTY OF NEW BUSINESS STRATEGY--IMPLEMENTATION OF OUR NEW STRATEGY MAY
DISRUPT OUR OPERATIONS AND MAY FAIL TO INCREASE EARNINGS.
We are currently implementing a new business strategy that will require us
to incur significant costs in the short-term. We cannot be sure that this new
strategy will be successful. From our inception in 1994 through the end of 1997,
we grew primarily through acquisitions. Our new strategy, which we describe in
greater detail in "Business--Business Strategies," involves integrating the
operations we have acquired, reducing costs and increasing sales. The short-term
costs of implementing this strategy include costs for outside consultants to
help us implement the strategy more quickly, costs of fixing, selling or closing
ineffective operations and costs of upgrading our technology and distribution
systems. We discuss these costs in greater detail in "--Management's Discussion
and Analysis of Financial Condition and Results of Operations--Introduction." In
addition, some of our management will sometimes be focused on implementing the
new business strategy rather than normal day-to-day operations during the
implementation of these changes, which could cause our business to suffer.
We expect that the increased costs discussed above will reduce our
profitability at least through October 1999. If we are unable to implement our
new strategy effectively, our business may suffer for a longer period of time.
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HIGH LEVEL OF DEBT--OUR HIGH LEVEL OF DEBT LIMITS OUR ABILITY TO GET
ADDITIONAL DEBT FINANCING AND MAY RESTRICT OUR OPERATIONS IN OTHER WAYS.
We have a high level of debt compared to our stockholders' equity and
compared to some of our major competitors. This high level of debt may restrict
our business operations in the following ways:
- Lenders may not be willing to lend additional amounts to us for future
working capital needs, acquisitions, general corporate or other purposes,
or may only be willing to lend these amounts to us at relatively
unfavorable terms.
- We will have to use a substantial portion of our cash flow to pay interest
expense on our debt rather than to fund our operations.
- If our cash flow is lower than we expect, we may not have enough cash left
after we pay interest costs to fully implement our new business strategy,
or to implement it as quickly as we would like.
- If our cash flow is insufficient to pay interest expense on our debt, we
may be forced to refinance our debt, modify our operations or sell
portions of our business to meet our debt obligations.
- We may be more vulnerable to economic downturns than those of our
competitors that have less debt, reducing our ability to compete
effectively.
As of April 24, 1999, we are able to incur $250.0 million in additional debt
under our New Credit Facility. If our operating results decline, however, this
available amount may be reduced. Additional borrowings would increase the above
risks.
INTEREST RATE INCREASES--INCREASES IN INTEREST RATES WILL INCREASE THE COST
OF PAYING INTEREST ON OUR DEBT.
Of our debt, $266.0 million or 24.4% is subject to interest rates that vary
based on changes in prevailing interest rates. If interest rates rise, the cost
of paying interest on this portion of our debt will increase. Increased interest
rates on our debt may restrict our business operations further, in the ways
described above.
CHALLENGES OF COMBINING ACQUIRED BUSINESSES--WE MAY FAIL TO EFFECTIVELY
COMBINE OPERATIONS OF THE BUSINESSES WE HAVE ACQUIRED.
We are continuing to integrate businesses we have acquired. For this process
to be successful, we need to effectively combine and manage the businesses we
have acquired, including their employees, facilities and distribution systems,
in such a way that we reduce costs and increase revenue. In the short term, this
process is expensive and complex, and involves significant risks, including:
- The integration process may distract and overburden our management.
- Unanticipated liabilities or contingencies of acquired companies may arise
and consume resources unexpectedly.
- The combination of the acquired business' financial, personnel, computer
and other systems will be expensive and unpredictable, and costly
complications may arise.
- Our controls and information systems may not be adequate to manage a fully
integrated business.
- We may lose employees who cannot adapt to the changes required by the
integration process.
As a result of the above risks, our sales or customer service may suffer. We
cannot assure you that we will be able to integrate these new businesses
effectively or as quickly as we expect.
DECLINES IN FOREIGN CURRENCIES--DECLINES IN THE VALUE OF NEW ZEALAND AND
AUSTRALIAN DOLLARS WOULD REDUCE OUR REPORTED REVENUE AND EARNINGS.
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We derive approximately one-third of our revenues from our operations in New
Zealand and Australia. As a result, declines in the value of the currencies of
these countries, relative to the value of the U.S. dollar, would reduce our
reported revenues. During 1999 and 1998, the value of these currencies declined
substantially as compared to the U.S. dollar. Due primarily to this devaluation,
our reported revenues from New Zealand and Australia for fiscal year 1999
declined as compared to fiscal year 1998 by 8.2%. If these currencies continue
to fall relative to the U.S. dollar, our reported revenues from these operations
would continue to fall and would fail to reflect our operational success. We
cannot be sure whether and to what extent these declines will continue. Also, we
are obligated to repay substantially all of our indebtedness in U.S. dollars. As
a result, declines in these currency exchange rates may make it more difficult
for us to repay our debt.
Beginning with fiscal year 2000, we are revising the way we account for
adjustments to our intercompany loans with Blue Star that arise from changes in
the value of foreign currencies. We describe this in detail in Note 2 of the
Notes to our consolidated financial statements. Under our prior policy,
adjustments were not reflected in earnings. However, in the future, adjustments
will be reflected in earnings in the fiscal quarter the currency value changes.
If currency exchange rates decline, this new policy will reduce our earnings.
ABILITY TO COMPETE--SOME OF OUR NATIONAL COMPETITORS HAVE MORE RESOURCES
THAN WE HAVE TO CAPTURE MARKET SHARE.
We operate in a highly competitive environment and this competition has been
increasing. Overall, we compete with a large number of smaller, independent
companies, many of which are well-established in their local markets. In the
United States, we also compete with five large, national office products
companies who operate in many of our geographic and product markets. Some of
these large, national companies also compete with us in New Zealand and
Australia.
We are facing increasing competition from our national competitors. Some of
our national competitors have more resources than we do to compete for
customers. Some of these competitors have begun to compete more aggressively for
businesses that have 25 to 500 employees. Our national competitors had not
previously focused on that market, and we may lose customers in that market to
national competitors.
We also face increasing competitive pressures from our customers,
particularly those with larger accounts. These customers are demanding more
competitive bids. Some of our national competitors may be better able to respond
to these more intense customer demands and we may lose or fail to attract large
account customers due to these competitive pressures. Also, because it is
becoming more common for larger companies to require their smaller offices to
purchase supplies from a single supplier designated by their corporate
headquarters, we may also lose customers that are smaller offices of large
accounts we do not serve. During the past year, we have lost customers in this
way, and this may continue.
COMPETITION ON THE INTERNET--WE MAY LOSE MARKET SHARE TO COMPETITORS WHO
SELL PRODUCTS ON THE INTERNET SOONER OR MORE EFFECTIVELY THAN WE DO.
The increasing use of the Internet for commercial transactions may further
increase and intensify the competition we face. Many of our competitors,
particularly our large, national competitors, are pursuing new and alternative
sales methods, such as direct mail and Internet sales. Many of these efforts are
specifically targeted at middle-market businesses, which have been one of U.S.
Office Products' primary market focuses. Competitors who sell products on the
Internet most effectively may gain a competitive advantage because they may
provide added convenience to customers and may reduce their costs of doing
business. Also, since the Internet may require lower start-up costs than
traditional businesses, new competitors may more quickly and easily establish
themselves.
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We may not be able to fully implement our Internet sales effort as
effectively as our competitors. Our competitors may have more resources to
devote to development of their Internet business and may have a better ability
to, among other things:
- Produce or buy advertising;
- Maintain an effective web site;
- Provide quality customer service and telephone support related to their
Internet sales; and
- Hire effective technical staff.
Our high level of debt and dedication of resources to our new business
strategy may hinder our ability to devote additional resources to Internet sales
compared to our competitors, particularly in the short term.
ABILITY TO SELL BUSINESSES--WE MAY NOT BE ABLE TO GET REASONABLE TERMS FOR
BUSINESSES WE WANT TO SELL.
As part of our new strategy, we have identified a number of operations that
we want to sell. Our decisions to sell these operations involve risks, including
the following:
- We may not be able to sell these businesses as quickly as we would like.
- We may not be able to find suitable purchasers for these businesses or get
terms for the sales that are favorable to us. As a result, we may incur
losses as a result of these sales.
- The performance of each business we wish to sell may suffer if the sale
process disrupts the business, or if employees choose to leave when they
hear of the potential sale of the operation.
- Sales at the businesses may decline if customers stop buying from us as a
result of the potential sale of the business or a decline in performance.
INFLUENCE OF CLAYTON, DUBILIER & RICE--THE GROUP AFFILIATED WITH CLAYTON,
DUBILIER & RICE THAT HOLDS A LARGE BLOCK OF OUR STOCK HAS SIGNIFICANT POWER TO
AFFECT OUR MANAGEMENT. BECAUSE CLAYTON, DUBILIER & RICE'S INTERESTS MAY NOT
ALWAYS BE THE SAME AS THOSE OF OUR OTHER SECURITY HOLDERS, THIS MAY LEAD TO
COMPANY DECISIONS THAT ARE NOT SATISFACTORY TO THESE OTHER SECURITY HOLDERS.
Our major stockholder is an investment fund that is affiliated with Clayton,
Dubilier & Rice. As our major stockholder, this fund and Clayton, Dubilier &
Rice have significant power to affect our business. This may result in outcomes
that are not satisfactory to our other security holders because the interests of
Clayton, Dubilier & Rice may not always be the same as those other security
holders.
Clayton, Dubilier & Rice has significant power to affect our stockholder
votes. Pursuant to the Strategic Restructuring Plan and a separate investment
completed in April of this year, the investment fund:
- Owns 24.8% of our outstanding common stock;
- Owns preferred stock that has votes representing 16.6% of all votes in
circumstances we describe below; and
- Owns rights to buy additional shares of our common stock that could
increase its ownership to as high as 39.9% of our stock in the future
(48.1% if the preferred stock is converted to common stock).
The preferred shares owned by the fund are generally non-voting but do have
voting rights in the following instances:
- Approval of a merger, consolidation or sale of all or substantially all of
our assets;
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- Approval of any proposed changes to our corporate documents that adversely
affect the preferred shares; and
- Approval of a reorganization, dissolution, winding-up, liquidation or
similar action of our Company.
The investment fund also has significant representation on our Board of
Directors, as explained below. This representation may allow Clayton, Dubilier &
Rice's interests to take a more prominent role in Board decisions. As stated
above, these interests, however, may not always be the same as the interests of
our smaller investors.
The investment fund has the right to nominate three of the eight potential
members of our Board of Directors, including the Chairman of our Board. Three of
these eight directors were nominees of the investment fund. In addition, some
Board decisions, including those listed below, require the approval of
three-fourths of the Board. This requirement means that, for any of these
decisions to be approved, at least one of the directors nominated by the fund
must concur. These decisions include:
- Decisions regarding sales of our equity securities, unless the sales are
made under employee benefit plans, in acquisitions or in public offerings,
and then only if the sales do not exceed limits set out in our agreement
with the investment fund;
- Any merger, tender offer for our securities or sale, lease or disposition
of all or substantially all of our assets or other business combinations
of our company, unless the consideration for the sale is all cash or is
freely tradable common stock of a large public company;
- Any dissolution or partial liquidation of our company; and
- Any change to our charter or by-laws that is inconsistent with the fund's
rights under agreements it has entered into with us as part of the
Strategic Restructuring Plan.
CHALLENGES OF ONGOING LITIGATION--OUR NEED TO DEFEND ONGOING LAWSUITS MAY
DISTRACT US, AND THE DEFENSE OF THESE LAWSUITS MAY BE EXPENSIVE.
We are currently defending several lawsuits related to events surrounding
the Strategic Restructuring Plan. These lawsuits are further described in Item
3--Legal Proceedings. We may be required to devote significant company resources
to the defense of these lawsuits, including:
- Employee time for depositions, document production and other matters;
- Cash to pay legal fees and costs incurred by our lawyers; and
- Cash to pay for other costs of the lawsuits, e.g., internal duplication
costs, facsimile and telephone communications.
Our employees and directors may be distracted by participation in these
lawsuits and this may reduce our productivity. Although we expect our insurance
to cover much of the legal fees and costs as well as any liability that may
result from these lawsuits, we cannot be sure that insurance proceeds will cover
all payments we could be required to make. Also, we may not be promptly
reimbursed by our insurance providers and may have to make payments in advance
of receiving those proceeds.
POTENTIAL TAX LIABILITY FROM OUR 1998 SPIN-OFFS--THE TAX FREE NATURE OF OUR
1998 SPIN-OFFS COULD BE CHALLENGED WHICH COULD RESULT IN A SIGNIFICANT TAX
LIABLITY TO US AND POSSIBLY TAX LIABILITIES FOR THOSE WHO WERE OUR STOCKHOLDERS
AT THE TIME OF THE SPIN-OFFS.
If the tax-free nature of our 1998 spin-offs were challenged successfully,
we would be required to pay a significant tax liability. In connection with the
Strategic Restructuring Plan, we received an opinion from our counsel that the
spin-offs were not taxable under section 355 of the Code. That opinion is not
binding upon either the Internal Revenue Service or any Court.
46
<PAGE>
We cannot be sure that the tax free nature of our 1998 spin-offs will not be
challenged by the Internal Revenue Service. If the Internal Revenue Service were
to challenge successfully the tax-free nature of a spin-off, we would be taxed
on the gain that we would have recognized if we had sold the common stock of the
spin-off company for its fair market value on the date the spin-offs occurred.
In addition, in some cases, each person that was one of our stockholders at the
time of the spin-offs would be treated as having received a taxable corporate
distribution in an amount equal to the fair market value of the common stock of
the spin-off company distributed to that stockholder on the date of the
distribution.
LIMITATIONS ON ISSUING ADDITIONAL STOCK--TAX RULES MAY LIMIT OUR ABILITY TO
RAISE CAPITAL BY ISSUING MORE COMMON STOCK.
In order to preserve the tax-free nature of spin-offs in our 1998 Strategic
Restructuring Plan we may be subject to Internal Revenue Code (Section 355(e))
restrictions on our ability to issue stock. These restrictions may prevent us
from entering into transactions involving sales of our stock that we would
otherwise believe to be beneficial. Generally, these restrictions prevent us
from issuing our stock if:
- The issuance is part of a plan or series of related transactions that
includes one or more of the spin-offs; and
- As part of the plan or series of related transactions, one or more persons
acquires stock of our Company that represents 50% or more of the voting
power or our Company or 50% or more of the value or our Company's Stock.
UNCERTAINTIES OF OUR FOREIGN OPERATIONS--OUR FOREIGN OPERATIONS FACE
ADDITIONAL UNCERTAINTIES THAT MAY HARM OUR OPERATING RESULTS.
Our operations in New Zealand and Australia--and to a lesser extent in the
United Kingdom--are subject to a number of risks that are different or more
intense than the risks we face in North America. These risks include the
following:
- We face a few strong competitors in New Zealand and Australia, and our
market share and margins are directly affected by the actions of these
competitors. They could take action that would reduce our market share or
profits.
- The market in Australia is large and widely dispersed and there are many
competitors. We may be unable to reach a large enough portion of the
market to operate at a cost sufficiently low to be profitable over the
long run.
- Because of our geographic distance from these operations, we may find it
difficult to anticipate changes in the business environment in our foreign
locations such as legal and regulatory requirements, availability of
labor, or other changes in economic, political, or social conditions. Our
inability to anticipate these changes may impair our ability to react as
promptly as local competitors, thus reducing our market share.
- Our ability to monitor and control management of foreign operations is
reduced because of their remote location. We may fail to promptly detect
management or operational problems and may have more difficulty effecting
change in these locations.
UNPREDICTABILITY OF MBE REVENUES--REVENUES FROM FRANCHISES OF MBE MAY BE
UNPREDICTABLE BECAUSE WE HAVE VERY LIMITED CONTROL OVER FRANCHISEES.
Business at MBE is conducted primarily through franchisees and licensees and
we have limited control over these operations. Our control is limited by:
- Our contractual relationships with these franchisees and licensees; and
- Significant government regulation over the franchisee relationship.
47
<PAGE>
Accordingly, we may not be able to correct operational problems at
franchises and we may not be able to react promptly and effectively to changes
in business conditions. As a result, franchises may experience increased costs
or decreased revenue, which could cause our franchise revenue to go down
unexpectedly.
SIGNIFICANT TECHNOLOGY INVESTMENT BY MBE--MBE'S EXPANSION INTO THE ONLINE
SHIPPING SERVICES BUSINESS AND MBE'S UPGRADE OF TECHNOLOGY AT ITS DOMESTIC
FRANCHISES MAY FAIL TO PRODUCE A DESIRABLE RETURN.
MBE is in the process of investing approximately $15 million to expand its
presence in the online shipping services business and to introduce
state-of-the-art technology to its network of domestic franchises. We cannot be
sure that these investment decisions will result in a profitable return for MBE
and our company.
STOCK SALE BY OUR MAJOR STOCKHOLDER--THE MARKET PRICE OF OUR STOCK COULD
DROP SIGNIFICANTLY IF THE INVESTMENT FUND AFFILIATED WITH CLAYTON, DUBILIER &
RICE DECIDED TO SELL A SIGNIFICANT PORTION OF ITS SHARES AT ANY ONE TIME AND THE
PROSPECT OF A SALE BY THEM MIGHT DEPRESS OUR STOCK PRICE.
The investment fund affiliated with Clayton, Dubilier & Rice currently owns
approximately 9.1 million shares of common stock and shares of preferred stock
convertible into 7.3 million shares of our common stock. The preferred stock
converts into common stock only if the fund sells the shares to an independent
third party. The investment fund also has rights to buy additional shares of our
common stock that could increase its ownership by an additional 9.2 million
shares of our stock in the future. Our agreements with the fund limit its
ability to sell its shares but the fund will be able to sell its shares
beginning in June 2005, and they can require us to facilitate an underwritten
offering in some cases as early as June 2000. If the fund decides to sell a
significant portion of its shares at any one time, or if the market expects that
the fund may sell its shares, the market price of our common stock could drop
significantly, even if our business is doing well.
INTANGIBLE ASSETS--MANY OF OUR ASSETS ARE SO-CALLED "INTANGIBLE" ASSETS. IF
WE SELL OR CLOSE OUR BUSINESSES, BUYERS MAY NOT PAY AS MUCH FOR THESE INTANGIBLE
ASSETS AS WE EXPECT.
As of the end of fiscal year 1999, approximately $858.2 million or 42.7% of
our total assets represented so-called "intangible" assets. The majority of
these intangible assets fall in the category of goodwill. Goodwill represents
the excess of cost over the fair value of net assets acquired in business
combinations accounted for under the purchase method. If we sell our business,
we cannot be sure that a buyer would value these intangible assets as high as we
do. If we close our business, those assets may lose most or all of their value
and would not be available to be used to repay our creditors or distribute to
our investors.
LIABILITY FOR COSTS OF OUR 1998 SPIN-OFFS--WE MAY STILL BE LIABLE FOR COSTS
RELATED TO THE BUSINESSES WE SPUN OFF IN 1998.
As part of the Strategic Restructuring Plan, the businesses we spun off in
1998 agreed to indemnify us for any payments we made related to, among other
things, the operation of the businesses we spun off and some of the lawsuits we
are currently defending. We cannot be sure that all of the spin-off companies
will be able to satisfy these obligations. If a spin-off company fails to
indemnify us for a particular liability, we will be required to satisfy the
payment obligation instead. Also, we agreed to indemnify the fund affiliated
with Clayton, Dubilier & Rice for any losses we suffer as a result of a spin-off
company failing to meet its indemnity obligations as described above.
CHANGES IN SENIOR MANAGEMENT--RECENT CHANGES IN SENIOR MANAGEMENT IN THE
LAST YEAR MAY IMPAIR OUR ABILITY TO OPERATE EFFECTIVELY.
We have had several recent changes in our senior management. Transition at
this high management level may disrupt our operations for the immediate period
of time--it may be difficult for our employees to adjust to new management
styles and to new programs being implemented by this management. Also, we cannot
be sure that the individuals in these re-assigned or new positions will perform
as well as we expect.
We have also made changes, and continue to make changes, to the management
of our local operations. These changes may cause some disruption at these
businesses.
48
<PAGE>
ITEM 7A. 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
Approximately $766.0 million of the Company's long-term debt is maintained
in variable rate debt instruments. The Company manages its exposure to changes
in the interest rate on the Company's variable rate debt by entering into
interest rate swap agreements for a total notional amount of $500.0 million. The
Company utilizes interest rate swap agreements for the purpose of hedging
potential increases in interest rates. These swap agreements expire over a range
from June 15, 2001 through June 16, 2003. The interest rate swaps effectively
limit the LIBOR-based interest rate exposure to rates ranging from 5.7% to 6.0%.
Based on the Company's outstanding long-term debt obligations as of April
24, 1999, a hypothetical 10% increase in the weighted average interest rate
would result in approximately $1.7 million, net of taxes, in additional interest
expense annually and reduce the Company's fiscal 1999 net income accordingly.
Without the effect of the interest rate swaps, a hypothetical 10% increase in
the weighted average interest rate would result in additional interest expense
of approximately $4.9 million, net of taxes.
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). 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. The Blue Star Group uses foreign
currency forward contracts to hedge the impact of adverse fluctuations in the
exchange rate on the purchases and sales of goods to overseas markets, as well
as on the interest paid related to intercompany debt obligations denominated in
U.S. dollars. The Company does not enter into foreign currency forward contracts
with respect to the CDN dollar due to the minimal level of operations conducted
by the Canadian businesses.
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 cumulative translation effects for the
subsidiaries using functional currencies other than the U.S. dollar are included
in Accumulated Other Comprehensive Loss in stockholders' equity.
As of April 24, 1999, Blue Star held foreign currency forward contracts for
a notional amount of approximately $14.0 million at rates ranging from $0.51 to
$0.56. These contracts expire from April 30, 1999 to December 31, 1999.
The potential unrealized loss that would result from a hypothetical 10%
change in exchange rates would be approximately $1.1 million. Without the effect
of the foreign currency forward contracts, a hypothetical 10% change in exchange
rates would result in $1.2 million of additional unrealized losses.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
U.S. OFFICE PRODUCTS COMPANY:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 96 present fairly, in all material
respects, the financial position of U.S. Office Products Company and its
subsidiaries at April 24, 1999 and April 25, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended April 24, 1999, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(2) on page 96 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Washington, DC
June 8, 1999
50
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 76,102 $ 52,021
Accounts receivable, less allowance for doubtful accounts of $11,720 and $8,639,
respectively...................................................................... 304,374 310,527
Inventories, net.................................................................... 206,857 228,671
Prepaid expenses and other current assets........................................... 106,771 117,150
------------ ------------
Total current assets............................................................ 694,104 708,369
Property and equipment, net........................................................... 231,152 228,715
Intangible assets, net................................................................ 858,197 923,024
Other assets.......................................................................... 228,706 194,701
Net assets from discontinued operations:
Amounts receivable upon the Distributions........................................... 132,145
All other net assets................................................................ 354,473
------------ ------------
Total assets.................................................................... $ 2,012,159 $ 2,541,427
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................................................... $ 19,193 $ 368,227
Accounts payable.................................................................... 168,976 162,718
Accrued compensation................................................................ 46,384 43,013
Other accrued liabilities........................................................... 100,688 81,411
------------ ------------
Total current liabilities....................................................... 335,241 655,369
Long-term debt........................................................................ 1,171,429 382,174
Other long-term liabilities and minority interests.................................... 25,947 17,753
------------ ------------
Total liabilities............................................................... 1,532,617 1,055,296
------------ ------------
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares authorized, 73,262 and none issued
and outstanding, respectively.....................................................
Common stock, $.001 par value, 500,000,000 shares authorized, 36,853,505 and
33,460,864 shares issued, 36,702,778 and 33,460,864 shares outstanding, and
150,727 and none held in treasury, respectively................................... 37 33
Additional paid-in capital.......................................................... 727,614 1,472,125
Accumulated other comprehensive loss................................................ (119,941) (112,803)
Retained earnings (accumulated deficit)............................................. (128,168) 126,776
------------ ------------
Total stockholders' equity...................................................... 479,542 1,486,131
------------ ------------
Total liabilities and stockholders' equity...................................... $ 2,012,159 $ 2,541,427
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
------------ ------------ ------------
Revenues................................................................ $ 2,664,589 $ 2,611,740 $ 2,115,954
Cost of revenues........................................................ 1,933,796 1,884,892 1,518,287
------------ ------------ ------------
Gross profit...................................................... 730,793 726,848 597,667
Selling, general and administrative expenses............................ 635,181 591,463 488,215
Amortization expense.................................................... 25,834 19,938 12,416
Strategic Restructuring Plan costs...................................... 97,505
Impaired asset write-offs............................................... 58,735
Operating restructuring costs........................................... 24,042 6,187 4,201
Non-recurring acquisition costs......................................... 8,001
------------ ------------ ------------
Operating income (loss)........................................... (110,504) 109,260 84,834
Interest expense........................................................ 106,291 37,837 36,047
Interest income......................................................... (2,070) (1,853) (6,857)
Loss on sale and closure of businesses.................................. 10,199
Other expense (income).................................................. 2,980 (7,146) (4,233)
------------ ------------ ------------
Income (loss) from continuing operations before provision for (benefit
from) income taxes and extraordinary items............................ (227,904) 80,422 59,877
Provision for (benefit from) income taxes............................... (30,402) 36,946 27,939
------------ ------------ ------------
Income (loss) from continuing operations before extraordinary items..... (197,502) 43,476 31,938
Income (loss) from discontinued operations, net of income taxes......... (1,294) 23,712 26,800
------------ ------------ ------------
Income (loss) before extraordinary items................................ (198,796) 67,188 58,738
Extraordinary items--losses on early terminations of debt facilities,
net of income taxes................................................... 269 1,450
------------ ------------ ------------
Net income (loss)....................................................... $ (199,065) $ 67,188 $ 57,288
------------ ------------ ------------
------------ ------------ ------------
Per share amounts:
Basic:
Income (loss) from continuing operations before extraordinary
items............................................................. $ (5.45) $ 1.45 $ 1.42
Income (loss) from discontinued operations.......................... (0.03) 0.80 1.19
Extraordinary items................................................. (0.01) (0.06)
------------ ------------ ------------
Net income (loss)................................................... $ (5.49) $ 2.25 $ 2.55
------------ ------------ ------------
------------ ------------ ------------
Diluted:
Income (loss) from continuing operations before extraordinary
items............................................................. $ (5.45) $ 1.43 $ 1.39
Income (loss) from discontinued operations.......................... (0.03) 0.77 1.17
Extraordinary items................................................. (0.01) (0.06)
------------ ------------ ------------
Net income (loss)................................................... $ (5.49) $ 2.20 $ 2.50
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER EARNINGS
------------------------ ----------------------- PAID-IN COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT)
----------- ----------- ---------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1996..................... $ 19,866,106 $ 20 $ 313,337 $ 770 $ 80,619
Issuances of common
stock, net of
associated expenses in
conjunction with:
Public offering........ 3,255,874 3 275,709
Direct equity
investment........... 468,750 1 38,112
Acquisitions........... 2,171,363 2 166,078
Exercise of stock
options, including
tax benefits......... 49,436 2,843
Employee stock purchase
plan................. 57,500 3,145
Transactions of Pooled
Companies:
Issuances of common
stock for repayment
of debt and payment
of acquisition
expenses............. 102,408 6,859
Capital
contributions........ 3,086 1,857
Exercise of warrants
and stock options.... 119,654 1,980
Retirement of common
stock................ 25,576 (443) (34)
Cash dividends paid and
declared............. (20,931)
Undistributed earnings
of Subchapter S
corporations acquired
in
pooling-of-interests
business
combinations......... 57,640 (57,640)
Adjustment to conform the
year-ends of Pooled
Companies.............. 286
Comprehensive loss:
Other comprehensive
loss................. (6,353)
Net income............. 57,288
----------- --- ---------- --- ----------- -------------- ------------
Balance at April 26,
1997..................... 26,119,753 26 867,117 (5,583) 59,588
Issuances of common
stock, net of
associated expenses in
conjunction with:
Acquisitions........... 6,944,625 7 584,470
Repayment of debt...... 7,044 570
Exercise of stock
options, including
tax benefits......... 335,516 15,908
Employee stock purchase
plan................. 62,974 4,060
Share adjustments at
Pooled Companies....... (9,048)
Comprehensive loss:
Other comprehensive
loss................. (107,220)
Net income............. 67,188
----------- --- ---------- --- ----------- -------------- ------------
Balance at April 25,
1998..................... $ 33,460,864 $ 33 $1,472,125 $ (112,803) $ 126,776
<CAPTION>
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 30,
1996..................... $ 394,746
Issuances of common
stock, net of
associated expenses in
conjunction with:
Public offering........ 275,712
Direct equity
investment........... 38,113
Acquisitions........... 166,080
Exercise of stock
options, including
tax benefits......... 2,843
Employee stock purchase
plan................. 3,145
Transactions of Pooled
Companies:
Issuances of common
stock for repayment
of debt and payment
of acquisition
expenses............. 6,859
Capital
contributions........ 1,857
Exercise of warrants
and stock options.... 1,980
Retirement of common
stock................ (477)
Cash dividends paid and
declared............. (20,931)
Undistributed earnings
of Subchapter S
corporations acquired
in
pooling-of-interests
business
combinations.........
Adjustment to conform the
year-ends of Pooled
Companies.............. 286
Comprehensive loss:
Other comprehensive
loss................. (6,353)
Net income............. 57,288
------------
Balance at April 26,
1997..................... 921,148
Issuances of common
stock, net of
associated expenses in
conjunction with:
Acquisitions........... 584,477
Repayment of debt...... 570
Exercise of stock
options, including
tax benefits......... 15,908
Employee stock purchase
plan................. 4,060
Share adjustments at
Pooled Companies.......
Comprehensive loss:
Other comprehensive
loss................. (107,220)
Net income............. 67,188
------------
Balance at April 25,
1998..................... $1,486,131
</TABLE>
53
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER EARNINGS
------------------------ ----------------------- PAID-IN COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT)
----------- ----------- ---------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 25,
1998..................... $ 33,460,864 $ 33 $1,472,125 $ (112,803) $ 126,776
Issuance of preferred
stock, net of
associated expenses in
conjunction with equity
investment by
Investor............... 73,262 49,332
Issuances of common
stock, net of
associated expenses in
conjunction with:
Equity Investment by
Investor............. 9,101,129 9 254,167
2001 Notes Exchange.... 2,025,185 2 151,423
Conversion of 2003
Notes................ 7,911 1,000
Exercise of stock
options, including
tax benefits......... 1,203,688 1 66,790
Employee stock purchase
plan................. 160,788 1 2,019
Purchase price
adjustments related
to acquisitions...... 2,474 (102)
Repurchase of common
stock, net of
associated expenses in
conjunction with Equity
Tender................. (9,259,261) (9) (999,991)
Compensation expense
related to options
repurchased in Equity
Tender................. 57,711
Adjustments related to
the Distributions...... (326,860) 1,150 (55,879)
Comprehensive loss:
Other comprehensive
loss................. (8,288)
Net loss............... (199,065)
----------- --- ---------- --- ----------- -------------- ------------
Balance at April 24,
1999..................... 73,262 $ 36,702,778 $ 37 $ 727,614 $ (119,941) $ (128,168)
----------- --- ---------- --- ----------- -------------- ------------
----------- --- ---------- --- ----------- -------------- ------------
<CAPTION>
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at April 25,
1998..................... $1,486,131
Issuance of preferred
stock, net of
associated expenses in
conjunction with equity
investment by
Investor............... 49,332
Issuances of common
stock, net of
associated expenses in
conjunction with:
Equity Investment by
Investor............. 254,176
2001 Notes Exchange.... 151,425
Conversion of 2003
Notes................ 1,000
Exercise of stock
options, including
tax benefits......... 66,791
Employee stock purchase
plan................. 2,020
Purchase price
adjustments related
to acquisitions...... (102)
Repurchase of common
stock, net of
associated expenses in
conjunction with Equity
Tender................. (1,000,000)
Compensation expense
related to options
repurchased in Equity
Tender................. 57,711
Adjustments related to
the Distributions...... (381,589)
Comprehensive loss:
Other comprehensive
loss................. (8,288)
Net loss............... (199,065)
------------
Balance at April 24,
1999..................... $ 479,542
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- ---------- ----------
Cash flows from operating activities:
Net income (loss)......................................................... $ (199,065) $ 67,188 $ 57,288
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
(Income) loss from discontinued operations.............................. 1,294 (23,712) (26,800)
Depreciation and amortization........................................... 67,574 57,167 36,102
Strategic Restructuring Plan costs...................................... 70,380
Impaired asset write-offs............................................... 58,735
Loss on sale and closure of businesses.................................. 10,199
Provision for doubtful accounts......................................... 6,982 5,298 5,085
Provision for slow moving or obsolete inventory......................... 21,829 9,437 9,526
Deferred income taxes................................................... (10,239) 4,534 (1,035)
Equity in net loss (income) of affiliate................................ 910 (1,315) (782)
Loss (gain) on sale of assets........................................... 303 (991)
Extraordinary losses.................................................... 269 1,450
Non-recurring acquisition costs......................................... 8,001
Unrealized foreign currency gain........................................ (3,420)
Changes in current assets and liabilities (net of assets acquired and
liabilities assumed in business combinations):
Accounts receivable................................................... 1,585 (17,202) (31,322)
Inventories........................................................... (2,902) (13,222) (12,926)
Prepaid expenses and other current assets............................. 3,019 (2,284) (6,059)
Accounts payable...................................................... 5,796 (3,258) (26,692)
Accrued liabilities................................................... 24,878 1,922 7,396
----------- ---------- ----------
Net cash provided by operating activities........................... 61,547 83,562 15,812
----------- ---------- ----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received........................... (34,508) (69,299) (345,319)
Payments of acquisition costs............................................. (2,580) (3,431) (5,343)
Additions to property and equipment, net of disposals..................... (41,556) (46,695) (34,036)
Investment in affiliate................................................... (40,773) (41,270)
Proceeds from sale of investments......................................... 1,990 5,729
Other..................................................................... 1,987 4,080 2,013
----------- ---------- ----------
Net cash used in investing activities............................... (74,667) (150,389) (423,955)
----------- ---------- ----------
</TABLE>
55
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................................. 1,153,176 649 225,387
Payments of long-term debt................................................ (226,171) (13,972) (174,788)
Proceeds from (payments of) short-term debt, net.......................... (370,371) 206,698 24,132
Proceeds from issuance of preferred stock................................. 49,332
Proceeds from issuance of common stock.................................... 322,987 15,696 318,899
Repurchase of common stock in Equity Tender............................... (1,000,000)
Net repayments by (advances to) discontinued operations................... 123,551 (132,653) (111,891)
Payments to terminate credit facility..................................... (3,121) (261)
Payments of dividends at Pooled Companies................................. (6,158)
Capital contributed by stockholders of Pooled Companies................... 1,814
Adjustments to conform fiscal year-ends of certain
Pooled Companies........................................................ 286
----------- ---------- ----------
Net cash provided by financing activities........................... 49,383 76,418 277,420
----------- ---------- ----------
Effect of exchange rates on cash and cash equivalents....................... 336 (4,002) (511)
Cash provided by (used in) discontinued operations.......................... (12,518) 2,406 (8,223)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................ 24,081 7,995 (139,457)
Cash and cash equivalents at beginning of period............................ 52,021 44,026 183,483
----------- ---------- ----------
Cash and cash equivalents at end of period.................................. $ 76,102 $ 52,021 $ 44,026
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid................................................................ $ 92,251 $ 37,211 $ 36,536
Income taxes paid............................................................ 3,990 27,944 22,734
</TABLE>
56
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company issued common stock and cash in connection with certain business
combinations related to continuing operations accounted for under the purchase
method during fiscal 1999, 1998 and 1997. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
--------- ---------- ----------
Accounts receivable............................................................ $ 3,251 $ 33,270 $ 99,747
Inventories, net............................................................... 3,189 22,136 115,995
Prepaid expenses and other current assets...................................... 3,929 15,877 20,874
Property and equipment......................................................... 3,050 55,438 94,112
Intangible assets.............................................................. 29,691 403,114 490,011
Other assets................................................................... 465 33,692 7,748
Short-term debt................................................................ (2,586) (9,615) (20,612)
Accounts payable............................................................... (1,222) (27,161) (99,753)
Accrued liabilities............................................................ (842) (11,194) (52,464)
Long-term debt................................................................. (580) (22,324) (153,448)
Other long-term liabilities and minority interest.............................. (3,837) (834) (1,296)
--------- ---------- ----------
Net assets acquired.................................................... $ 34,508 $ 492,399 $ 500,914
--------- ---------- ----------
--------- ---------- ----------
The acquisitions were funded as follows:
Common stock............................................................... $ $ 423,100 $ 155,595
Cash....................................................................... 34,508 69,299 345,319
--------- ---------- ----------
Total.................................................................. $ 34,508 $ 492,399 $ 500,914
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
NON-CASH TRANSACTIONS:
- During fiscal 1999, the Company issued 2,025,185 shares of common stock
upon conversion of $130,989 of the 2001 Notes in conjunction with the 2001
Notes Exchange.
- During fiscal 1999, the Company issued 7,911 shares of common stock upon
conversion of $1,000 of the 2003 Notes.
- During fiscal 1999, 1998 and 1997, the Company recorded additional paid-in
capital of approximately $217, $4,272 and $1,250, respectively, related to
the tax benefit on stock options exercised.
- During fiscal 1998 and 1997, the Company issued 7,044 and 96,158 shares of
common stock, respectively, to repay $570 and $6,359 of indebtedness,
respectively.
See accompanying notes to consolidated financial statements.
57
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--BUSINESS ORGANIZATION
U.S. Office Products Company ("U.S. Office Products" or the "Company") was
founded in October 1994. The Company is a supplier of a broad range of office
products and business services to corporate customers. The Company serves a
broad range of business customers, from large corporations to small businesses.
The Company provides office products and business services in North America, New
Zealand and Australia and, through a 49% owned subsidiary, in the United
Kingdom.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
and the companies acquired in business combinations accounted for under the
purchase method (the "Purchased Companies") from their respective acquisition
dates and give retroactive effect to the results of the companies acquired in
business combinations accounted for under the pooling-of-interests method (the
"Pooled Companies") for all periods presented. 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 3, "Strategic Restructuring
Plan." The Company's continuing operations consist of its North American Office
Products Group (which includes office supplies, office furniture, and breakroom
products and services (office coffee, beverage and vending services)) ("NAOPG"),
Mail Boxes Etc. ("MBE"), which the Company acquired in November 1997, 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. NAOPG operates
primarily in the United States; it also includes two coffee and beverage
businesses located in Canada.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
During the consolidation of several warehouse and distribution facilities in
late fiscal 1999, the Company identified inventory losses greater than reserves
previously established to cover slow moving and obsolete inventory. As a result,
the Company developed new methodologies to calculate the estimated reserve for
slow moving and obsolete inventory in NAOPG, which resulted in the recognition
of additional inventory reserves of $7,031 in the fourth quarter. In addition,
during the fourth quarter of fiscal 1999, the Company recorded an additional
$1,212 increase in the allowance for doubtful accounts for NAOPG.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1999", "fiscal 1998" and "fiscal
1997" refer to the Company's fiscal years ended April 24, 1999, April 25, 1998
and April 26, 1997, respectively. On August 20, 1996, the Company's Board
58
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of Directors approved a change in the Company's fiscal year-end, effective for
fiscal 1997, from April 30 to the last Saturday in April.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Investments in less than 50% owned entities
are accounted for under the equity method. All significant intercompany
transactions and accounts are eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to fiscal 1998 and fiscal 1997 to
conform to the current year presentation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivable. Receivables
arising from sales to customers are not collateralized and, as a result,
management continually monitors the financial condition of its customers to
reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements that
extend the physical or economic life of property and equipment are capitalized.
Maintenance and repairs are expensed as incurred. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the respective assets. The estimated useful lives range from 25 to 40
years for buildings and its components and 3 to 15 years for furniture, fixtures
and equipment. Property and equipment leased under capital leases are being
amortized over the lesser of its useful life or its lease term. Gains and losses
from sales and retirements are included in operations as they occur.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of net assets acquired in business combinations
accounted for under the purchase method. Goodwill is amortized on a
straight-line basis over estimated useful lives ranging from 20 to 40 years.
Management periodically evaluates the recoverability of goodwill, which would be
adjusted for a permanent decline in
59
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value, if any, as determined by comparing anticipated undiscounted future cash
flows from operations to net book value.
ACCRUED ACQUISITION COSTS
The Company accrues the direct external costs incurred in conjunction with
the consummation of business combinations and the costs incurred to consolidate
acquired operations into existing Company facilities, including the external
costs and liabilities to close redundant facilities and severance and relocation
costs related to the acquired entity's employees in accordance with EITF Issue
No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of operations accounts are translated
using the monthly average exchange rates. Translation adjustments are recorded
as a separate component of other comprehensive loss. In fiscal 1999, 1998 and
1997, currency translation adjustments were not adjusted for income taxes as the
Company considered its investment in foreign subsidiaries to be permanent in
nature. During fiscal 1999, 1998 and 1997, U.S. Office Products Company (the
"Parent") considered its intercompany loans to the Blue Star Group to be a
long-term investment and, therefore, the currency transaction gain (loss)
related to the intercompany loans is recorded as a component of other
comprehensive loss. As a result of the strategic review of operations conducted
during the fourth quarter of fiscal 1999, the Parent has subsequently changed
its perspective on the Blue Star Group operations and no longer considers the
intercompany loans to be long-term in nature. Accordingly, effective April 25,
1999, the Company will record the currency transaction gain (loss) related to
its intercompany loans with the Blue Star Group as a component of income from
continuing operations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate debt. The swap agreements are
contracts to exchange floating rate for fixed interest payments periodically
over the life of the agreements without the exchange of the underlying notional
amounts. The notional amounts of interest rate swap agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. For interest rate instruments that effectively hedge
interest rate exposures, the net cash amounts paid or received on the agreements
are accrued and recognized as a component of interest expense.
The Company also enters into foreign currency forward contracts to reduce
the impact of changes in the exchange rates of the New Zealand and Australian
dollars. As of April 24, 1999, the Company held contracts denominated in U.S.
dollars for a total notional amount of approximately $14,000 at rates ranging
from $0.51 to $0.56. These contracts mature on dates ranging from April 30, 1999
to December 31, 1999.
60
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using the following methods and assumptions:
- The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value;
- The fair values of the 5 1/2% Convertible Subordinated Notes due 2001 (the
"2001 Notes"), the 5 1/2% Convertible Subordinated Notes due 2003 (the
"2003 Notes") and the 9 3/4% Senior Subordinated Notes due 2008 (the "2008
Notes") are based on quoted market prices;
- The carrying amounts of the Company's debt, other than the 2001 Notes, the
2003 Notes and the 2008 Notes, approximate fair value, based on discounted
cash flow analyses using the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
INCOME TAXES
Income taxes have been computed utilizing the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Certain
companies acquired in pooling-of-interests transactions during fiscal 1997
elected to be taxed as subchapter S corporations, and accordingly, no federal
income taxes were recorded by those companies for periods prior to their
acquisition by U.S. Office Products.
TAXES ON UNDISTRIBUTED EARNINGS
No provision was made for U.S. income taxes on earnings of subsidiary
companies which the Company controls but does not include in the consolidated
federal income tax return, since it was management's practice and intent to
permanently reinvest the earnings of these subsidiaries.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. The Company also leases equipment to customers under both short-term and
long-term lease agreements. Revenue related to short-term leases is recognized
on a monthly basis over the life of the lease. Certain long-term leases qualify
as sales-type leases and, accordingly, the present value of the future lease
payments is recognized as income upon delivery of the equipment to the customer.
The Company, through its wholly owned subsidiary MBE, enters into area and
individual franchise agreements in the United States and master license
agreements in other countries. Area franchise agreements grant the area
franchisee the exclusive right to market individual franchise centers for the
Company in the area franchisee's territory. The area franchisee generally
receives a commission on the individual franchises sold as well as a share of
the royalties earned by the Company from centers in the area franchisee's
territory. Individual franchise agreements grant the individual franchisee the
exclusive right to open and operate a franchise center in the individual
franchisee's territory.
61
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Franchise fee revenue is recognized upon the completion of all significant
initial services provided to the franchisee, area franchisee or master licensee
and upon satisfaction of all material conditions of the franchise agreement,
area franchise agreement or master license. For individual franchise sales, the
significant initial obligations that must be completed before any revenue is
recognized are: the site is located, a store lease is in place, the franchise
agreement has been signed, the store design and layout is complete, all manuals
and systems have been provided, and training at MBE is complete. For area
franchise sales, the significant initial obligations that must be completed
before any revenue is recognized are: all operating manuals are provided,
training is completed and a pilot center is opened. For master license
agreements, the significant obligations that must be completed before any
revenue is recognized are: all operating manuals are provided and training is
completed. Revenue is recognized using the installment method when the revenue
is collectible over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each franchisee's
sales (as defined). Such fees are recognized as revenue based upon reported or
estimated sales activity by the franchisees. Revenue from sales of supplies and
equipment is recognized when orders are shipped, or the lease is completed,
whichever is later.
COST OF REVENUES
Delivery and occupancy costs are included in cost of revenues. Vendor
rebates are recorded as a reduction in the cost of inventory and recognized as a
reduction in cost of revenues when such inventory is sold.
STRATEGIC RESTRUCTURING PLAN COSTS
Strategic Restructuring Costs represent costs incurred in conjunction with
the completion of the Company's Strategic Restructuring Plan. See Note 3,
"Strategic Restructuring Plan" for a description of the components of this plan.
OPERATING RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities,
including the external costs and liabilities to close redundant Company
facilities, and severance costs related to the Company's employees in accordance
with EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in Restructuring)."
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations. Generally accepted accounting
principles require the Company to expense all acquisition costs (both those paid
by the Company and those paid by the sellers of the acquired companies) related
to business combinations accounted for under the pooling-of-interests method.
62
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of operations as a
component of selling, general and administrative expenses. During fiscal 1999,
1998 and 1997, the Company incurred advertising expenses of $20,276, $18,473 and
$14,355, respectively.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 requires the dual presentation of basic and diluted EPS on the face of the
consolidated statement of operations. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income (loss) and its components. Comprehensive income (loss)
consists of net income (loss) and foreign currency translation adjustments as
presented in the consolidated statement of stockholders' equity. The adoption of
SFAS No. 130 had no impact on total stockholders' equity or net income (loss).
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14. SFAS No. 131 requires the Company to report segment information based on the
"management," or "operating segment," approach rather than the "industry"
approach required under SFAS No. 14. Additionally, SFAS No. 131 requires
disclosures about the Company's products and services, geographic areas and
major customers. The adoption of SFAS No. 131 had no impact on the results of
operations or financial position of the Company, but did affect the disclosure
of segment information.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000 (fiscal 2002 for the Company). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its limited use
of derivative instruments, the adoption of SFAS No. 133 will not have a
significant effect on the results of operations or financial position of the
Company.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998 (fiscal 2000 for
the Company). SOP 98-1 provides guidance for accounting for the costs of
computer software developed
63
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or obtained for internal use. Management of the Company anticipates that the
adoption of SOP 98-1 will not have a significant effect on the results of
operations or financial position of the Company.
NOTE 3--STRATEGIC RESTRUCTURING PLAN
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan") that was approved by the Company's Board of
Directors in January 1998. The principal elements of the Strategic Restructuring
Plan were:
- EQUITY TENDER OFFER. Pursuant to a self-tender offer (the "Equity
Tender"), the Company repurchased 9,259,261 shares of its common stock,
including 1,140,186 shares that were issued on exercise of vested and
unvested options for common stock at $108.00 per share (or in the case of
stock options, at $108.00 per share minus the exercise price of the
options). The Company repurchased the shares for $934,569 in cash. In
fiscal 1999, the Company recorded a non-cash compensation expense of
$57,711, related to the participation of stock options in the Equity
Tender.
- SPIN-OFF DISTRIBUTIONS. After acceptance of the shares in the Equity
Tender, the Company distributed to U.S. Office Products' stockholders the
shares of four separate companies: Aztec Technology Partners, Inc. (one
share for every 1.25 shares of U.S. Office Products common stock held),
Workflow Management, Inc. (one share for every 1.875 shares of U.S. Office
Products common stock held), School Specialty, Inc. (one share for every
2.25 shares of U.S. Office Products common stock held) and Navigant
International, Inc. (one share for every 2.5 shares of U.S. Office
Products common stock held) (collectively, the "Spin-Off Companies"). The
distributions of the shares of the Spin-Off Companies are referred to in
these consolidated financial statements as the "Distributions." The
Spin-Off Companies hold U.S. Office Products' former Technology Solutions,
Print Management, Educational Supplies and Corporate Travel Services
businesses, respectively.
- EQUITY INVESTMENT. After the Distributions, an affiliate ("Investor") of
an investment fund managed by Clayton, Dubilier & Rice, Inc., a private
investment firm, acquired the following equity securities of the Company
for $254,176, net of $15,824 in fees: (i) 9,101,129 shares (24.9%) of the
Company's common stock, (ii) special warrants (the "Special Warrants")
entitling Investor to purchase additional common stock in certain
circumstances intended to permit Investor to maintain its 24.9% equity
ownership position, and (iii) warrants (the "Warrants") entitling Investor
to purchase additional shares of common stock for $405,000 equal to the
number of shares of common stock it purchased outright plus the number of
shares it acquires or is entitled to acquire pursuant to the Special
Warrants. In April 1999, in conjunction with Investor's additional
investment in the Company (see Note 14, "Stockholders' Equity"), the
exercise price of the Warrants was reduced to $5.625 per share.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
completed the following financing transactions (the "Financing Transactions") in
June 1998:
- Pursuant to a tender offer, the Company repurchased $222,215 of its 2003
Notes for a purchase price of 94.5% of the principal amount and accrued
interest on such notes.
- Pursuant to an exchange offer, the Company exchanged $130,989 of its 2001
Notes for 2,025,185 shares of common stock at an exchange rate of 15.461
shares of U.S. Office Products common stock
64
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
for each $1 principal amount of such notes, which effectively reduced the
conversion price of such notes from $76.00 to $64.68 while the exchange
offer was open.
- The Company entered into a new $1,225,000 senior secured bank credit
facility (the "New Credit Facility") that consisted of the following (i) a
$200,000 seven-year multi-draw loan facility; (ii) a $250,000 seven-year
revolving credit facility; (iii) a $100,000 seven-year term loan facility;
and (iv) a $675,000 eight-year term loan facility. As a result of the
Company entering into the New Credit Facility, the former credit facility
was terminated. In agreement with the Company's lenders, certain terms of
the New Credit Facility were subsequently modified. (see Note 9, "Credit
Facilities").
- The Company issued and sold $400,000 of the 2008 Notes in a private
placement at 99.583% of the principal amount.
DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for all periods presented in the Company's
consolidated financial statements. The Spin-Off Companies (and their respective
lines of business) are Aztec Technology Partners, Inc. (technology solutions),
Navigant International, Inc. (corporate travel services), School Specialty, Inc.
(educational supplies), and Workflow Management, Inc. (print management). The
Spin-Off Companies began operating as independent companies on June 10, 1998.
Accordingly, the fiscal 1999 results of discontinued operations represent the
period from April 26, 1998 to June 9, 1998.
65
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
The income (loss) from discontinued operations included in the consolidated
statement of operations represents the sum of the results of the Spin-Off
Companies for the periods they were included in the results of the Company and
is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Fiscal 1999:
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)
Fiscal 1998:
Revenues..................................... $ 353,351 $ 120,424 $ 310,455 $ 208,341 $ 992,571
Operating income............................. 16,776 7,808 18,103 13,091 55,778
Income before provision for income taxes..... 15,099 7,631 12,173 13,114 48,017
Provision for income taxes................... 7,392 4,569 6,065 6,279 24,305
Income from discontinued operations, net of
income taxes............................... 7,707 3,062 6,108 6,835 23,712
Fiscal 1997:
Revenues..................................... $ 334,220 $ 57,677 $ 191,746 $ 136,278 $ 719,921
Operating income............................. 16,426 5,668 10,295 11,198 43,587
Income before provision for (benefit from)
income taxes............................... 11,224 5,450 6,375 10,914 33,963
Provision for (benefit from) income taxes.... 3,651 1,353 (2,034) 4,193 7,163
Income from discontinued operations, net of
income taxes............................... 7,573 4,097 8,409 6,721 26,800
</TABLE>
The results of the Spin-Off Companies include allocations of interest expense,
at U.S. Office Products' weighted average interest rates, based on the average
intercompany debt outstanding during the periods presented. Intercompany debt
allocated to the Spin-Off Companies generally was comprised of funding provided
to the Spin-Off Companies by U.S. Office Products for acquisitions and
acquisition related expenses, repayments of long-term and short-term debt of
acquired companies, payments of direct operating expenses of the Spin-Off
Companies and the net results of daily advances and sweeps of cash by the
Company to keep each Spin-Off Company's cash balance at or near zero on a daily
basis. To the extent that the sum of the intercompany funding and third-party
debt outstanding exceeded the amount of debt to be allocated to the Spin-Off
Companies pursuant to the investment agreement with Investor, such excess
amounts have been characterized as divisional equity. The results of the
Spin-Off Companies do not include any allocations of corporate overhead from the
Company during the periods presented.
66
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3--STRATEGIC RESTRUCTURING PLAN (CONTINUED)
The other net assets of the discontinued operations included in the
Company's consolidated balance sheet represent the sum of the net assets of the
Spin-Off Companies for the period presented and is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
April 25, 1998:
Current assets................................ $ 90,961 $ 21,993 $ 99,643 $ 66,835 $ 279,432
Property, plant and equipment, net............ 33,210 18,008 22,553 5,831 79,602
Intangible assets, net........................ 14,014 87,590 99,613 63,829 265,046
Other assets.................................. 8,259 852 34 574 9,719
Current liabilities........................... (57,434) (18,643) (54,642) (33,363) (164,082)
Long-term liabilities......................... (30,250) (16,523) (63,415) (5,056) (115,244)
------------ ----------- ----------- ----------- ------------
Other net assets of discontinued
operations.............................. $ 58,760 $ 93,277 $ 103,786 $ 98,650 $ 354,473
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
</TABLE>
The amounts receivable upon the Distributions reflected in the April 25,
1998 consolidated balance sheet were recovered from the Spin-Off Companies in
connection with the Distributions.
NOTE 4--BUSINESS COMBINATIONS
PURCHASE METHOD
In fiscal 1999, the Company made 22 acquisitions, all related to continuing
operations, which were accounted for under the purchase method. The aggregate
purchase price for these 22 acquisitions was $34,508, consisting entirely of
cash. The total assets related to these 22 acquisitions were $43,575, including
goodwill of $29,691. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
In fiscal 1998, the Company made 73 acquisitions, including 51 related to
continuing operations, accounted for under the purchase method. The aggregate
purchase price for these 73 acquisitions was $762,456, consisting of $177,979 of
cash and 6,944,625 shares of common stock with a market value of $584,477. The
total assets related to these 73 acquisitions were $900,870, including goodwill
of $643,413. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
In fiscal 1997, the Company made 77 acquisitions, including 71 related to
continuing operations, accounted for under the purchase method. The aggregate
purchase price for these 77 acquisitions was $520,891 consisting of $354,811 of
cash, and 2,171,363 shares of common stock with a market value of $166,080. The
total assets related to these 77 acquisitions were $861,647, including goodwill
of $506,386. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
In addition, there is the potential for the payment of up to an additional
750,000 shares of common stock, subject to an upward adjustment on the share
limit (which the Company currently estimates could be
67
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
approximately two times such limit) related to a purchase acquisition based upon
the financial performance of such purchase acquisition and the value of the
Company's common stock. The issuance of shares under this agreement would also
entitle Investor to anti-dilution protection under the terms of the Special
Warrants.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1999 and 1998 and includes the Company's consolidated
financial statements and the results of the Purchased Companies and excludes the
results of all business divestitures and closures as if all such purchase
acquisitions and business divestitures and closures had been made at the
beginning of fiscal 1998. The results presented below include certain pro forma
adjustments to reflect the amortization of intangible assets, adjustments in
executive compensation and the inclusion of a federal income tax provision on
all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
<S> <C> <C>
APRIL 24, APRIL 25,
1999 1998
------------ ------------
Revenues.............................................................................. $ 2,653,198 $ 2,766,170
Income (loss) from continuing operations before extraordinary items................... (94,712) 15,666
Basic income (loss) per share from continuing operations before extraordinary items... (2.58) 0.43
Diluted income (loss) per share from continuing operations before extraordinary
items............................................................................... (2.58) 0.42
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the purchase acquisitions and business divestitures and closures
occurred at the beginning of fiscal 1998 or the results which may occur in the
future.
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 8,290,791 shares of common stock, to
acquire 40 companies, including 25 companies related to continuing operations,
in business combinations accounted for under the pooling-of-interests method.
The Company's consolidated financial statements give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented. Certain of the
Pooled Companies were previously reported on fiscal years ending other than
April 26, 1997.
68
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
Commencing on May 1, 1996, the year-ends of the Pooled Companies were
changed to April 26, 1997 resulting in adjustments to retained earnings of $286
during fiscal 1997. Following is a summary of the results related to the
adjustments to retained earnings:
<TABLE>
<CAPTION>
FOR THE
FISCAL
YEAR ENDED
APRIL 26,
1997
-------------
<S> <C>
Revenues........................................................................................... $ (9,907)
Costs and expenses................................................................................. (10,193)
-------------
Net adjustment............................................................................... $ 286
-------------
-------------
</TABLE>
The following presents the fiscal 1997 results, of U.S. Office Products
(excluding the results of Pooled Companies prior to the dates on which they were
acquired), and the Pooled Companies up to the dates on which they were acquired:
<TABLE>
<CAPTION>
U.S. OFFICE POOLED
PRODUCTS COMPANIES COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Fiscal 1997:
Revenues............................................................... $ 1,906,496 $ 209,458 $ 2,115,954
Income from continuing operations before extraordinary items........... $ 27,978 $ 3,960 $ 31,938
</TABLE>
EQUITY INVESTMENT IN AFFILIATE
In November 1996, the Company acquired a 49% equity interest in Dudley
Stationery Limited ("Dudley"), which is accounted for under the equity method.
Under the terms of the agreement, the Company invested $82,043 in Dudley. The
Company's investment in Dudley as of April 24, 1999 was $83,344, including
$34,489 which represents the excess of the Company's proportionate share of the
underlying net assets of Dudley, and is included in other assets on the
consolidated balance sheet. The portion of the investment in excess of the
Company's proportionate share of the underlying assets of Dudley is being
amortized over 40 years. The Company has included its share of Dudley's net
income (loss) as a component of other (income) expense on the consolidated
statement of operations.
NOTE 5--ACCRUED ACQUISITION COSTS
As of the consummation date of an acquisition, the Company begins to assess
and formulate a plan to exit activities of the acquired companies. Typically,
this involves evaluating the facilities of the Company and the acquired
companies in the specific geographic areas, determining which of the acquired
facilities will be exited and identifying employee groups that will be
terminated or relocated. In most cases, the facilities are closed and the
employees terminated within one year of the completion of the plan.
69
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--ACCRUED ACQUISITION COSTS (CONTINUED)
The following table sets forth the Company's accrued acquisition costs for
the periods ended April 25, 1998 and April 24, 1999:
<TABLE>
<CAPTION>
EMPLOYEE DISPOSAL OF
REDUNDANT SEVERANCE AND ASSETS AND
FACILITIES RELOCATION OTHER TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at April 26, 1997....................................... $ 1,593 $ 2,484 $ 6,712 $ 10,789
Additions..................................................... 3,836 7,494 4,844 16,174
Utilizations.................................................. (3,046) (6,861) (6,164) (16,071)
----------- ------ ----------- ---------
Balance at April 25, 1998....................................... 2,383 3,117 5,392 10,892
Additions..................................................... 334 367 1,077 1,778
Utilizations and reversals.................................... (2,053) (2,485) (6,353) (10,891)
----------- ------ ----------- ---------
Balance at April 24, 1999....................................... $ 664 $ 999 $ 116 $ 1,779
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
NOTE 6--OPERATING RESTRUCTURING COSTS
The following table sets forth the Company's accrued operating restructuring
costs for the periods ended April 26, 1997, April 25, 1998 and April 24, 1999:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATIONS TERMINATIONS AND COSTS TOTAL
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Balance at April 30, 1996................................. $ $ $ $
Additions............................................... 1,337 308 2,556 4,201
Utilizations............................................ (302) (229) (2,150) (2,681)
------------- ------------ ------------ ----------
Balance at April 26, 1997................................. 1,035 79 406 1,520
Additions............................................... 2,008 3,053 1,126 6,187
Utilizations............................................ (2,076) (1,877) (1,058) (5,011)
------------- ------------ ------------ ----------
Balance at April 25, 1998................................. 967 1,255 474 2,696
Additions............................................... 6,786 13,090 4,166 24,042
Utilizations............................................ (2,166) (9,775) (3,854) (15,795)
------------- ------------ ------------ ----------
Balance at April 24, 1999................................. $ 5,587 $ 4,570 $ 786 $ 10,943
------------- ------------ ------------ ----------
------------- ------------ ------------ ----------
</TABLE>
In fiscal 1999, management approved restructuring plans, which included
initiatives to streamline its operating structure by reducing the number of
employees, eliminating duplicative facilities, and deploying a common
information system. The total operating restructuring costs recorded during
fiscal 1999 included $13,090 of employee separation costs for 503 employees
working in the majority of the Company's business functions, job classes and
geographies. These costs also include $6,786 related to the closure or
consolidation of 89 facilities containing redundant or unutilized warehousing,
sales and/or administrative functions. These costs primarily represent the
estimated excess lease costs associated with exited facilities. The remaining
$4,166 recorded during fiscal 1999 relates to the write-off of unutilized assets
resulting from facility closings and the deployment of the Company's common
information system. The total cost of $24,042 represents $19,876 of cash and
$4,166 of non-cash charges.
70
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--OPERATING RESTRUCTURING COSTS (CONTINUED)
In fiscal 1998, management approved restructuring plans in conjunction with
its continuing initiatives to integrate acquired companies and streamline
operations. The operating restructuring costs recorded during fiscal 1998
included $3,053 of employee separation costs for 241 employees working primarily
in the general administrative and warehouse areas. The costs also included
$2,008 related to closure or consolidation of 28 facilities, primarily related
to excess lease costs at exited facilities containing primarily redundant
warehouse and administrative functions. The remaining $1,126 relates to the
write-off of unutilized assets resulting from facility closures. The total cost
of $6,187 represents $4,248 of cash and $1,939 of non-cash charges.
In fiscal 1997, management approved restructuring plans primarily related to
integrating acquired companies and closing a number of retail locations. The
operating restructuring costs included $308 of employee separation costs for 64
employees working primarily in the customer service and general administrative
areas. The costs also include $1,337 related to the closure or consolidation of
13 facilities, primarily related to excess lease costs at exited facilities
containing retail and warehousing operations. The remaining $2,556 relates to
the write-off of unutilized assets resulting from facility closure and exited
lines of business. The total cost of $4,201 represents $1,643 of cash and $2,558
of non-cash charges.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
----------- ----------
<S> <C> <C>
Land..................................................................................... $ 25,529 $ 27,728
Buildings................................................................................ 40,516 45,268
Furniture and fixtures................................................................... 152,741 136,198
Warehouse equipment...................................................................... 78,397 72,929
Equipment under capital leases........................................................... 9,296 17,719
Leasehold improvements................................................................... 27,674 10,162
----------- ----------
334,153 310,004
Less: Accumulated depreciation........................................................... (103,001) (81,289)
----------- ----------
Net property and equipment............................................................... $ 231,152 $ 228,715
----------- ----------
----------- ----------
</TABLE>
Depreciation expense for fiscal 1999, 1998 and 1997 was $41,739, $33,260 and
$20,699, respectively.
71
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
---------- ----------
<S> <C> <C>
Goodwill.................................................................................. $ 909,675 $ 953,819
Other..................................................................................... 4,225 4,036
---------- ----------
913,900 957,855
Less: Accumulated amortization............................................................ (55,703) (34,831)
---------- ----------
$ 858,197 $ 923,024
---------- ----------
---------- ----------
</TABLE>
Amortization expense for fiscal 1999, 1998 and 1997 was $24,709, $19,938 and
$12,416, respectively.
During the Company's evaluation of the recoverability of goodwill, certain
operating companies were identified as having future undiscounted cash flow
projections less than the carrying value of the unamortized goodwill related to
such companies, thus indicating impairment. As a result, in fiscal 1999 an
impairment loss of $58,735 was recorded as a reduction to goodwill in an amount
equal to the excess of the carrying value over the future discounted cash flows
of the entities.
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
--------- ----------
<S> <C> <C>
Former Credit Facility, average interest rate of 6.4% at April 25, 1998.................... $ $ 365,000
Current maturities of long-term debt....................................................... 19,193 3,227
--------- ----------
Total short-term debt.............................................................. $ 19,193 $ 368,227
--------- ----------
--------- ----------
</TABLE>
At April 25, 1998, the Company had an agreement under which a syndicate of
financial institutions, led by Bankers Trust Company, as Agent (the "Bank"), was
providing the Company with a $500,000 credit facility (the "Former Credit
Facility") bearing interest, at the Company's option, at the Bank's base rate
plus an applicable margin of up to 1.25%, or a eurodollar rate plus an
applicable margin of up to 2.5%. The availability under the Former Credit
Facility was subject to certain sublimits including $100,000 for working capital
loans and $400,000 for acquisition loans. The Former Credit Facility was
collateralized by a majority of the assets of the Company and its subsidiaries
and contained customary covenants, including financial covenants with respect to
the Company's consolidated leverage and interest coverage ratios, capital
expenditures, payment of dividends and purchases and sales of assets, and
customary default provisions, including provisions related to non-payment of
principal and interest, default under other debt agreements and bankruptcy. At
April 25, 1998, the balance outstanding under the Former Credit Facility
included six eurodollar contracts, expiring within 30 days, totaling $351,000 at
an average interest rate of 6.38%.
72
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
Upon completion of the Strategic Restructuring Plan, the Company terminated
and repaid the balance outstanding under its Former Credit Facility and entered
into the New Credit Facility (see "Long-Term Debt"). In fiscal 1999, the Company
recorded a non-cash extraordinary expense of $4,745, before benefit from income
taxes, related to the write-off of debt issue costs capitalized in conjunction
with the Former Credit Facility.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
------------ ----------
<S> <C> <C>
Seven-year term loan due 2005, interest at 7.18% at April 24, 1999, principal and
interest payable quarterly............................................................ $ 91,667 $
Eight-year term loan due 2006, interest at 7.43% at April 24, 1999, principal and
interest payable quarterly............................................................ 674,333
Senior Subordinated Notes due 2008, interest at 9 3/4%, redeemable at any time on or
after June 15, 2003, interest payable semi-annually................................... 398,321
Convertible Subordinated Notes due 2003, interest at 5 1/2%, convertible into shares of
common stock at any time prior to maturity at a conversion price of $64.36 per share,
subject to adjustment in certain events, interest payable semi-annually............... 4,614 230,000
Convertible Subordinated Notes due 2001, interest at 5 1/2%, convertible into shares of
common stock at any time prior to maturity at a conversion price of $38.70 per share,
subject to adjustment in certain events, interest payable semi-annually............... 12,761 143,750
Other................................................................................... 2,265 3,074
Capital lease obligations............................................................... 6,661 8,577
------------ ----------
1,190,622 385,401
Less: Current maturities of long-term debt.............................................. (19,193) (3,227)
------------ ----------
Total long-term debt, net of current maturities..................................... $ 1,171,429 $ 382,174
------------ ----------
------------ ----------
</TABLE>
The New Credit Facility originally provided for an aggregate principal
amount of $1,225,000, consisting of (i) a seven-year multi-draw term loan
facility totaling $200,000, (ii) a seven-year revolving credit facility totaling
$250,000, (iii) a seven-year term loan facility totaling $100,000, and (iv) an
eight-year term loan facility totaling $675,000. During fiscal 1999, the Company
reached an agreement with its bank lenders to revise the terms of the New Credit
Facility. The revisions included modifications to the financial covenants and a
reduction in the amount available under the multi-draw term loan facility from
$200,000 to $50,000 and under the revolving credit facility from $250,000 to
$200,000. There was no change to the interest rates that the Company pays on
borrowings under the New Credit Facility. The Company paid amendment fees of
$2,929 in connection with the modifications to the New Credit Facility and
recorded a non-cash expense of $1,857, which is included in interest expense, to
write-off capitalized debt issue costs.
73
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
In connection with the completion of the Strategic Restructuring Plan and
the Financing Transactions, the Company borrowed the full amount of the two
single-draw term loan facilities. The multi-draw term loan facility and the
revolving credit facility remain available for future borrowings. Costs incurred
in connection with the issuance of the two single-draw term loan facilities
totaling $10,407 are included in other assets and are being amortized over the
period to maturity. Interest rates on such borrowings bear interest, at the
Company's option, at the lending bank's base rate plus an applicable margin of
up to 1.50%, or a eurodollar rate plus an applicable margin of up to 2.50%. A
commitment fee of 0.50% is applied to the multi-draw term loan facility and
seven-year term loan. The Company's obligations under the New Credit Facility
are guaranteed by its present domestic subsidiaries; future material domestic
subsidiaries will also be required to guarantee these obligations. The New
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 was
required to enter into arrangements to ensure that the effective interest rate
paid by the Company on at least 50% of the aggregate amount outstanding under
the New Credit Facility and the 2008 Notes was at a fixed rate of interest. As a
result, the Company has entered into interest rate swap arrangements to limit
the LIBOR-based interest rate exposure on $500,000 of the outstanding balance
under the New Credit Facility to rates ranging from 5.7% to 6.0%. The interest
rate swap agreements expire over a period ranging from 2001 to 2003. As a result
of these swap agreements (and including the fixed-rate 2008 Notes), the Company
has fixed the interest rates on $900,000 (75.6%) of the long-term debt
outstanding at April 24, 1999. The Company's weighted average interest rate in
fiscal year 1999 was 8.2%.
The New Credit Facility includes, among others, restrictions on the
Company's ability to incur additional indebtedness, sell assets, pay dividends,
or engage in certain other transactions, and requirements that the Company
maintain certain financial ratios, and other provisions customary for loans to
highly leveraged companies, including representations by the Company, conditions
to funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The New 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 redeemable at any time on or after June 15, 2003,
initially at 104.875% of their principal amount, plus accrued interest, if any,
declining ratably to 100% of their principal amount, plus accrued interest, to
the redemption date, on or after June 15, 2006. In addition, at any time prior
to June 15, 2001, the Company at its option may redeem up to 35% of the original
principal amount of the 2008 Notes with the proceeds of one or more equity
offerings at a redemption price of 109.75% of the principal amount of the 2008
Notes. 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. Costs incurred in connection with the issuance of the 2008 Notes
totaling $10,348 are included in other assets and are being amortized over the
ten year period of maturity. The fair value of the 2008 Notes at April 24, 1999,
based upon quoted market prices, totaled $268,000.
74
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
The 2003 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after May 22, 1998, but may not be redeemed
prior to May 15, 1999 unless the closing price of the common stock is at least
150% of the conversion price for a period of time prior to the notice of
redemption. Costs incurred in connection with the issuance of the 2003 Notes are
included in other assets and are being amortized over the seven year period of
maturity. The fair value of the 2003 Notes at April 24, 1999, based upon quoted
market prices, totaled $1,615. In conjunction with the Strategic Restructuring
Plan, $222,215 of the 2003 Notes were retired at 94.5% of the principal amount,
resulting in an extraordinary gain in fiscal 1999 of $12,396, before provision
for income taxes, and the conversion price on the remaining outstanding 2003
Notes was adjusted to $64.36. In addition, the Company recorded an extraordinary
expense of $5,174, before benefit from income taxes, related to the write-off of
debt issue costs capitalized in connection with the issuance of the 2003 Notes.
The 2001 Notes are redeemable, in whole or in part, at the Company's option
at specified redemption prices on or after February 3, 1998, but may not be
redeemed prior to February 2, 1999 unless the closing price of the common stock
is at least 150% of the conversion price for a period of time prior to the
notice of redemption. Costs incurred in connection with the issuance of the 2001
Notes are included in other assets and are being amortized over the five year
period of maturity. The fair value of the 2001 Notes at April 24, 1999, based
upon quoted market prices, totaled $4,466. In conjunction with the Strategic
Restructuring Plan, $130,989 of the 2001 Notes were exchanged for 2,025,185
shares of common stock at a conversion price that was temporarily reduced from
$76.00 per share to $64.68 per share, resulting in an expense in fiscal 1999 of
$20,436 as a result of the reduction in the conversion price, and the conversion
price on the remaining outstanding 2001 Notes was adjusted to $38.70. In
addition, in fiscal 1999 the Company recorded an extraordinary expense of
$2,911, before benefit from income taxes, related to the write-off of debt issue
costs capitalized in connection with the issuance of the 2001 Notes.
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
2000............................................................................ $ 19,193
2001............................................................................ 30,742
2002............................................................................ 17,425
2003............................................................................ 16,433
2004............................................................................ 20,986
Thereafter...................................................................... 1,085,843
---------
$1,190,622
---------
---------
</TABLE>
NOTE 10--INCOME TAXES
The Company files a consolidated income tax return for its wholly owned
domestic subsidiaries. Separate returns are filed for its foreign subsidiaries.
The consolidated tax provision, therefore, is based upon the separate tax
provisions of the domestic and foreign jurisdictions.
75
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
Domestic and foreign income (loss) from continuing operations before
provision for (benefit from) income taxes and extraordinary items consists of
the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- --------- ---------
Domestic....................................................................... $ (156,873) $ 53,478 $ 37,244
Foreign........................................................................ (71,031) 26,944 22,633
----------- --------- ---------
Total...................................................................... $ (227,904) $ 80,422 $ 59,877
----------- --------- ---------
----------- --------- ---------
</TABLE>
The provision for (benefit from) income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
---------- --------- ---------
Income taxes currently (receivable) payable:
Federal....................................................................... $ (17,301) $ 16,746 $ 18,776
State......................................................................... (4,124) 4,161 1,987
Foreign....................................................................... 1,262 11,505 8,211
---------- --------- ---------
(20,163) 32,412 28,974
Deferred income tax expense (benefit)........................................... (10,239) 4,534 (1,035)
---------- --------- ---------
Total provision for (benefit from) income taxes............................. $ (30,402) $ 36,946 $ 27,939
---------- --------- ---------
---------- --------- ---------
</TABLE>
76
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 24, APRIL 25,
1999 1998
---------- ----------
<S> <C> <C>
Current deferred tax assets:
Inventory............................................................................... $ 7,338 $ 6,788
Allowance for doubtful accounts......................................................... 5,000 2,921
Accrued liabilities..................................................................... 16,939 7,191
Foreign net operating losses............................................................ 1,869 3,042
---------- ----------
Total current deferred tax assets..................................................... 31,146 19,942
---------- ----------
Long-term deferred tax assets:
Foreign net operating losses............................................................ 29,775 30,622
Restructuring reserves.................................................................. 5,380 2,130
Property and equipment.................................................................. 5,008
Other................................................................................... 6,312
---------- ----------
Total long-term deferred tax assets................................................... 46,475 32,752
---------- ----------
Long-term deferred tax liabilities:
Property and equipment.................................................................. (12,768) (6,042)
Intangible assets....................................................................... (1,457) (2,141)
Internal Revenue Service tax assessment................................................. (3,383)
Other................................................................................... (14,397) (2,368)
---------- ----------
Total long-term deferred tax liabilities.............................................. (28,622) (13,934)
---------- ----------
Net deferred tax asset................................................................ $ 48,999 $ 38,760
---------- ----------
---------- ----------
</TABLE>
The Company's foreign net operating losses ("NOLs") arise from the Blue Star
Group's operations in New Zealand and Australia. These foreign tax jurisdictions
do not limit the NOL carryforward period. The Company expects to be able to
utilize fully the NOLs by fiscal 2000 for the Australian operations and by
fiscal 2014 for the New Zealand operations.
Management believes that it is more likely than not that the Company's
deferred tax assets are realizable. Accordingly, no valuation allowance has been
provided.
The Internal Revenue Service ("IRS") tax assessment at April 25, 1998
relates to the deferral of a gain on the sale of land and a building by a
subsidiary of the Company. The IRS had determined that a portion of the gain
recorded by the subsidiary did not qualify for deferral and assessed the Company
additional taxes. The subsidiary recorded a deferred tax liability, including
interest, as a result of the assessment. In fiscal 1999, the matter was resolved
with the IRS, resulting in no additional taxes paid by the Company.
77
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax (benefit) rate varied from the U.S.
federal statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- ----------- -----------
U.S. federal statutory rate........................................................ (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax benefit.............................. (2.0 ) 4.1 3.3
Subchapter S corporation income not subject to corporate level taxation............ (3.3 )
Nondeductible domestic goodwill.................................................... 4.3 3.9 4.9
Nondeductible foreign goodwill..................................................... 7.2 3.8 3.9
Nondeductible Strategic Restructuring costs........................................ 7.0
Nondeductible acquisition costs.................................................... 4.7
Difference between foreign taxation and U.S. taxation.............................. 2.7 (1.2 ) (3.0 )
Other.............................................................................. 2.5 0.3 1.2
----- --- ---
Effective income tax (benefit) rate................................................ (13.3 )% 45.9% 46.7%
----- --- ---
----- --- ---
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements that
expire at various dates, some of which include rent escalation clauses. Future
minimum lease payments under noncancelable capital and operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2000....................................................................................... $ 2,120 $ 49,720
2001....................................................................................... 1,766 46,011
2002....................................................................................... 1,450 30,968
2003....................................................................................... 452 23,501
2004....................................................................................... 368 18,131
Thereafter................................................................................. 3,879 59,680
--------- ----------
Total minimum lease payments............................................................... 10,035 $ 228,011
----------
----------
Less: Amounts representing interest........................................................ (3,374)
---------
Present value of net minimum lease payments................................................ $ 6,661
---------
---------
</TABLE>
Rent expense for all operating leases for fiscal 1999, 1998 and 1997 was
$66,555, $57,535 and $40,183, respectively.
78
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
During fiscal 1999, individuals purporting to represent various classes of
the Company's stockholders filed actions in U.S. District Courts for the
Southern District of New York and for the District of Columbia. The actions
claim the named defendants, including the Company, made misstatements and failed
to disclose material information in connection with the Company's Strategic
Restructuring Plan. Two of the actions allege breach of contract under
California law in conjunction with the Company's acquisition of MBE. The actions
seek declaratory relief, damages and attorney's fees. The Company is currently
awaiting filing of a consolidated amended complaint. The Company intends to
vigorously contest this action.
Complaints were also filed in fiscal 1999 by sellers of businesses that the
Company acquired in the fall of 1997 and that were spun off in connection with
the Strategic Restructuring Plan. The complaints assert violation of Federal
and/or state securities and other laws, claims of fraud, misrepresentation,
conspiracy, breach of contract, negligence and/or breach of fiduciary duty. The
Company believes that these claims may be subject to indemnification, in part,
under the terms of the distribution agreement executed in connection with the
Strategic Restructuring Plan. The Company intends to vigorously contest these
actions.
During fiscal 1998, a stockholder purporting to represent a class composed
of all U.S. Office Products' stockholders filed an action in the Delaware
Chancery Court. The action claims that the Directors breached their fiduciary
duty to the stockholders of U.S. Office Products by changing the terms of the
Equity Tender to include employee stock options. The complaint seeks injunctive
relief, damages and attorneys fees. The Company believes that this lawsuit is
without merit and intends to vigorously contest it.
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POST-EMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 24, 1999 or April
25, 1998 related to these agreements.
NOTE 13--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after six months of
service. In fiscal 1999, 1998 and 1997 the Company's matching contribution
expense was $2,329, $2,906 and $1,195, respectively.
79
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
The following information presents the Company's computations of basic and
diluted EPS from continuing operations before extraordinary items for the
periods presented in the consolidated statement of operations.
<TABLE>
<CAPTION>
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -----------
<S> <C> <C> <C>
Fiscal 1999:
Basic EPS............................................................ $ (197,502) 36,259,075 $ (5.45)
-----------
-----------
Effect of dilutive employee stock options
------------- -------------
Diluted EPS.......................................................... $ (197,502) 36,259,075 $ (5.45)
------------- ------------- -----------
------------- ------------- -----------
Fiscal 1998:
Basic EPS............................................................ $ 43,476 29,889,007 $ 1.45
-----------
-----------
Effect of dilutive employee stock options............................ 592,787
------------- -------------
Diluted EPS.......................................................... $ 43,476 30,481,794 $ 1.43
------------- ------------- -----------
------------- ------------- -----------
Fiscal 1997:
Basic EPS............................................................ $ 31,938 22,506,428 $ 1.42
-----------
-----------
Effect of dilutive employee stock options............................ 433,765
------------- -------------
Diluted EPS.......................................................... $ 31,938 22,940,193 $ 1.39
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
The basic and diluted loss per share amounts for fiscal 1999 were calculated
using the same weighted average number of shares outstanding since, as a result
of the loss from continuing operations during the period, all of the Company's
employee stock options and the two series of convertible debt securities
outstanding during the period were anti-dilutive. The Company had additional
employee stock options and two series of convertible debt securities outstanding
during fiscal 1998 and 1997 that were not included in the computation of diluted
EPS because they were anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
-----------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- ----------- ---------
Net income (loss)............................................................ $ (199,065) $ 67,188 $ 57,288
Other comprehensive loss:
Cumulative translation adjustment.......................................... (8,288) (107,220) (6,353)
----------- ----------- ---------
Comprehensive income (loss).................................................. $ (207,353) $ (40,032) $ 50,935
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
80
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
In April 1999, the Company issued 73,262 shares of non-voting convertible
preferred stock to a fund led by Investor for $49,332, net of fees of $1,668.
The preferred shares are convertible to 7,326,200 shares of common stock, upon
transfer to anyone other than Investor or its affiliates, and require no
additional investment upon conversion. The preferred shares do not have dividend
rights in addition to the level of dividends provided to common stockholders and
have a nominal liquidation preference. The preferred stock carries no voting
rights, but where stockholder approval is required for a merger, consolidation,
or sale of all or substantially all of the Company's assets, the preferred stock
will vote together with the common stock.
COMMON STOCK
In June 1998, the Company repurchased 9,259,261 shares of common stock in
the Equity Tender Offer described in Note 3.
In June 1998, the Company effected a one-for-four reverse split of the
Company's common stock whereby each four shares of common stock were exchanged
for one share of common stock. In October 1997, the Company effected a
three-for-two split of the Company's common stock. All share and per share data
appearing in these consolidated financial statements and notes hereto have been
retroactively adjusted for these splits.
STOCK WARRANTS
In June 1998, the Company issued the Special Warrants entitling Investor to
purchase additional shares of common stock in certain circumstances intended to
permit Investor to maintain its 24.9% equity ownership position. In addition,
the Company issued the Warrants entitling Investor to purchase additional shares
of common stock for $405,000 equal to the number of shares of common stock it
purchased as part of its initial equity investment plus the number of shares it
acquires or is entitled to acquire pursuant to the Special Warrants. The
Warrants are exercisable at any time after June 10, 2000 until June 10, 2010. In
April 1999, in conjunction with investor's additional investment in the Company,
the exercise price of the Warrants was reduced to $5.625 per share.
STOCK COMPENSATION PLANS
In October 1994, the Board of Directors and the Company's stockholders
approved the Company's 1994 Long-Term Compensation Plan (the "Plan"). The
purpose of the Plan is to provide officers, key employees and consultants with
additional incentives by increasing their ownership interests in the Company.
The maximum number of options to purchase common stock granted in any calendar
or fiscal year under the Plan, as amended, is equal to 20% of the aggregate
number of shares of the Company's common stock outstanding at the time an award
is granted, less, in each case, the number of shares subject to previously
outstanding awards under the Plan. At April 24, 1999, options to acquire
3,657,078 shares of common stock were outstanding under the Plan.
In August 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors'
Plan"). The purpose of the Directors' Plan is to promote ownership by
non-employee directors of a greater proprietary interest in the Company, thereby
81
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
aligning such directors' interests more closely with the interests of
stockholders of the Company. A total of 750,000 shares of common stock have been
reserved for issuance under the Directors' Plan. At April 24, 1999, options to
acquire 68,165 shares of common stock were outstanding under the Directors'
Plan.
Upon consummation of the merger with MBE in November 1997, the Company
assumed each outstanding and unexercised option to purchase shares of MBE common
stock and converted such options into options to purchase shares of the
Company's common stock. The purpose of the MBE plans was to provide MBE
employees with additional incentives by increasing their ownership interests in
the Company. These plans granted either incentive stock options or non-qualified
stock options. No additional options have been granted under these plans since
the date of the merger. At April 24, 1999, options to acquire 79,162 shares of
the Company's common stock were outstanding under the plans.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Accordingly, because the exercise prices of the options granted have
equaled the market price on the date of grant, no compensation expense has been
recognized for stock options granted. Had compensation cost for the Company's
stock options been recognized based upon the fair value of the stock options on
the grant date under the methodology prescribed by SFAS No. 123, the Company's
income (loss) from continuing operations before extraordinary items and income
(loss) per share from continuing operations before extraordinary items would
have been impacted as indicated in the following table. The pro forma results
shown below reflect only the impact of options granted in fiscal 1999, 1998 and
1997.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
---------------------------------
<S> <C> <C> <C>
APRIL 24, APRIL 25, APRIL 26,
1999 1998 1997
----------- --------- ---------
Income (loss) from continuing operations before extraordinary items:
As reported.................................................................. $ (197,502) $ 43,476 $ 31,938
Pro forma.................................................................... (243,487) 24,333 19,292
Income (loss) from continuing operations before extraordinary items
per share:
As reported:
Basic...................................................................... $ (5.45) $ 1.45 $ 1.42
Diluted.................................................................... (5.45) 1.43 1.39
Pro forma:
Basic...................................................................... $ (6.72) $ 0.81 $ 0.86
Diluted.................................................................... (6.72) 0.80 0.84
</TABLE>
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<S> <C> <C> <C>
Expected life of option........................................... 7 years 7 years 7 years
Risk free interest rate........................................... 5.18% 6.36% 6.66%
Expected volatility of Company stock.............................. 78.4% 44.1% 44.0%
</TABLE>
82
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value of options granted was $3.81, $34.77 and
$45.49 for fiscal 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at April 30, 1996......................................... 1,271,703 $ 44.71 81,199 $ 15.08
Granted......................................................... 1,682,291 81.66
Exercised....................................................... (49,436) 33.54
Canceled........................................................ (18,361) 50.62
-----------
Balance at April 26, 1997......................................... 2,886,197 66.40 399,557 40.41
Granted......................................................... 3,259,442 63.22
Exercised....................................................... (335,516) 34.88
Canceled........................................................ (278,230) 70.17
-----------
Balance at April 25, 1998......................................... 5,531,893 66.21 950,035 63.99
Granted......................................................... 3,310,417 5.77
Exercised....................................................... (1,203,688) 56.04
Canceled........................................................ (7,310,579) 30.96
Adjustment due to Distributions................................. 3,476,362
-----------
Balance at April 24, 1999......................................... 3,804,405 $ 10.30 805,723 $ 12.63
-----------
-----------
</TABLE>
The following table summarizes information about stock options outstanding
at April 24, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------------------------------------- ---------- ----------- ----------- --------- -----------
$4.50 to $10.00........................................ 3,084,422 8.6 years $ 5.69 566,598 $ 5.60
$10.01 to $20.00....................................... 147,935 6.3 years 16.98 77,337 16.54
$20.01 to $30.00....................................... 184,400 8.0 years 27.51 33,662 26.85
$30.01 to $40.00....................................... 313,784 8.0 years 34.10 95,939 35.04
$40.01 to $54.90....................................... 73,864 7.3 years 45.29 32,187 45.37
---------- ----------- --------- -----------
$4.50 to $54.90........................................ 3,804,405 8.4 years $ 10.30 805,723 $ 12.63
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
In December 1998, the Company completed a program in which it offered its
employees holding stock options issued by the Company the opportunity to
surrender their existing options for a smaller number of options at a lower
exercise price per share. Each employee holding options issued by the Company
was given the opportunity to have the Company (i) cancel existing options and
(ii) issue to the employee a
83
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
smaller number of new options with an exercise price equal to $5.375, the
closing price of the Company's common stock on December 11, 1998. The number of
options received was equal to the number of old options multiplied by a fraction
that varied with the exercise price of old options. The fraction ranged from
0.8844 for old options with an exercise price of $9.78 to 0.0984 for old options
with an exercise price of $54.90. Prior to the program, options to acquire
7,546,722 shares were outstanding; after completion of the program, options to
acquire 2,618,413 shares were issued and outstanding.
In June 1998, 1,140,186 stock options were exercised as part of the Equity
Tender. In addition, as a result of the Distributions, 713,015 stock options
held by employees of the Spin-Off Companies were canceled as they were replaced
with stock options of the Spin-Off Companies and, consistent with the
anti-dilution provisions of the Plan and the Director's Plan, the Company
increased the number of options outstanding and reduced the exercise prices of
such options in order to keep option holders in the same economic position
immediately before and after the Distributions. This was accomplished by
multiplying the number of options by 2.18 and dividing the exercise prices of
such options by 2.18.
NOTE 15--SEGMENT REPORTING
BUSINESS SEGMENTS
During fiscal 1999, the Company had three reportable segments, primarily
organized by geographic area: NAOPG, Blue Star Group, and MBE. The NAOPG segment
distributes the following products and provides the following services: office
supplies and coffee services, office furniture and refreshment (vending)
services. The Blue Star Group, located in New Zealand and Australia, operates
the following lines of business: business supplies, business solutions (office
automation products and services and other computer hardware, software and
communication systems), print and consumer retailing. MBE sells and manages
franchise operations that provide mailbox services, packaging, shipping,
document services, parcel receiving, faxing, money transfers, notary services
and passport photos in 29 countries. Other primarily includes the Company's
equity interest in Dudley and the Company's corporate office. Management
measures the performance of the business segments based on several factors,
including revenues, gross profit, operating income before restructuring costs
and impaired asset write-offs and EBITDA, as defined. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
FISCAL 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BLUE STAR CONSOLIDATED
NAOPG GROUP MBE OTHER ELIMINATIONS TOTALS
------------ ---------- --------- ------------ ------------ ------------
Revenues from external customers........... $ 1,790,992 $ 801,352 $ 72,245 $ $ $2,664,589
Gross profit............................... 448,350 244,056 38,387 730,793
Depreciation and amortization.............. 33,276 26,128 7,695 475 67,574
Operating income (loss) before
restructuring costs and impaired asset
write-offs............................... 61,697 26,660 12,454 (31,033) 69,778
EBITDA (a)................................. 94,972 52,788 20,149 (30,558) 137,351
Other significant items:
Identifiable assets........................ 767,751 738,170 310,477 1,167,788 (972,027) 2,012,159
Net capital expenditures for identifiable
assets................................... 18,432 20,032 958 2,046 88 41,556
</TABLE>
84
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BLUE STAR CONSOLIDATED
NAOPG GROUP MBE OTHER ELIMINATIONS TOTALS
------------ ---------- --------- ------------ ------------ ------------
Revenues from external customers........... $ 1,708,365 $ 872,855 $ 30,520 $ $ $2,611,740
Gross profit............................... 440,521 269,519 16,808 726,848
Depreciation and amortization.............. 23,656 26,357 3,150 4,004 57,167
Operating income before restructuring and
non-recurring acquisition costs.......... 85,579 37,691 7,606 (15,429) 115,447
EBITDA (a)................................. 109,235 64,048 10,756 (11,425) 172,614
Other significant items:
Identifiable assets (b).................. 778,751 798,953 315,472 1,301,653 (1,140,020) 2,054,809
Net capital expenditures for identifiable
assets................................. 19,321 20,325 377 6,350 322 46,695
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BLUE STAR CONSOLIDATED
NAOPG GROUP OTHER ELIMINATIONS TOTALS
------------ ---------- ---------- ------------ ------------
Revenues from external customers............... $ 1,415,161 $ 700,793 $ $ $2,115,954
Gross profit................................... 369,614 228,053 597,667
Depreciation and amortization.................. 18,990 13,744 3,368 36,102
Operating income before restructuring and
non-recurring acquisition costs.............. 77,703 30,516 (11,183) 97,036
EBITDA (a)..................................... 96,693 44,260 (7,815) 133,138
Other significant items:
Identifiable assets (b)...................... 688,822 758,136 863,664 (769,871) 1,540,751
Net capital expenditures for identifiable
assets..................................... 20,758 8,024 5,076 178 34,036
</TABLE>
- ------------------------
(a) EBITDA represents earnings from continuing operations before interest
expense, provision for income taxes, depreciation expense, amortization expense,
Strategic Restructuring Plan costs, operating restructuring costs, impaired
asset write-offs, non-recurring acquisition costs, loss on sale and closure of
businesses, 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 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 amounts listed above as identifiable assets of continuing operations
at year-end differ from the total asset amounts presented on the consolidated
balance sheet since net assets of discontinued operations of $486,618 and
$171,122 at April 25, 1998 and April 26, 1997, respectively, were excluded from
the above analysis but are included in total assets on the Company's
consolidated balance sheet.
Effective April 25, 1999, the Company will evaluate its operations by the
following product lines: North American office supplies and office coffee
services, North American office furniture, North American refreshment services,
the Blue Star Group, Mail Boxes Etc., and Other.
85
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 15--SEGMENT REPORTING (CONTINUED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Fiscal 1999:
Revenues.............................................................. $ 1,863,237 $ 801,352 $ 2,664,589
Operating loss........................................................ (87,566) (22,938) (110,504)
Identifiable assets of continuing operations at year-end.............. 1,273,989 738,170 2,012,159
Fiscal 1998:
Revenues.............................................................. $ 1,738,885 $ 872,855 $ 2,611,740
Operating income...................................................... 71,756 37,504 109,260
Identifiable assets of continuing operations at year-end.............. 1,255,856 798,953 2,054,809
Fiscal 1997:
Revenues.............................................................. $ 1,415,161 $ 700,793 $ 2,115,954
Operating income...................................................... 56,126 28,708 84,834
Identifiable assets of continuing operations at year-end.............. 782,615 758,136 1,540,751
</TABLE>
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data.
<TABLE>
<CAPTION>
FISCAL 1999 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues........................................... $ 651,949 $ 677,205 $ 676,622 $ 658,813 $ 2,664,589
Gross profit....................................... 177,664 185,039 194,073 174,017 730,793
Operating income (loss)............................ (83,346) 24,763 25,782 (77,703) (110,504)
Loss from continuing operations before
extraordinary items.............................. (83,543) (3,982) (12,463) (97,514) (197,502)
Loss from discontinued operations.................. (1,294) (1,294)
Extraordinary items................................ 269 269
Net loss........................................... (85,106) (3,982) (12,463) (97,514) (199,065)
Per share amounts:
Basic and Diluted:
Loss from continuing operations................ (2.38) (0.11) (0.34) (2.66) (5.45)
Loss from discontinued operations.............. (0.04) (0.03)
Extraordinary items............................ (0.01) (0.01)
Net loss....................................... (2.43) (0.11) (0.34) (2.66) (5.49)
</TABLE>
86
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ------------
Revenues........................................... $ 614,814 $ 649,340 $ 665,959 $ 681,627 $ 2,611,740
Gross profit....................................... 170,782 179,256 189,220 187,590 726,848
Operating income................................... 23,802 28,300 37,289 19,869 109,260
Income from continuing operations.................. 9,035 12,770 15,431 6,240 43,476
Income (loss) from discontinued operations......... 10,951 11,428 3,085 (1,752) 23,712
Net income......................................... 19,986 24,198 18,516 4,488 67,188
Per share amounts:
Basic:
Income from continuing operations.............. 0.34 0.46 0.48 0.18 1.45
Income (loss) from discontinued operations..... 0.41 0.42 0.10 (0.05) 0.80
Net income..................................... 0.75 0.88 0.58 0.13 2.25
Diluted:
Income from continuing operations.............. 0.33 0.45 0.47 0.18 1.43
Income (loss) from discontinued operations..... 0.41 0.40 0.09 (0.05) 0.77
Net income..................................... 0.74 0.85 0.56 0.13 2.20
</TABLE>
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, segregating guarantor subsidiaries and non-guarantor
subsidiaries. The accompanying financial information in the "Guarantor
Subsidiaries" column represents the financial information of the domestic
subsidiaries that guarantee 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 be material to investors.
87
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 24, 1999
-----------------------------------------------------------------------------------
U.S. OFFICE
PRODUCTS
PARENT NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------------- ------------ ------------ -------------------- ------------
<S> <C> <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>
88
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
APRIL 24, 1999
-----------------------------------------------------------------------------------
U.S. OFFICE
PRODUCTS
PARENT NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------------- ------------ ------------ -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 19,684 $ 15,743 $ 16,594 $ $ 52,021
Accounts receivable, less allowance
for doubtful
accounts............................ 219,046 91,481 310,527
Inventories, net...................... 118,553 110,248 (130) (b) 228,671
Prepaid expenses and other current
assets.............................. 29,799 34,753 52,598 117,150
-------------- ------------ ------------ ---------------- ------------
Total current assets................ 49,483 388,095 270,921 (130) 708,369
Property and equipment, net............. 11,441 101,671 116,103 (500) (b) 228,715
Intangible assets, net.................. 567,010 356,014 923,024
Investment in subsidiaries.............. 1,140,020 (1,140,020) (a)
Other assets............................ 97,683 30,334 66,684 194,701
Net assets of discontinued operations:
Amounts to become receivable upon the
Distributions....................... 132,145 132,145
All other net assets.................. 354,473 354,473
-------------- ------------ ------------ ---------------- ------------
Total assets........................ $1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $2,541,427
-------------- ------------ ------------ ---------------- ------------
-------------- ------------ ------------ ---------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt....................... $ 365,000 $ 1,859 $ 1,368 $ $ 368,227
Short-term intercompany
balances............................ 66,027 (100,324) 34,297
Accounts payable...................... 2,303 85,712 74,703 162,718
Accrued compensation.................. 4,218 20,918 17,877 43,013
Other accrued liabilities............. (26,456) 60,113 47,988 (234) (b) 81,411
-------------- ------------ ------------ ---------------- ------------
Total current liabilities........... 411,092 68,278 176,233 (234) 655,369
Long-term debt.......................... 373,750 5,083 3,341 382,174
Other long-term liabilities and minority
interests............................. 13,908 3,510 335 17,753
Long-term intercompany balances......... (651,930) 195,242 456,785 (97) (b)
-------------- ------------ ------------ ---------------- ------------
Total liabilities................... 146,820 272,113 636,694 (331) 1,055,296
-------------- ------------ ------------ ---------------- ------------
Stockholders' equity:
Common stock.......................... 33 33
Additional paid-in capital............ 1,417,917 709,266 484,962 (1,140,020) (a) 1,472,125
Accumulated other comprehensive
loss................................ (66,472) (46,331) (112,803)
Retained earnings (accumulated
deficit)............................ (67,526) 105,731 88,870 (299) (b) 126,776
-------------- ------------ ------------ ---------------- ------------
Total stockholders' equity.......... 1,283,952 814,997 527,501 (1,140,319) 1,486,131
-------------- ------------ ------------ ---------------- ------------
Total liabilities and stockholders'
equity............................ $1,430,772 $ 1,087,110 $ 1,164,195 $ (1,140,650) $2,541,427
-------------- ------------ ------------ ---------------- ------------
-------------- ------------ ------------ ---------------- ------------
</TABLE>
89
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 24, 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
Revenues...................... $ $ 1,884,150 $813,769 $(33,330)(c) $2,664,589
Cost of revenues.............. (3,593) 1,404,692 565,939 (33,242)(c) 1,933,796
---------------- ------------ ------------ ------------- ------------
Gross profit............ 3,593 479,458 247,830 (88) 730,793
Selling, general and
administrative expenses..... 39,909 383,938 211,586 (252)(c) 635,181
Amortization expense.......... 1,125 15,834 8,875 25,834
Strategic Restructuring Plan
costs....................... 96,950 555 97,505
Impaired asset write-offs..... 17,486 41,249 58,735
Operating restructuring
costs....................... 1,918 13,708 8,416 24,042
---------------- ------------ ------------ ------------- ------------
Operating income
(loss)................ (136,309) 47,937 (22,296) 164 (110,504)
Interest expense.............. 115,592 (47,956) 38,655 106,291
Interest income............... (114) (831) (1,125) (2,070)
Loss on sale and closure of
businesses.................. 360 9,839 10,199
Other (income) expense........ (69,329) 71,166 1,143 2,980
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations before provision
for (benefit from) income
taxes and extraordinary
items....................... (182,458) 25,198 (70,808) 164 (227,904)
Provision for (benefit from)
income taxes................ (52,909) 26,512 (4,009) 4(c) (30,402)
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations before
extraordinary items......... (129,549) (1,314) (66,799) 160 (197,502)
Loss from discontinued
operations, net of income
taxes....................... (1,294) (1,294)
---------------- ------------ ------------ ------------- ------------
Income (loss) before
extraordinary items......... (129,549) (1,314) (68,093) 160 (198,796)
Extraordinary items--losses on
early terminations of debt
facilities, net of income
taxes....................... 269 269
---------------- ------------ ------------ ------------- ------------
Net income (loss)....... $(129,818) $ (1,314) $(68,093) $ 160 $ (199,065)
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
</TABLE>
90
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
APRIL 25, 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
Revenues...................... $ $ 1,749,247 $885,292 $(22,799)(c) $2,611,740
Cost of revenues.............. (1,647) 1,297,349 611,415 (22,225)(c) 1,884,892
---------------- ------------ ------------ ------------- ------------
Gross profit............ 1,647 451,898 273,877 (574) 726,848
Selling, general and
administrative expenses..... 19,025 346,826 225,834 (222)(c) 591,463
Amortization expense.......... 10,771 9,167 19,938
Operating restructuring
costs....................... 685 5,331 171 6,187
---------------- ------------ ------------ ------------- ------------
Operating income
(loss)................ (18,063) 88,970 38,705 (352) 109,260
Interest expense.............. 30,464 (7,789) 15,162 37,837
Interest income............... 8,279 (8,325) (1,807) (1,853)
Other (income) expense........ (43,090) 37,423 (1,479) (7,146)
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations before provision
for (benefit from) income
taxes....................... (13,716) 67,661 26,829 (352) 80,422
Provision for (benefit from)
income taxes................ (6,519) 32,159 11,457 (151)(c) 36,946
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations.................. (7,197) 35,502 15,372 (201) 43,476
Income from discontinued
operations, net of income
taxes....................... 23,712 23,712
---------------- ------------ ------------ ------------- ------------
Net income (loss)....... $ (7,197) $ 35,502 $ 39,084 $ (201) $ 67,188
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
</TABLE>
91
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
APRIL 26, 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
Revenues...................... $ $ 1,408,102 $708,389 $ (537)(c) $2,115,954
Cost of revenues.............. (4,487) 1,046,069 477,061 (356)(c) 1,518,287
---------------- ------------ ------------ ------------- ------------
Gross profit............ 4,487 362,033 231,328 (181) 597,667
Selling, general and
administrative expenses..... 11,183 284,280 192,752 488,215
Amortization expense.......... 5,307 7,109 12,416
Operating restructuring
costs....................... 750 1,759 1,692 4,201
Non-recurring acquisition
costs....................... 2,288 5,437 276 8,001
---------------- ------------ ------------ ------------- ------------
Operating income
(loss)................ (9,734) 65,250 29,499 (181) 84,834
Interest expense.............. 18,473 5,067 12,507 36,047
Interest income............... (3,038) (1,727) (2,092) (6,857)
Other (income) expense........ (19,509) 18,826 (3,550) (4,233)
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations before provision
for (benefit from) income
taxes and extraordinary
items....................... (5,660) 43,084 22,634 (181) 59,877
Provision for (benefit from)
income taxes................ (2,931) 22,314 8,639 (83)(c) 27,939
---------------- ------------ ------------ ------------- ------------
Income (loss) from continuing
operations before
extraordinary items......... (2,729) 20,770 13,995 (98) 31,938
Income from discontinued
operations, net of income
taxes....................... 26,800 26,800
---------------- ------------ ------------ ------------- ------------
Income (loss) before
extraordinary items......... (2,729) 20,770 40,795 (98) 58,738
Extraordinary items--losses on
early terminations of debt
facilities, net of income
taxes....................... 612 40 798 1,450
---------------- ------------ ------------ ------------- ------------
Net income (loss)....... $ (3,341) $ 20,730 $ 39,997 $ (98) $ 57,288
---------------- ------------ ------------ ------------- ------------
---------------- ------------ ------------ ------------- ------------
</TABLE>
92
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 17--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
APRIL 24, 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS
----------------- ----------- ----------- ---------------
Cash flows from operating activities.......................... $ (76,237) $ 123,043 $ 14,652 $ 89(d)
Cash flows from investing activities.......................... (28,364) (20,249) (25,966) (88)(d)
Cash flows from financing activities.......................... 133,011 (109,256) 25,629 (1)(d)
Effect of exchange rates on cash and cash equivalents......... 336
Cash used in discontinued operations.......................... (12,518)
-------- ----------- ----------- -----
Net increase (decrease) in cash and cash equivalents.......... 28,410 (6,462) 2,133
Cash and cash equivalents at beginning of period.............. 19,684 15,743 16,594
-------- ----------- ----------- -----
Cash and cash equivalents at end of period.................... $ 48,094 $ 9,281 $ 18,727 $
-------- ----------- ----------- -----
-------- ----------- ----------- -----
<CAPTION>
<S> <C>
CONSOLIDATED
TOTAL
------------
Cash flows from operating activities.......................... $ 61,547
Cash flows from investing activities.......................... (74,667)
Cash flows from financing activities.......................... 49,383
Effect of exchange rates on cash and cash equivalents......... 336
Cash used in discontinued operations.......................... (12,518)
------------
Net increase (decrease) in cash and cash equivalents.......... 24,081
Cash and cash equivalents at beginning of period.............. 52,021
------------
Cash and cash equivalents at end of period.................... $ 76,102
------------
------------
</TABLE>
<TABLE>
<CAPTION>
APRIL 25, 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS
----------------- ----------- ----------- ---------------
Cash flows from operating activities.......................... $ (34,147) $ 66,097 $ 51,837 $ (225)(d)
Cash flows from investing activities.......................... (21,240) (20,700) (108,771) 322(d)
Cash flows from financing activities.......................... 61,861 (37,412) 52,066 (97)(d)
Effect of exchange rates on cash and cash equivalents......... (4,002)
Cash provided by discontinued operations...................... 2,406
-------- ----------- ----------- -----
Net increase (decrease) in cash and cash equivalents.......... 6,474 7,985 (6,464)
Cash and cash equivalents at beginning of period.............. 13,210 7,758 23,058
-------- ----------- ----------- -----
Cash and cash equivalents at end of period.................... $ 19,684 $ 15,743 $ 16,594 $
-------- ----------- ----------- -----
-------- ----------- ----------- -----
<CAPTION>
<S> <C>
CONSOLIDATED
TOTAL
------------
Cash flows from operating activities.......................... $ 83,562
Cash flows from investing activities.......................... (150,389)
Cash flows from financing activities.......................... 76,418
Effect of exchange rates on cash and cash equivalents......... (4,002)
Cash provided by discontinued operations...................... 2,406
------------
Net increase (decrease) in cash and cash equivalents.......... 7,995
Cash and cash equivalents at beginning of period.............. 44,026
------------
Cash and cash equivalents at end of period.................... $ 52,021
------------
------------
</TABLE>
<TABLE>
<CAPTION>
APRIL 26, 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. OFFICE NON-
PRODUCTS PARENT GUARANTOR GUARANTOR CONSOLIDATING
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS
----------------- ----------- ----------- ---------------
Cash flows from operating activities.......................... $ (17,528) $ 44,291 $ (10,773) $ (178)(d)
Cash flows from investing activities.......................... (110,042) (19,850) (294,241) 178(d)
Cash flows from financing activities.......................... (27,357) (26,901) 331,678
Effect of exchange rates on cash and cash equivalents......... (511)
Cash used in discontinued operations.......................... (8,223)
----------------- ----------- ----------- -----
Net increase (decrease) in cash and cash equivalents.......... (154,927) (2,460) 17,930
Cash and cash equivalents at beginning of period.............. 168,137 10,218 5,128
----------------- ----------- ----------- -----
Cash and cash equivalents at end of period.................... $ 13,210 $ 7,758 $ 23,058 $
----------------- ----------- ----------- -----
----------------- ----------- ----------- -----
<CAPTION>
<S> <C>
CONSOLIDATED
TOTAL
------------
Cash flows from operating activities.......................... $ 15,812
Cash flows from investing activities.......................... (423,955)
Cash flows from financing activities.......................... 277,420
Effect of exchange rates on cash and cash equivalents......... (511)
Cash used in discontinued operations.......................... (8,223)
------------
Net increase (decrease) in cash and cash equivalents.......... (139,457)
Cash and cash equivalents at beginning of period.............. 183,483
------------
Cash and cash equivalents at end of period.................... $ 44,026
------------
------------
</TABLE>
- ------------------------------
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.
93
<PAGE>
U.S. OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 18--SUBSEQUENT EVENTS (UNAUDITED)
On June 9, 1999, the Blue Star Group signed an agreement with Blue Star
Shelf (No. 1) Limited ("Purchaser") to sell 60% of the stock of the subsidiaries
of the Blue Star Group that operate as the Blue Star Business Solutions Group
("Business Solutions"). The sale is conditional upon the Purchaser's ability to
obtain the necessary financing, which is estimated to be three to six months
from the effective date. The Company will receive approximately $55,500 in cash
and a 6-year promissory note with a face value of $11,000 as consideration. The
Company expects to realize a loss of approximately $15,500 on the disposal. The
Company will record the transaction in the period the Purchaser obtains the
necessary financing. As of April 24, 1999, the net assets of Business Solutions
are included in the accompanying consolidated balance sheet. The Company will
account for its remaining 40% investment in Business Solutions under the equity
method of accounting.
94
<PAGE>
SCHEDULE II
U.S. OFFICE PRODUCTS COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE FISCAL YEARS IN THE PERIOD ENDED APRIL 24, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTION DATE
- ------------------------------ --------------- ----------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts.................... May 1, 1996 $ 3,586,000 $ 5,085,000 $ 685,000(a) $ (2,019,000 (c) April 26, 1997
April 27, 1997 7,337,000 5,298,000 1,402,000(a) (5,398,000 (c) April 25, 1998
April 26, 1998 8,639,000 6,982,000 1,516,000(b) (5,417,000 (c) April 24, 1999
Accumulated amortization of
intangibles................. May 1, 1996 3,747,000 12,416,000 524,000(d) (24,000 (e) April 26, 1997
April 27, 1997 16,663,000 19,938,000 (1,770,000 (e) April 25, 1998
April 26, 1998 34,831,000 24,709,000 (3,837,000 (e) April 24, 1999
Accrued restructuring costs... May 1, 1996 1,520,000 4,201,000 (2,681,000 (f) April 26, 1997
April 27, 1997 2,696,000 6,187,000 (5,011,000 (f) April 25, 1998
April 26, 1998 24,042,000 (15,795,000 (f) April 24, 1999
Inventory reserve............. May 1, 1996 4,749,000 9,526,000 1,442,000(a) (1,811,000 (g) April 26, 1997
April 27, 1997 13,906,000 9,437,000 1,302,000(a) (13,663,000 (g) April 25, 1998
April 26, 1998 10,982,000 21,829,000 23,000(a) (11,314,000 (g) April 24, 1999
<CAPTION>
BALANCE
AT END OF
DESCRIPTION PERIOD
- ------------------------------ -----------
<S> <C>
Allowance for doubtful
accounts.................... $ 7,337,000
8,639,000
11,720,000
Accumulated amortization of
intangibles................. 16,663,000
34,831,000
55,703,000
Accrued restructuring costs... 1,520,000
2,696,000
10,943,000
Inventory reserve............. 13,906,000
10,982,000
21,520,000
</TABLE>
- ------------------------
(a) Allowance for doubtful accounts and inventory reserve acquired in purchase
acquisitions.
(b) Includes $1,656,000 of recoveries and ($174,000) of translation gains
arising from sales transactions in Canada, Australia and New Zealand.
(c) Represents write-offs of uncollectible accounts receivable.
(d) Represents a $524,000 adjustment to conform the year-ends of certain Pooled
Companies.
(e) Represents write-offs of fully amortized intangible assets and amortized
portion of impaired intangible assets.
(f) Represents cash payments related to facility closures, severance and
terminations.
(g) Represents write-offs of obsolete or damaged inventory.
95
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on August 31,
1999.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on August 31,
1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on August 31,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference to the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on August 31,
1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, EXHIBITS AND SCHEDULES
1. FINANCIAL STATEMENTS (See Item 8 hereof)
Consolidated Balance Sheet as of April 24, 1999 and April 25, 1998
Consolidated Statement of Operations for the fiscal years ended April
24, 1999, April 25, 1998 and April 26, 1997
Consolidated Statement of Stockholders' Equity for the fiscal years
ended April 24, 1999, April 25, 1998 and April 26, 1997
Consolidated Statement of Cash Flows for the fiscal years ended April
24, 1999, April 25, 1998 and April 26, 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES (See Item 8 hereof)
Schedule II--Valuation and Qualifying Accounts and Reserves
All schedules, other than those outlined above, are omitted as the
information is not required or is otherwise furnished.
96
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Distribution dated as of June 9, 1998 between U.S. Office Products Company,
Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant
International, Inc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
3.1 Amended and Restated Certificate of Incorporation of U.S. Office Products Company as amended through
April 22, 1999.
3.2 Second Amended and Restated By-Laws of U.S. Office Products Company as amended through July 14, 1999.
4.1 Form of Indenture relating to the Company's $143.75 million 5 1/2% Convertible Subordinated Notes due
2001 (including form of Note) (Exhibit 4.1 of the Company's Registration Statement on Form S-1 (File
No. 33-80553) is hereby incorporated by reference).
4.2 Form of Indenture relating to the Company's $230.0 million 5 1/2% Convertible Subordinated Notes due
2003 (including form of Note) (Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended April 30, 1996 is hereby incorporated by reference).
4.3 Indenture dated as of June 10, 1998 between U.S. Office Products Company and State Street Bank and
Trust Company (Exhibit 4.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
4.4 Registration Rights Agreement dated as of June 10, 1998 between U.S. Office Products Company and Morgan
Stanley & Co., Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT Alex Brown
Incorporated and Chase Securities, Inc. (Exhibit 99.1 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
4.5 Common Stock Purchase Warrant dated April 23, 1999, between U.S. Office Products Company and CDR-PC
Acquisition L.L.C.
4.6 Common Stock Purchase Special Warrant dated April 23, 1999, between U.S. Office Products Company and
CDR-PC Acquisition L.L.C.
4.7 Registration Rights Agreement dated as of June 10, 1998 among U.S. Office Products Company and CDR-PC
Acquisition L.L.C. (Exhibit 99.6 of the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
4.8 Amendment to the Registration Rights Agreement, between U.S. Office Products Company and CDR-PC
Acquisition L.L.C. (included at Exhibit V to Investment Agreement dated March 30, 1999 by and between
U.S. Office Products Company and CDR-PC Acquisition, L.L.C.).
10.1 U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive Plan, as amended (Exhibit A
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference).
10.2 Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products Company and Jonathan
J. Ledecky (Exhibit 99.13 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
10.3 Employment Agreement for Donald H. Platt (Exhibit 10.4 of the Company's Post-Effective Amendment No. 6
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference).
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Employment Agreement for Mark D. Director (Exhibit 10.14 of the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 is hereby incorporated by reference).
10.5 Amendment No. 1, dated as of December 5, 1997, to Employment Agreement, dated as of February 3, 1997,
by and between the Company and Thomas I. Morgan (Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended October 25, 1997 is hereby incorporated by reference).
10.6 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between the Company and
Michael J. Barnell (Exhibit 10.2 of the Company's Form 10-Q for the quarter ended October 25, 1997 is
hereby incorporated by reference).
10.7 Second Amendment to Employment Agreement, dated as of June 28, 1999, by and between the Company and
Michael J. Barnell.
10.8 Loanout Agreement, dated February 23, 1999, by and among U.S. Office Products Company and Clayton,
Dubilier & Rice, Inc.
10.9 Stock Purchase Agreement, dated as of January 31, 1996, by and between U.S. Office Products Company and
Eric John Watson (Exhibit 2.8 of the Company's Post-Effective Amendment No. 1 to Form S-1 (File No.
33-80117) is hereby incorporated by reference).
10.10 Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by and between the Company and Eric
John Watson (Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended April 30,
1996, is hereby incorporated by reference).
10.11 Credit Agreement dated as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan
Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers and the other lenders named therein
(Exhibit 99.2 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is hereby
incorporated by reference).
10.12 First Amendment to the Credit Agreement, dated August 21, 1998, to the Credit Agreement, dated as of
June 9, 1998 between U.S. Office Products Company and The Chase Manhattan Bank, as Administrative
Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation
Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as co-arrangers and the other lenders named therein.
10.13 Second Amendment, dated as of April 15, 1999, to the Credit Agreement, dated as of June 9, 1998 between
U.S. Office Products Company and The Chase Manhattan Bank, as Administrative Agent, Bankers Trust
Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation Agent, Chase
Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-arrangers and the other lenders named therein.
10.14 Consent to Section 10 of Second Amendment, dated as of April 15, 1999, to the Credit Agreement, dated
as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan Bank, as Administrative
Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation
Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as co-arrangers and the other lenders named therein.
10.15 U.S. Office Products Company Executive Deferred Compensation Plan (Exhibit B to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference).
10.16 U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan (Exhibit C to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference).
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.17 U.S. Office Products Company Amended and Restated Employee Stock Purchase Plan, as amended (Exhibit D
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
10.18 Investment Agreement dated January 12, 1998, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C. ("1998 Investment Agreement") (Exhibit 99.1 of the Company's Form 8-K (Commission
file No. 000-25372), filed January 16, 1998, is hereby incorporated by reference).
10.19 Amendment No. 1 to the 1998 Investment Agreement, dated as of February 3, 1998 by and between U.S.
Office Products Company and CDR-PC Acquisition L.L.C. (Exhibit 99.1 of the Company's Form 8-K
(Commission file No. 000-25372), filed February 12, 1998, is hereby incorporated by reference).
10.20 Amendments to the 1998 Investment Agreement (included at Exhibit IV to Investment Agreement dated March
30, 1999 by and between U.S. Office Products Company and CDR-PC Acquisition, L.L.C.).
10.21 Investment Agreement dated March 30, 1999, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C.
10.22 Tax Allocation Agreement dated as of June 9, 1998 among U.S. Office Products Company, Workflow
Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant International,
Inc. (Exhibit 99.9 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.23 Consulting Agreement dated as of June 10, 1998, by and between U.S. Office Products Company and
Clayton, Dubilier & Rice, Inc. (Exhibit 99.7 of the Company's Form 8-K (Commission file No. 000-25372),
filed June 25, 1998, is hereby incorporated by reference).
10.24 Indemnification Agreement dated as of June 10, 1998 by and among U.S. Office Products Company, CDR-PC
Acquisition, L.L.C., Clayton, Dubilier & Rice Fund V Limited Partnership, and Clayton, Dubilier & Rice,
Inc. (Exhibit 99.8 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.25 Employee Benefits Services and Liabilities Agreement dated as of June 9, 1998 between U.S. Office
Products Company, Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc.
and Navigant International, Inc. (Exhibit 99.10 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
10.26 Section 162(m) Bonus Plan of U.S. Office Products Company (Annex A to the Company's Proxy Statement,
filed with the Commission September 8, 1997, is hereby incorporated by reference).
10.27 Guarantee and Collateral Agreement, dated as of June 10, 1998, made by U.S. Office Products Company and
each of the other signatories thereto, in favor of The Chase Manhattan Bank, as Administrative Agent
for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit
Agreement, dated as of June 9, 1998, among U.S. Office Products Company, Blue Star Group Limited, the
Lenders, The Chase Manhattan Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent
and Merrill Lynch Capital Corporation, as Documentation Agent (Exhibit 10.26 of the Company's Annual
Report on Form 10-K for the year ended April 25, 1998 is hereby incorporated by reference).
21.1 List of Subsidiaries of U.S. Office Products Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
</TABLE>
99
<PAGE>
(b) REPORTS ON FORM 8-K. During the last quarter of the fiscal year covered
by this report, the Company filed the following Current Reports on Form 8-K:
i. Form 8-K dated March 30, 1999 and filed with the Commission on April
12, 1999 reporting information under Item 5.
100
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Distribution dated as of June 9, 1998 between U.S. Office Products Company,
Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. and Navigant
International, Inc. (Exhibit 2.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
3.1 Amended and Restated Certificate of Incorporation of U.S. Office Products Company as amended through
April 22, 1999.
3.2 Second Amended and Restated By-Laws of U.S. Office Products Company as amended through July 14, 1999.
4.1 Form of Indenture relating to the Company's $143.75 million 5 1/2% Convertible Subordinated Notes due
2001 (including form of Note) (Exhibit 4.1 of the Company's Registration Statement on Form S-1 (File
No. 33-80553) is hereby incorporated by reference).
4.2 Form of Indenture relating to the Company's $230.0 million 5 1/2% Convertible Subordinated Notes due
2003 (including form of Note) (Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended April 30, 1996 is hereby incorporated by reference).
4.3 Indenture dated as of June 10, 1998 between U.S. Office Products Company and State Street Bank and
Trust Company (Exhibit 4.1 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
4.4 Registration Rights Agreement dated as of June 10, 1998 between U.S. Office Products Company and Morgan
Stanley & Co., Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BT Alex Brown
Incorporated and Chase Securities, Inc. (Exhibit 99.1 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
4.5 Common Stock Purchase Warrant dated April 23, 1999, between U.S. Office Products Company and CDR-PC
Acquisition L.L.C.
4.6 Common Stock Purchase Special Warrant dated April 23, 1999, between U.S. Office Products Company and
CDR-PC Acquisition L.L.C.
4.7 Registration Rights Agreement dated as of June 10, 1998 among U.S. Office Products Company and CDR-PC
Acquisition L.L.C. (Exhibit 99.6 of the Company's Form 8-K (Commission file No. 000-25372), filed June
25, 1998, is hereby incorporated by reference).
4.8 Amendment to the Registration Rights Agreement, between U.S. Office Products Company and CDR-PC
Acquisition L.L.C. (included at Exhibit V to Investment Agreement dated March 30, 1999 by and between
U.S. Office Products Company and CDR-PC Acquisition, L.L.C.).
10.1 U.S. Office Products Company Amended and Restated 1994 Long-Term Incentive Plan, as amended (Exhibit A
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference).
10.2 Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products Company and Jonathan
J. Ledecky (Exhibit 99.13 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25,
1998, is hereby incorporated by reference).
10.3 Employment Agreement for Donald H. Platt (Exhibit 10.4 of the Company's Post-Effective Amendment No. 6
to the Registration Statement on Form S-1 (File No. 33-89978) is hereby incorporated by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Employment Agreement for Mark D. Director (Exhibit 10.14 of the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 is hereby incorporated by reference).
10.5 Amendment No. 1, dated as of December 5, 1997, to Employment Agreement, dated as of February 3, 1997,
by and between the Company and Thomas I. Morgan (Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended October 25, 1997 is hereby incorporated by reference).
10.6 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between the Company and
Michael J. Barnell (Exhibit 10.2 of the Company's Form 10-Q for the quarter ended October 25, 1997 is
hereby incorporated by reference).
10.7 Second Amendment to Employment Agreement, dated as of June 28, 1999, by and between the Company and
Michael J. Barnell.
10.8 Loanout Agreement, dated February 23, 1999, by and among U.S. Office Products Company and Clayton,
Dubilier & Rice, Inc.
10.9 Stock Purchase Agreement, dated as of January 31, 1996, by and between U.S. Office Products Company and
Eric John Watson (Exhibit 2.8 of the Company's Post-Effective Amendment No. 1 to Form S-1 (File No.
33-80117) is hereby incorporated by reference).
10.10 Amendment to Stock Purchase Agreement, dated as of June 20, 1996, by and between the Company and Eric
John Watson (Exhibit 10.24 of the Company's Annual Report on Form 10-K for the year ended April 30,
1996, is hereby incorporated by reference).
10.11 Credit Agreement dated as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan
Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as co-arrangers and the other lenders named therein
(Exhibit 99.2 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is hereby
incorporated by reference).
10.12 First Amendment to the Credit Agreement, dated August 21, 1998, to the Credit Agreement, dated as of
June 9, 1998 between U.S. Office Products Company and The Chase Manhattan Bank, as Administrative
Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation
Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as co-arrangers and the other lenders named therein.
10.13 Second Amendment, dated as of April 15, 1999, to the Credit Agreement, dated as of June 9, 1998 between
U.S. Office Products Company and The Chase Manhattan Bank, as Administrative Agent, Bankers Trust
Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation Agent, Chase
Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
co-arrangers and the other lenders named therein.
10.14 Consent to Section 10 of Second Amendment, dated as of April 15, 1999, to the Credit Agreement, dated
as of June 9, 1998 between U.S. Office Products Company and The Chase Manhattan Bank, as Administrative
Agent, Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital Corporation, as Documentation
Agent, Chase Securities Inc., BT Alex Brown Incorporated, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as co-arrangers and the other lenders named therein.
10.15 U.S. Office Products Company Executive Deferred Compensation Plan (Exhibit B to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference).
10.16 U.S. Office Products Company 1996 Non-Employee Directors' Stock Plan (Exhibit C to the Company's Proxy
Statement, dated July 22, 1996, is hereby incorporated by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.17 U.S. Office Products Company Amended and Restated Employee Stock Purchase Plan, as amended (Exhibit D
to the Company's Proxy Statement, dated July 22, 1996, is hereby incorporated by reference)
10.18 Investment Agreement dated January 12, 1998, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C. ("1998 Investment Agreement") (Exhibit 99.1 of the Company's Form 8-K (Commission
file No. 000-25372), filed January 16, 1998, is hereby incorporated by reference).
10.19 Amendment No. 1 to the 1998 Investment Agreement, dated as of February 3, 1998 by and between U.S.
Office Products Company and CDR-PC Acquisition L.L.C. (Exhibit 99.1 of the Company's Form 8-K
(Commission file No. 000-25372), filed February 12, 1998, is hereby incorporated by reference).
10.20 Amendments to the 1998 Investment Agreement (included at Exhibit IV to Investment Agreement dated March
30, 1999 by and between U.S. Office Products Company and CDR-PC Acquisition, L.L.C.).
10.21 Investment Agreement dated March 30, 1999, by and between U.S. Office Products Company and CDR-PC
Acquisition, L.L.C.
10.22 Tax Allocation Agreement dated as of June 9, 1998 among U.S. Office Products Company, Workflow
Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc. And Navigant International,
Inc. (Exhibit 99.9 to the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.23 Consulting Agreement dated as of June 10, 1998, by and between U.S. Office Products Company and
Clayton, Dubilier & Rice, Inc. (Exhibit 99.7 of the Company's Form 8-K (Commission file No. 000-25372),
filed June 25, 1998, is hereby incorporated by reference).
10.24 Indemnification Agreement dated as of June 10, 1998 by and among U.S. Office Products Company, CDR-PC
Acquisition, L.L.C., Clayton, Dubilier & Rice Fund V Limited Partnership, and Clayton, Dubilier & Rice,
Inc. (Exhibit 99.8 of the Company's Form 8-K (Commission file No. 000-25372), filed June 25, 1998, is
hereby incorporated by reference).
10.25 Employee Benefits Services and Liabilities Agreement dated as of June 9, 1998 between U.S. Office
Products Company, Workflow Management, Inc., School Specialty, Inc., Aztec Technology Partners, Inc.
and Navigant International, Inc. (Exhibit 99.10 to the Company's Form 8-K (Commission file No.
000-25372), filed June 25, 1998, is hereby incorporated by reference).
10.26 Section 162(m) Bonus Plan of U.S. Office Products Company (Annex A to the Company's Proxy Statement,
filed with the Commission September 8, 1997, is hereby incorporated by reference).
10.27 Guarantee and Collateral Agreement, dated as of June 10, 1998, made by U.S. Office Products Company and
each of the other signatories thereto, in favor of The Chase Manhattan Bank, as Administrative Agent
for the banks and other financial institutions (the "Lenders") from time to time parties to the Credit
Agreement, dated as of June 9, 1998, among U.S. Office Products Company, Blue Star Group Limited, the
Lenders, The Chase Manhattan Bank, as Administrative Agent, Bankers Trust Company, as Syndication Agent
and Merrill Lynch Capital Corporation, as Documentation Agent (Exhibit 10.26 of the Company's Annual
Report on Form 10-K for the year ended April 25, 1998 is hereby incorporated by reference).
21.1 List of Subsidiaries of U.S. Office Products Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE>
(b) REPORTS ON FORM 8-K. During the last quarter of the fiscal year covered
by this report, the Company filed the following Current Reports on Form 8-K:
i. Form 8-K dated March 30, 1999 and filed with the Commission on April
12, 1999 reporting information under Item 5.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
U.S. OFFICE PRODUCTS COMPANY
AS AMENDED THROUGH APRIL 22, 1999
ARTICLE ONE
The name of the Corporation is: U.S. OFFICE PRODUCTS COMPANY.
ARTICLE TWO
The address of the Corporation's registered office in the
State of Delaware is 1209 Orange St., in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is Corporation
Trust Center.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Five Hundred Million Five Hundred
Thousand (500,500,000) shares, of which Five Hundred Thousand (500,000) shares,
designated as Preferred Stock, shall have a par value of One Tenth of One Cent
($.001) per share (the "Preferred Stock"), and Five Hundred Million
(500,000,000) shares, designated as Common Stock, shall have a par value of One
Tenth of One Cent ($.001) per share (the "Common Stock").
A statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of each class of
stock of the Corporation is as follows:
<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the
Board of Directors as shares of one or more classes or series. Subject to the
provisions of this Restated Certificate of Incorporation and the limitations
prescribed by law, the Board of Directors is expressly authorized by adopting
resolutions to issue the shares, fix the number of shares and change the number
of shares constituting any series, and to provide for or change the voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions thereof, including
dividend rights (and whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), a redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
class or series of the Preferred Stock, without any further action or vote by
the stockholders.
SERIES A NON-VOTING CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as the Series
A Non-Voting Participating Convertible Preferred Stock (the "Series A
Preferred Stock") and the number of shares initially constituting such series
shall be 73,350, which number may be increased or decreased by the Board of
Directors without a vote of stockholders; PROVIDED, HOWEVER, that no decrease
shall reduce the number of shares of Series A Preferred Stock to a number
less than the number of shares of Series A Preferred Stock then outstanding
plus the number of shares of Series A Preferred Stock reserved for issuance
upon the exercise of outstanding options, rights or warrants for, or upon the
conversion of any outstanding securities issued by the Corporation
convertible into, Series A Preferred Stock.
2. VOTING RIGHTS. SERIES A PREFERRED STOCK.
(a) Except as expressly set forth herein or as otherwise
required by law, the Series A Preferred Stock shall be non-voting, the
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required for the taking of any corporation action.
(b) To the extent that the Series A Preferred Stock is
entitled to vote or required to consent as provided by law or as set forth
herein, the Series A Preferred Stock shall have one hundred votes per share.
The Series A Preferred Stock shall vote with the Common Stock (as hereinafter
defined), as a single class, on the following matters:
i. mergers or consolidations with, or agreements to merge
or consolidate with, any business, business organization
or division thereof, or any other Person; or
ii. sales, leases or conveyances of all or substantially all
of the Corporation's assets.
(c) The Corporation shall not, without having obtained the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of Series A Preferred Stock, (I) amend, alter or repeal
(by merger, consolidation or otherwise) any provision of, or add any
provision to, the Certificate of Incorporation, the By-Laws of the
Corporation or this Certificate of Designation, if such action would
adversely affect the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred Stock, or
(II) undertake or agree to undertake any reorganization, compromise or
arrangement, dissolution, winding-up, liquidation or similar transaction
involving the Corporation, or the initiation of any proceeding therefor.
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3. DIVIDENDS.
In the event the Board of Directors of the Corporation
shall declare a dividend or a distribution (whether of evidences of
indebtedness of the Corporation, cash, assets or securities) payable upon the
then outstanding shares of common stock of the Corporation, par value $.001
per share (the "Common Stock"), the Board of Directors shall declare at the
same time a dividend or distribution, as the case may be, upon the then
outstanding shares of Series A Preferred Stock, payable at the same time and
in like kind as the dividend or distribution paid on the Common Stock, in an
amount per share of Series A Preferred Stock equal to the amount that would
have been payable on the number of shares of Common Stock into which each
share of Series A Preferred Stock would have been converted if the Series A
Preferred Stock had been converted to Common Stock pursuant to the provisions
of Section 5 hereof as of the record date for the determination of holders of
Common Stock entitled to receive such dividends; PROVIDED, THAT (i) in the
case of dividends or distributions payable in shares of Common Stock, or
options, warrants or other rights to acquire shares of Common Stock, holders
of Series A Preferred Stock may elect to receive all or a portion of the
securities so payable in shares of, or options, warrants or other rights to
acquire, Common Stock or Series A Preferred Stock or a combination thereof
and (ii) if the dividends or distributions consist of other voting
securities, the Corporation shall make available to each holder of Series A
Preferred Stock, at such holder's request, dividends or distributions, as the
case may be, consisting of non-voting securities which are otherwise
identical to the voting securities and which are convertible into or
exchangeable for such voting securities on the same terms as the Series A
Preferred Stock is convertible into Common Stock and holders of Series A
Preferred Stock may elect to receive all or a portion of the dividend or
distribution in the form of such non-voting securities, voting securities or
a combination thereof.
4. LIQUIDATION.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, after payment or provision for
payment of the debts and other liabilities of the Corporation, the holders of
shares of Series A Preferred Stock shall be entitled, before any distribution
or payment is made upon any share of any other class of stock of the
Corporation, to be paid an amount equal to one dollar per share of Series A
Preferred Stock. If the assets of the Corporation available for distribution
to stockholders exceed such amounts, the holders of the Series A Preferred
Stock shall share PARI PASSU (on an as converted basis) with the holders of
the Common Stock in the remaining assets of the Corporation. For the purposes
of this Section 4, the voluntary sale, lease, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially
all of the Corporation's property or assets to, or a consolidation or merger
of the Corporation with, any other Person shall not be deemed to be a
liquidation, dissolution or winding up of the affairs of the Corporation.
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5. CONVERSION.
(a) CONVERSION OF SERIES A NON-VOTING COMMON STOCK. After
the initial issuance thereof, each share of Series A Preferred Stock shall
automatically convert without further action on the part of the holder
thereof (an "AUTOMATIC CONVERSION") into one hundred shares of Common Stock
upon any sale or transfer of such share of Series A Preferred Stock by the
holder thereof to any Person who is not an Affiliate of such holder.
(b) CONVERSION PROCEDURES. From and after an Automatic
Conversion, (A) each certificate formerly representing shares of Series A
Preferred Stock which were con verted pursuant to such Automatic Conversion
shall thereafter be deemed to represent the number of shares of Common Stock
into which such shares of Series A Preferred Stock have been converted
pursuant to such Automatic Conversion (and no holder shall thereafter have
any rights in respect of such shares of Series A Preferred Stock) and (B)
upon any surrender for transfer of any such certificate accompanied by a
written notice certifying that an Automatic Conversion has occurred and
specifying the number of shares so converted, the Corporation will issue and
deliver a certificate or certificates representing the shares of Common Stock
into which such shares of Series A Preferred Stock have been converted
pursuant to such Automatic Conversion.
(c) RESERVATION OF SHARES. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock or its treasury shares, solely for the purpose of issuance upon
the conversion of the Series A Preferred Stock, such number of shares of
Common Stock as may be issued upon conversion of all outstanding shares of
Series A Preferred Stock not previously converted.
(d) CANCELLATION OF SHARES. All shares of Series A
Preferred Stock which shall have been converted pursuant to this Section 5
shall be canceled and shall not be reissued as shares of Series A Preferred
Stock.
6. STOCK SPLITS; ADJUSTMENTS.
If the Corporation shall in any manner subdivide (by
reclassification, stock split, stock dividend or otherwise) or combine (by
reclassification, reverse stock split or otherwise) the outstanding shares of
Common Stock, then the outstanding shares of Series A Preferred Stock shall
be subdivided or combined, as the case may be, to the same extent, share and
share alike, and effective provision shall be made for the protection of the
conversion rights hereunder.
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If the Corporation shall be a party to any reorganization,
reclassification or change of the Common Stock (including without limitation
a merger, consolidation, statutory share exchange, or recapitalization of the
Common Stock), in each case as a result of which all or substantially all of
the Common Stock is converted into the right to receive different securities
or other property (including cash), each share of Series A Preferred Stock
which is not converted into the right to receive different securities or
other property prior to such transaction shall thereafter be convertible
into, in lieu of Common Stock, the kind and amount of different securities
and other property (including cash) receivable upon the consummation of such
transaction by a holder of that number of shares of Common Stock into which
one share of Series A Preferred Stock was convertible immediately prior to
such transaction. The Corporation shall not be a party to any such
transaction unless the terms of such transaction are consistent with the
provisions of this Section 6, and the Corporation shall not consent or agree
to the occurrence of any such transaction until it has entered into an
agreement with the successor or purchasing entity, as the case may be, for
the benefit of the holders of the Series A Preferred Stock, that will contain
provisions enabling the holders of the shares of Series A Preferred Stock
that remain outstanding after such transaction to convert each such share
into the consideration received by that number of shares of Common Stock into
which one share of Series A Preferred Stock was convertible immediately prior
to such transaction. The provisions of this Section 6 shall similarly apply
to successive such transactions.
7. REDEMPTION.
In no event and under no circumstances shall the Series A
Preferred Stock be redeemed or redeemable.
8. NO CHARGE.
The issuance of certificates for shares of Common Stock
upon conversion of shares of the Series A Preferred Stock shall be made
without charge to the holders of such shares for any issuance tax in respect
thereof or other cost incurred by the Corporation in connection with such
conversion and/or the issuance of shares of Common Stock; PROVIDED, HOWEVER,
that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
any certificate in a name other than that of the holder of the Series A
Preferred Stock converted.
9. DEFINITIONS.
As used herein, the following terms shall have the meanings
shown below:
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(a) "AFFILIATE" shall mean with respect to any Person, any
other person, directly or indirectly controlling, controlled by or under
common control with such Person. For the purpose of the above definition, the
term "control" (including with correlative meaning, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or
otherwise.
(b) "PERSON" or "PERSON" shall be construed broadly and
shall include an individual, a partnership, a limited liability company, a
corporation, a trust, a joint venture, an unincorporated organization or
other entity or a government or any department or agency thereof.
COMMON STOCK
1. Dividends.
Subject to the preferred rights of the holders of shares of
any class or series of Preferred Stock as provided by the Board of Directors
with respect to any such class or series of Preferred Stock, the holders of the
Common Stock shall be entitled to receive, as and when declared by the Board of
Directors out of the funds of the Corporation legally available therefor, such
dividends (payable in cash, stock or otherwise) as the Board of Directors may
from time to time determine, payable to stockholders of record on such dates,
not exceeding 60 days preceding the dividend payment dates, as shall be fixed
for such purpose by the Board of Directors in advance of payment of each
particular dividend.
2. Liquidation.
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after the distribution or
payment to the holders of shares of any class or series of Preferred Stock as
provided by the Board of Directors with respect to any such class or series of
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among and paid to the holders
of Common Stock ratably in proportion to the number of shares of Common Stock
held by them respectively.
3. Voting Rights.
Except as otherwise required by law or as provided by the
Board of Directors with respect to any class or series of Preferred Stock, the
entire voting power and all voting rights shall be vested exclusively in the
Common Stock. Each holder of shares of Common Stock shall be entitled to one
vote for each share standing in his name on the books of the Corporation.
4. Reclassification
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As of 5:00 p.m., Eastern time, on the date on which this
Certificate of Amendment is filed with the Secretary of State of Delaware (the
"Effective Time"), each four outstanding shares of common stock, $.001 per share
("Old Common Stock") shall thereupon be reclassified and
changed into one share of common stock, par value $.001 per share ("New Common
Stock"). Upon such Effective Time, each holder of Old Common Stock shall
thereupon automatically be and become the holder of one share of New Common
Stock for every four shares of Old Common Stock held by such holder prior
thereto. Upon such Effective Time, each certificate formerly representing a
stated number of shares of Old Common Stock shall thereupon be deemed for all
corporate purposes to evidence ownership of New Common Stock in the
appropriately reduced whole number of shares. As soon as practicable after such
Effective Time, stockholders as of the record date for the reclassification will
be notified thereof and upon their delivery of their certificates of Old Common
Stock to the Corporation or its designated agent, will be sent stock
certificates representing their shares of New Common Stock, rounded down to the
nearest whole number, together with cash representing the fair value of such
holder's fractional shares of Old Common Stock. No scrip or fractional share
certificate for New Common Stock will be issued in connection with this reverse
stock split. All references elsewhere in the Amended and Restated Certificate of
Incorporation to the "Common Stock" shall, after the Effective Time, refer to
the New Common Stock.
ARTICLE FIVE
1. Board of Directors.
The Directors shall be elected at each annual meeting of
stockholders to hold office until their successors have been duly elected and
qualified. At each annual meeting of stockholders at which a quorum is present,
the persons receiving a plurality of the votes cast shall be directors. No
director or class of directors may be removed from office by a vote of the
stockholders at any time except for cause. Election of directors need not be by
written ballot unless the By-laws of the Corporation so provide.
2. Vacancies.
Any vacancy on the Board of Directors resulting from death,
retirement, resignation, disqualification or removal from office or other cause,
as well as any vacancy resulting from an increase in the number of directors
which occurs between annual meetings of the stockholders at which directors are
elected, shall be filled only by a majority vote of the remaining directors then
in office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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Notwithstanding the foregoing, whenever the holders of one or
more classes or series of Preferred Stock shall have the right, voting
separately, as a class or series, to elect directors, the election, term of
office, filling of vacancies, removal and other features of such directorships
shall be governed by the terms of the resolution or resolutions adopted by the
Board of Directors pursuant to ARTICLE FOUR applicable thereto, and each
director so elected shall not be subject to the provisions of this ARTICLE FIVE
unless otherwise provided therein.
3. Power to Make, Alter and Repeal By-laws.
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter and
repeal the By-laws of the Corporation.
ARTICLE SIX
The Corporation reserves the right to amend, alter, change or
repeal any provision in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute.
ARTICLE SEVEN
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the director derived an improper
personal benefit.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify each director and officer of the Corporation from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders, vote of
disinterested directors or otherwise, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such persons and the Corporation may purchase
and maintain insurance on behalf of any director or officer to the extent
permitted by Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
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jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for the Corporation
under the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
the Corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of the Corporation as a consequence of such
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
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Exhibit 3.2
July 14, 1999
SECOND AMENDED AND RESTATED
BY-LAWS
OF
U.S. OFFICE PRODUCTS COMPANY
ARTICLE I
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.
SECTION 2. SPECIAL MEETINGS. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors, the Chairman of
the Board or the President and shall be called by the Chairman of the Board, at
the request in writing of the stockholders holding together at least twenty-five
percent of the number of shares of stock outstanding and entitled to vote at
such meeting. Any special meeting of the stockholders shall be held on such
date, at such time and at such place within or without the State of Delaware as
the Board of Directors or the officer calling the meeting may designate. At a
special meeting of the stockholders, no business shall be transacted and no
corporate action shall be taken other than that stated in the notice of the
meeting unless all of the stockholders are present in person or by proxy, in
which case any and all business may be transacted at the meeting even though the
meeting is held without notice.
SECTION 3. NOTICE OF MEETINGS. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. QUORUM. At any meeting of the stockholders, the holders of
a majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
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purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
SECTION 5. ADJOURNED MEETINGS. Whether or not a quorum shall be
present in person or represented at any meeting of the stockholders, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting may adjourn
from time to time; provided, however, that if the holders of any class of stock
of the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. ORGANIZATION. The Chairman of the Board or, in his absence,
the President or any Vice President shall call all meetings of the stockholders
to order, and shall act as Chairman of such meetings. In the absence of the
Chairman of the Board, the President and all of the Vice Presidents, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting shall elect
a Chairman.
The Secretary of the Corporation shall act as Secretary of all
meetings of the stockholders; but in the absence of the Secretary, the Chairman
may appoint any person to act as Secretary of the meeting. It shall be the duty
of the Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. VOTING. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the
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Corporation. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. When directed by the presiding officer or
upon the demand of any stockholder, the vote upon any matter before a meeting of
stockholders shall be by ballot. Except as otherwise provided by law or by the
Certificate of Incorporation, Directors shall be elected by a plurality of the
votes cast at a meeting of stockholders by the stockholders entitled to vote in
the election and, whenever any corporate action, other than the election of
Directors is to be taken, it shall be authorized by a majority of the votes cast
at a meeting of stockholders by the stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
SECTION 8. INSPECTORS. When required by law or directed by the
presiding officer or upon the demand of any stockholder entitled to vote, but
not otherwise, the polls shall be opened and closed, the proxies and ballots
shall be received and taken in charge, and all questions touching the
qualification of voters, the validity of proxies and the acceptance or rejection
of votes shall be decided at any meeting of the stockholders by two or more
Inspectors who may be appointed by the Board of Directors before the meeting, or
if not so appointed, shall be appointed by the presiding officer at the meeting.
If any person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless
otherwise provided in the Certificate of Incorporation, any action required to
be taken or which may be taken at any annual or special meeting of the
stockholders of the Corporation, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of any such corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
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ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of
the Corporation shall be managed by or under the direction of a Board of
Directors, none of whom need be stockholders of the Corporation. The number
of Directors constituting the Board of Directors shall be fixed from time to
time by resolution passed by a majority of the Board of Directors, PROVIDED,
that the number of Directors constituting the Board of Directors shall be no
less than eight (8) and no more than twelve (12); provided further, that the
minimum number of directors shall be increased to nine (9) when the Board of
Directors appoints a successor to the current Chief Executive Officer who is
not affiliated with Clayton, Dubilier & Rice, Inc. The Directors shall,
except as hereinafter otherwise provided for filling vacancies, be elected at
the annual meeting of stockholders, and shall hold office until their
respective successors are elected and qualified or until their earlier
resignation or removal.
SECTION 2. NOMINATION OF INVESTOR DIRECTORS. CDR-PC Acquisition, L.LC.
("Investor") shall have the right to nominate three Directors ("Investor
Directors") for election by the stockholders, PROVIDED,
(a) if the total number of shares of common stock of the
Corporation owned by Investor or issuable pursuant to special warrants
and warrants held by Investor ("Investor's Total Securities") declines
by more than 33_% but less than 66_% from Investor's Total Securities
at June 10, 1998 by reason of sales or other dispositions of common
stock, warrants or special warrants by Investor, Investor shall have
the right to nominate two Investor Directors;
(b) if Investor's Total Securities decline by 66_% or more from
Investor's Total Securities at June 10, 1998, but Investor's
Percentage Interest (as defined below) remains at least 5% of the
outstanding voting securities of the Corporation, by reason of sales
or other dispositions of common stock, warrants or special warrants by
Investor, Investor shall have the right to nominate one Investor
Director;
(c) in the event that the size of the Board of Directors shall be
increased to a number greater than nine (9), Investor shall have the
right to at least proportionate representation on the Board of
Directors following such increase based on the composition of the
Board of Directors as between Investor Directors and non-Investor
Directors immediately prior to such increase; and
(d) if the Chief Executive Officer of the Corporation is not then
a member of the Board of Directors or a nominee for election as a
Director, Investor shall be entitled to approve an additional nominee
to the Board of Directors.
For purposes hereof, "Investor's Percentage Interest" shall have the meaning
given the term "Purchaser's Percentage Interest" in that certain Investment
Agreement dated January 12, 1998, as amended, between Investor and the
Corporation (the "Investment Agreement").
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SECTION 3. REMOVAL, VACANCIES AND ADDITIONAL DIRECTORS. The
stockholders may, at any special meeting the notice of which shall state that it
is called for that purpose, remove, with or without cause, any Director and fill
the vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class. Vacancies caused by any such removal and not filled by
the stockholders at the meeting at which such removal shall have been made, or
any vacancy caused by the death or resignation of any Director or for any other
reason, and any newly created directorship resulting from any increase in the
authorized number of Directors, may be filled by the affirmative vote of a
majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his successor is elected and qualified or until his earlier
resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 4. PLACE OF MEETING. The Board of Directors may hold its
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time to time shall determine.
SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times and places as the Board from time to time
by resolution shall determine. No notice shall be required for any regular
meeting of the Board of Directors; but a copy of every resolution fixing or
changing the time or place of regular meetings shall be mailed to every Director
at least five days before the first meeting held in pursuance thereof.
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by direction of the Chairman of the
Board, the President or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting
shall be given by mailing the same at least two days before the meeting or by
causing the same to be transmitted by telegraph, cable or wireless at least one
day before the meeting to each Director. Unless otherwise indicated in the
notice thereof, any and all business other than an amendment of these By-Laws
may be transacted at any special meeting, and an amendment of these By-Laws may
be acted upon if the notice of the meeting shall have stated that the amendment
of these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
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SECTION 7. QUORUM. Subject to the provisions of Section 3 and Section
9 of this Article II, a majority of the members of the Board of Directors in
office (but in no case less than one-third of the total number of Directors nor
less than two Directors) shall constitute a quorum for the transaction of
business and the vote of the majority of the Directors present at any meeting of
the Board of Directors at which a quorum is present shall be the act of the
Board of Directors. If at any meeting of the Board there is less than a quorum
present, a majority of those present may adjourn the meeting from time to time.
SECTION 8. ORGANIZATION. The Chairman of the Board shall preside at
all meetings of the Board of Directors. In the absence of the Chairman of the
Board, an acting Chairman shall be elected from the Directors present to preside
at such meeting. The Secretary of the Corporation shall act as Secretary of all
meetings of the Directors; but in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting.
SECTION 9. SUPERMAJORITY VOTING PROVISIONS. So long as Investor has
the right to designate at least two nominees to the Board of Directors pursuant
to Section 2 of this Article II, the following actions shall require the
affirmative vote of not less than three-fourths of the Directors:
(a) any issuance of Equity Securities (as defined below) other
than (i) issuances pursuant to employee stock option or incentive
compensation plans of Equity Securities (other than in respect of
options outstanding as of January 12, 1998) in an aggregate amount not
to exceed 5% of the common stock outstanding on June 10, 1998 on a
fully diluted basis ("Permitted Options"), or (2) issuances pursuant
to acquisitions or in public offerings, such issuances not to exceed
5% of the common stock outstanding on June 10, 1998 on a fully diluted
basis in any one issuance or 20% in the aggregate, PROVIDED, HOWEVER,
that no such issuance shall be permitted if as a result thereof any
person would own 10% of the common stock outstanding immediately
following such issuance on a fully diluted basis;
(b) (1) any merger, consolidation or other business combination
to which the Corporation is a party or any decision whether to approve
a tender offer involving the Corporation's Equity Securities, in a
case other than a Cash Transaction (as defined below) or a Permitted
Securities Transaction (as defined below) or (2) any amendment of any
shareholder rights plan (or "poison pill") maintained by the
Corporation and any redemption of the rights issued thereunder, except
to permit a Cash Transaction ro a Permitted Securities Transaction;
(c) any sale, lease, transfer or other disposition in one
transaction or a series of related transactions of all or
substantially all the assets of the
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Corporation, in any case other than a Cash Transaction or a Permitted
Securities Transaction;
(d) any major recapitalization or similar transaction involving
the Corporation; or
(e) any amendment or modification of the Certificate of
Incorporation or these By-Laws that is inconsistent with the terms of
the Investment Agreement.
For purposes hereof, the terms "Equity Securities," "Cash Transaction" and
"Permitted Securities Transaction" shall have the meaning given such terms in
the Investment Agreement.
SECTION 10. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. Subject
to any law or stock exchange rule prohibiting committee membership by affiliates
of the Corporation, any committee designated by the Board of Directors shall
have at least proportionate representation by Investor Directors, based on the
composition of the Board of Directors as between Investor Directors and
Non-Investor Directors. The Board may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided by resolution passed by a majority of the
whole Board, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and the affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending these By-Laws; and unless such
resolution, these By-Laws, or the Certificate of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
SECTION 11. CONFERENCE TELEPHONE MEETINGS. Unless otherwise restricted
by the Certificate of Incorporation or by these By-Laws, the members of the
Board of Directors or any committee designated by the Board, may participate in
a meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
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SECTION 12. CONSENT OF DIRECTORS OR COMMITTEE IN LIEU OF MEETING.
Unless otherwise restricted by the Certificate of Incorporation or by these
By-Laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary and
a Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 7 of this Article III.
The Chairman of the Board, the President, one or more Vice Presidents, the
Secretary and the Treasurer shall be elected by the Board of Directors at its
first meeting after each annual meeting of the stockholders. The failure to hold
such election shall not of itself terminate the term of office of any officer.
All officers shall hold office at the pleasure of the Board of Directors. Any
officer may resign at any time upon written notice to the Corporation. Officers
may, but need not, be Directors. Any number of offices may be held by the same
person.
All officers, agents and employees shall be subject to removal, with or without
cause, at any time by the Board of Directors. The removal of an officer without
cause shall be without prejudice to his contract rights, if any. The election or
appointment of an officer shall not of itself create contract rights. All agents
and employees other than officers elected by the Board of Directors shall also
be subject to removal, with or without cause, at any time by the officers
appointing them.
Any vacancy caused by the death of any officer, his resignation, his removal, or
otherwise, may be filled by the Board of Directors, and any officer so elected
shall hold office at the pleasure of the Board of Directors.
In additional to the powers and duties of the officers of the Corporation as set
forth in these By-Laws, the officers shall have such authority and shall perform
such duties as from time to time may be determined by the Board of Directors.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The
Chairman of the Board shall be subject to the control of the Board of Directors,
and shall have such powers and shall perform such duties as maybe assigned to
him from time to time by these By-Laws or by the Board of Directors. In
addition, he shall preside at all meetings of the stockholders and at all
meetings of the Board of Directors and shall have such other powers and perform
such other
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duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors.
SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. Unless otherwise
specified by the Board of Directors, the President shall be the Chief Executive
Officer of the Corporation and, subject to the control of the Board of
Directors, shall have general charge and control of all the Corporation's
business and affairs, and shall have all powers and perform all duties incident
to the office of President. In the absence of the Chairman of the Board, he
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors.
SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice
President shall have all powers and shall perform all duties incident to the
office of Vice President and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors or the President.
SECTION 5. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall
keep the minutes of all meetings of the Board of Directors and the minutes of
all meetings of the stockholders in books provided for that purpose; he shall
attend to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and he shall have all powers
and shall perform all duties incident to the office of Secretary and shall also
have such other powers and shall perform such other duties as may from time to
time be assigned to him by these By-Laws or by the Board of Directors or the
President.
SECTION 6. THE POWERS AND DUTIES OF THE TREASURER. The Treasurer shall
have custody of, and when proper shall pay out, disburse or otherwise dispose
of, all funds and securities of the Corporation which may have come into his
hands; he may endorse on behalf of the Corporation for collection checks, notes
and other obligations and shall deposit the same to the credit of the
Corporation in such bank or banks or depositary or depositaries as the Board of
Directors may designate; he shall sign all receipts and vouchers for payments
made to the Corporation; he shall enter or cause to be entered regularly in the
books of the Corporation kept for the purpose full and accurate accounts of all
moneys received or paid or otherwise disposed of by him and whenever required by
the Board of Directors or the President shall render statements of such
accounts; he shall, at all reasonable times, exhibit his books and accounts to
any Director of the Corporation upon application at the office of the
Corporation during business hours; and he shall have all powers and he shall
perform all duties incident to the office of
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Treasurer and shall also have such other powers and shall perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors or the President.
SECTION 7. ADDITIONAL OFFICERS. The Board of Directors may from time
to time elect such other officers (who may but need not be Directors), including
a Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors or the President.
The Board of Directors may from time to time by resolution delegate to
any Assistant Treasurer or Assistant Treasurers any of the powers or duties
herein assigned to the Treasurer; and may similarly delegate to any Assistant
Secretary or Assistant Secretaries any of the powers or duties herein assigned
to the Secretary.
SECTION 8. GIVING OF BOND BY OFFICERS. All officers of the
Corporation, if required to do so by the Board of Directors, shall furnish bonds
to the Corporation for the faithful performance of their duties, in such
penalties and with such conditions and security as the Board shall require.
SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board
of Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meetings shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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SECTION 1. NATURE OF INDEMNITY. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was or has agreed to become a Director or officer of the Corporation, or is or
was serving or has agreed to serve at the request of the Corporation as a
Director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, and may indemnify any person who was or is a party or
is threatened to be made a party to such an action, suit or proceeding by reason
of the fact that he is or was or has agreed to become an employee or agent of
the Corporation, or is or was serving or has agreed to serve at the request of
the Corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that in the case of
an action or suit by or in the right of the Corporation to procure a judgment in
its favor (1) such indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in the defense
or settlement of such action or suit, and (2) no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. SUCCESSFUL DEFENSE. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
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SECTION 3. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification of a Director or officer of the Corporation under Section 1 of
this Article IV (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Section 1. Any indemnification of an employee
or agent of the Corporation under Section 1 (unless ordered by a court) may be
made by the Corporation upon a determination that indemnification of the
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1. Any such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
SECTION 4. ADVANCE PAYMENT OF EXPENSES. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. SURVIVAL; PRESERVATION OF OTHER RIGHTS. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys' fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
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SECTION 6. SEVERABILITY. If this Article IV or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges, and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. SUBROGATION. In the event of payment of indemnification to
a person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. NO DUPLICATION OF PAYMENTS. The Corporation shall not be
liable under this Article IV to make any payment in connection with any claim
made against a person described in Section 1 of this Article IV to the extent
such person has otherwise received payment (under any insurance policy, by-law
or otherwise) of the amounts otherwise indemnified hereunder.
ARTICLE V
STOCK-SEAL-FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES OF STOCK. The certificates for
shares of stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be approved by the Board of
Directors. All certificates shall be signed by the President or a Vice President
and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates had not ceased
to be such officer or officers of the Corporation.
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All certificates for shares of stock shall be consecutively numbered
as the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth , to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or destroyed
certificate in lieu of which the new certificate is issued.
SECTION 3. TRANSFER OF SHARES. Shares of stock of the Corporation
shall be transferred on the books of the Corporation by the holder thereof, in
person or by his attorney duly authorized in writing, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in Section 2 of this Article IV.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. RECORD DATE. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment, of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next
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preceding the day on which notice is given or, if notice is waived, at the close
of business on the day next preceding the day on which the meeting is held; the
record date for determining stockholders entitled to express consent to
corporate action in writing without a meeting, when no prior action by the Board
or Directors is necessary, shall be the day on which the first written consent
is delivered to the Corporation; and the record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, and dividends declared upon the stock of the Corporation shall be
payable on such date or dates as the Board of Directors shall determine. If the
date fixed for the payment of any dividend shall in any year fall upon a legal
holiday, then the dividend payable on such date shall be paid on the next day
not a legal holiday.
SECTION 7. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be used
by any officer of the Corporation designated by the Board of Directors or the
President.
SECTION 8. FISCAL YEAR. The fiscal year of the Corporation shall be
such fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptance, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptance, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. LOANS. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bond or other
evidences of indebtedness of the Corporation. When authorized so to do, any
officer or agent of
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the Corporation may pledge, hypothecate or transfer, as security for the payment
of any and all loans, advances, indebtedness and liabilities of the Corporation,
any and all stocks, securities and other personal property at any time held by
the Corporation, and to that end may endorse, assign and deliver the same. Such
authority may be general or confined to specific instances.
SECTION 3. CONTRACTS. Except as otherwise provided in these By-Laws or
by law or as otherwise directed by the Board of Directors, the President or any
Vice President shall be authorized to execute and deliver, in the name and on
behalf of the Corporation, all agreements, bonds, contracts, deeds, mortgages,
and other instruments, either for the Corporation's own account or in a
fiduciary or other capacity, and the seal of the Corporation, if appropriate,
shall be affixed thereto by any of such officers or the Secretary or an
Assistant Secretary. The Board of Directors, the President or any Vice President
designated by the Board of Directors or the President may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto. The
grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. WAIVERS OF NOTICE. Whenever any notice whatever is required
to be given by law, by the Certificate of Incorporation or by these By-Laws to
any person or persons, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
SECTION 5. OFFICES OUTSIDE OF DELAWARE. Except as otherwise required
by the laws of the State of Delaware, the Corporation may have an office or
offices and keep its books, documents and papers outside of the State of
Delaware at such place or places as from time to time may be determined by the
Board of Directors or the President.
ARTICLE VII
AMENDMENTS
Subject to Section 9 of Article II, these By-Laws and any amendment thereof
may be altered, amended or repealed, or new By-Laws may be adopted, by the Board
of Directors at any regular or special meeting by the affirmative vote of a
majority of all of the members of the Board, provided in the case of any special
meeting at which all of the members of the Board are not present, that the
notice of such meeting shall have stated that the amendment of these By-Laws and
any amendment thereof may be altered, amended or repealed or new By-Laws may be
adopted by the holders of a majority of the total outstanding stock of the
Corporation entitled to vote at any annual meeting or at any special meeting,
provided, in the case of any special meeting, that notice of such proposed
alteration, amendment, repeal or adoption is included in the notice of the
meeting.
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Exhibit 4.5
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE
CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
U.S. Office Products Company
Common Stock Purchase Warrant
Expiring June 10, 2010
New York, N.Y.
April 23, 1999
No. W-002
U.S. Office Products Company, a Delaware corporation (the "Company"),
for value received, hereby certifies that CDR-PC Acquisition, L.L.C., a Delaware
limited liability company (the "Purchaser"), or its permitted assigns, is
entitled to purchase from the Company 9,202,920 duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock, par value $.001 per share,
of the Company (the "Common Stock") at the purchase price per share determined
pursuant to Sections 1.1 and 2 hereof, at any time or from time to time after
June 10, 2000, but prior to 5:00 P.M., New York City time, on June 10, 2010 (or
such later date as may be determined pursuant to Section 18), all subject to the
terms, conditions and adjustments set forth below in this Warrant.
This Warrant is the amended and restated Common Stock Purchase Warrant
(the "Warrant," such term to include all Warrants issued in substitution
therefor), originally issued on June 10, 1998 (the "Closing Date") in connection
with the issue and sale by the Company of 9,092,106 shares of its Common Stock
pursuant to an Investment Agreement, dated as of January 12, 1998, between the
Company and the Purchaser (as
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amended, the "1998 Investment Agreement"), as amended and restated pursuant to
the terms of an Investment Agreement, dated as of March 30, 1999 between the
Company and the Purchaser (the "1999 Investment Agreement"). This Warrant as
amended and restated evidences rights to purchase 9,202,920 duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock, par value
$.001 per share (such number of shares of Common Stock referred to herein as the
"Initial Exercise Shares"), subject to adjustment as provided herein. Certain
capitalized terms used in the Warrant are defined in Section 13.
1. EXERCISE OF WARRANT. 1.1. MANNER OF EXERCISE. (a) The Warrant may
be exercised by the holder of the Warrant or any portion hereof (the "Holder"),
in whole or in part, during normal business hours on any Business Day following
the second anniversary of the Closing Date by surrender of the Warrant, with the
form of subscription at the end hereof (or a reasonable facsimile thereof) (the
"Subscription Notice") duly executed by such Holder, to the Company at its
principal office (or, if such exercise shall be in connection with an
underwritten Public Offering of shares of Common Stock (or Other Securities)
subject to the Warrant, at the location at which the Company shall have agreed
to deliver the shares of Common Stock (or Other Securities) subject to such
offering), accompanied by payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount (such amount referred
to herein as the "Exercise Price") obtained by multiplying (I) the number of
shares of Common Stock (without giving effect to any adjustment provided for in
Section 2) designated in such Subscription Notice by (II) $5.625, and such
Holder shall thereupon be entitled to receive the number of duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock (or Other
Securities) determined as provided in Section 2 hereof.
(b) In lieu of tendering the Exercise Price to the Company, the holder
may elect to perform a "Cashless Exercise" of the Warrant, in whole or in part,
by surrendering the Warrant to the Company, with a duly executed Subscription
Notice marked "Cashless Exercise" and designating the number of shares of Common
Stock desired by the Holder out of the total for which the Warrant is
exercisable (without giving effect to any adjustments provided for in Section
2). The Holder shall thereupon be entitled to receive the number of duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
(or Other Securities) having a value (at the Market Price) that is equal to the
excess of (I) the then Market Price per share of Common Stock (or Other
Securities) multiplied by the number of the shares of Common Stock (or Other
Securities) (determined as of the date immediately preceding the date of any
such Subscription Notice) into which the Warrant, or portion thereof designated
by
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the Holder, would have been exercisable pursuant to Section 1.1(a) upon
payment of the Exercise Price by the Holder over (II) the Exercise Price the
Holder would have been required to pay under Section 1.1(a) in respect of such
an exercise.
1.2. WHEN EXERCISE DEEMED EFFECTED. Each exercise of the Warrant shall
be deemed to have been effected immediately prior to the close of business on
the Business Day on which the Warrant shall have been surrendered to the Company
as provided in Section 1.1, and at such time the person or persons in whose name
or names any certificate or certificates for shares of Common Stock (or Other
Securities) shall be issuable upon such exercise as provided in Section 1.2
shall be deemed to have become the holder or holders of record thereof.
1.3. DELIVERY OF STOCK CERTIFICATES, ETC. As soon as practicable after
the exercise of the Warrant, in whole or in part, and in any event within five
Business Days thereafter (unless such exercise shall be in connection with an
underwritten Public Offering of shares of Common Stock (or Other Securities)
subject to the Warrant, in which event, concurrently with such exercise), the
Company at its expense (including the payment by it of any taxes applicable to
an issuer upon the issuance of shares, but excluding transfer taxes) shall cause
to be issued in the name of and delivered to the Holder or, subject to Section
6, as such Holder (upon payment by such Holder of any applicable transfer taxes)
may direct,
(a) a certificate or certificates for the number of duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock (or
Other Securities) to which such Holder shall be entitled upon such exercise
plus, in lieu of any fractional share to which such Holder would otherwise
be entitled, cash in an amount equal to the same fraction of the Market
Price per share of such Common Stock (or Other Securities) on the Business
Day next preceding the date of such exercise, and
(b) in case such exercise is in part only, a new Warrant or Warrants
of like tenor, calling in the aggregate on the face or faces thereof for
the number of shares of Common Stock equal (without giving effect to any
adjustment therein) to the number of such shares called for on the face of
the Warrant minus the number of such shares designated by the Holder upon
such exercise as provided in Section 1.1.
1.4. COMPANY TO REAFFIRM OBLIGATIONS. The Company shall, at the time
of or at any time after each exercise of the Warrant, upon the request of the
Holder,
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acknowledge in writing its continuing obligation to afford to such
holder all rights (including, without limitation, any right of registration of
the Warrant and of any shares of Common Stock (or Other Securities) issuable
upon exercise of the Warrant pursuant to Section 7) to which such Holder shall
continue to be entitled after such exercise in accordance with the terms of the
Warrant, PROVIDED that if any such Holder shall fail to make any such request,
the failure shall not affect the continuing obligation of the Company to afford
such rights to such Holder.
2. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE. 2.1. NUMBER OF
SHARES; WARRANT PRICE. The number of shares of Common Stock which the Holder
shall be entitled to receive upon each exercise hereof shall be determined by
multiplying the number of shares of Common Stock which would otherwise (but for
any application of the provisions of this Section 2) be issuable upon such
exercise, as designated by the Holder pursuant to Section 1.1, by a fraction of
which (I) the numerator is $5.625 and (II) the denominator is the Warrant Price
(as defined below) in effect on the date of such exercise. The "Warrant Price,"
which shall initially be $5.625 shall be adjusted and readjusted from time to
time as provided in Section 2 hereof and, as so adjusted or readjusted, shall
remain in effect until a further adjustment or readjustment thereof is required
by Section 2.
2.2. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If at any time
the Company shall:
(i) issue or deliver any shares of Common Stock as a result of the
declaration or payment of a dividend of Common Stock payable in, or other
distribution to holders of Common Stock of, shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock,
then the Warrant Price then in effect shall be adjusted to equal (1) the Warrant
Price in effect immediately prior to such event multiplied by the number of
shares of Common Stock for which the Warrant is exercisable immediately prior to
the adjustment divided by (2) the number of shares of Common Stock which a
record holder of the same number of shares of Common Stock for which the Warrant
is exercisable immediately prior to the happening of such event would own or be
entitled to receive after the happening of such event.
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2.3. EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS. If at any time the
Company shall distribute to all holders of its outstanding Common Stock
evidences of indebtedness of the Company, cash (other than a regular quarterly
dividend payable in cash out of earned surplus in an amount not exceeding 2% of
the average of the Market Price of the Common Stock on the fifteen trading days
immediately preceding the date of declaration of such dividend) or assets or
securities other than the Common Stock (any such evidences of indebtedness,
cash, assets or securities, the "Assets"), then, in each case, the Warrant Price
then in effect shall be reduced to a price determined by multiplying such
Warrant Price by a fraction,
(i) the numerator of which shall be the Market Price then in effect
less the value of such Assets applicable to one share of Common Stock, and
(ii) the denominator of which shall be such Market Price.
Any adjustment required by this Section 2.3 shall be made whenever any
such distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
2.4. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
(a) If at any time after the date hereof the Company shall (except as
hereinafter provided) issue or sell any Additional Shares of Common Stock
without consideration or in exchange for consideration in an amount per
Additional Share of Common Stock less than the Market Price at the time the
Additional Shares of Common Stock are issued, then the Warrant Price then in
effect shall be reduced to a price determined by multiplying such Warrant Price
by a fraction,
(i) the numerator of which shall be (X) the number of shares of Common
Stock outstanding immediately prior to such issue or sale plus (Y) the
number of shares of Common Stock which the aggregate consideration received
by the Company for the total number of such Additional Shares of Common
Stock so issued or sold would purchase at the Market Price, and
(ii) the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such issue or sale.
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(b) The provisions of paragraph (a) of this Section 2.4 shall not
apply to any issuance of Additional Shares of Common Stock for which an
adjustment is provided under Section 2.2.
2.5. ISSUANCE OF CONTINGENT STOCK. If at any time after the date
hereof the Company shall increase the number of Shares issuable upon the
exercise of the Special Warrants as a result of the issuance of any Contingent
Stock, then the Warrant Price then in effect shall be reduced to a price
determined by multiplying such Warrant Price by a fraction,
(a) the numerator of which shall be the number of shares of Common
Stock for which the Warrant was exercisable immediately prior to the
adjustment; and
(b) the denominator of which shall be (I) the number of shares of
Common Stock for which the Warrant was exercisable immediately prior to the
adjustment plus (II) the increase in the number of Shares issuable upon the
exercise of the Special Warrant as a result of the issuance of such
Contingent Stock.
If Holder is entitled to an adjustment to the Warrant Price pursuant to this
Section 2.5 as a result of the issuance of Contingent Stock, no other adjustment
shall be made with respect to such issuance under Section 2.6 or 2.7.
2.6. ISSUANCE OF WARRANTS OR OTHER RIGHTS. If at any time after the
date hereof the Company shall take a record of holders of Common Stock for the
purpose of entitling them to receive a distribution of, or shall in any manner
(whether directly or by assumption in a merger in which the Company is the
surviving corporation) issue or sell, any warrants or other rights to subscribe
for or purchase any Additional Shares of Common Stock or any Convertible
Securities, whether or not such rights thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such warrants or other rights or upon conversion or exchange of such Convertible
Securities shall be less than the Market Price in effect immediately prior to
the time of such issue or sale, then the Warrant Price shall be adjusted as
provided in Section 2.4 on the basis that the maximum number of shares of
Common Stock issuable pursuant to all such warrants or other rights or necessary
to effect the conversion or exchange of all such Convertible Securities shall be
deemed to have been issued and outstanding and the Company shall have received
all of the consideration payable therefor, if any, as of the date of the actual
issuance of such warrants or other rights. No
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further adjustments of the Warrant Price shall be made upon the actual issuance
of such Common Stock or of such Convertible Securities upon exercise of such
warrants or other rights or upon the actual issuance of such Common Stock upon
such conversion or exchange of such Convertible Securities.
2.7. ISSUANCE OF CONVERTIBLE SECURITIES. If at any time the Company
shall take a record of the holders of Common Stock for the purpose of entitling
them to receive a distribution of, or shall in any manner (whether directly or
by assumption in a merger in which the Company is the surviving corporation)
issue or sell, any Convertible Securities, whether or not the rights to exchange
or convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange shall be less
than the Market Price in effect immediately prior to the time of such issue or
sale, then the Warrant Price shall be adjusted as provided in Section 2.4 on the
basis that the maximum number of shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued and outstanding and the Company shall have received all of the
consideration payable therefor, if any, as of the date of actual issuance of
such Convertible Securities. No adjustment of the Warrant Price shall be made
under this Section 2.7 upon the issuance of any Convertible Securities which are
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have been made
upon the issuance of such warrants or other rights pursuant to Section 2.6. No
further adjustments of the Warrant Price shall be made upon the actual issuance
of such Common Stock upon conversion or exchange of such Convertible Securities,
and, if any issuance or sale of such Convertible Securities is made upon
exercise of any warrant or other right to subscribe for or to purchase or any
warrant or other right to purchase any such Convertible Securities for which
adjustments of the Warrant Price have been or are to be made pursuant to other
provisions of this Section 2, no further adjustments of the Warrant Price shall
be made by reason of such issuance or sale.
2.8. SUPERSEDING ADJUSTMENT. If, at any time after any adjustment of
the number of shares of Common Stock for which the Warrant is exercisable shall
have been made pursuant to Section 2.6 or 2.7 as the result of any issuance of
warrants, rights or Convertible Securities,
(i) such warrants or rights, or the right of conversion or exchange in
such other Convertible Securities, shall expire, and all or a portion of
such warrants or rights, or the right of conversion or exchange with
respect to all or a portion of
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such other Convertible Securities, as the case may be, shall not have
been exercised, or
(ii) the consideration per share for which shares of Common Stock are
issuable pursuant to such warrants or rights, or the terms of such other
Convertible Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such consideration per share
upon the occurrence of a specified date or event,
then such previous adjustment shall be rescinded and annulled and the shares of
Common Stock which were deemed to have been issued by virtue of the computation
made in connection with the adjustment so rescinded and annulled shall no longer
be deemed to have been issued by virtue of such computation. Thereupon, a
recomputation shall be made of the effect of such rights or options or other
Convertible Securities effective as of the date of such previous adjustment on
the basis of
(A) treating the number of shares of Common Stock or other property,
if any, theretofore actually issued or issuable pursuant to the previous
exercise of any such warrants or rights or any such right of conversion or
exchange, as having been issued on the date or dates of any such exercise
and for the consideration actually received and receivable therefor, and
(B) treating any such warrants or rights or any such other Convertible
Securities which then remain outstanding as having been granted or issued
immediately after the time of such increase of the consideration per share
for which shares of Common Stock or other property are issuable under such
warrants or rights or other Convertible Securities,
whereupon a new adjustment of the number of shares of Common Stock for which the
Warrant is exercisable shall be made effective as of the date of such previous
adjustment, which new adjustment shall supersede the previous adjustment so
rescinded and annulled. Any reduction in the number of shares of Common Stock
for which the Warrant is exercisable as a result of this Section 2.8 shall be
applied in its entirety to the number of shares of Common Stock for which the
Warrant is exercisable as of the date such new adjustment is made.
2.9. CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. (a)
In case at any time (and whether or not the Warrant is then exercisable) the
Company shall be a party to any transaction (including without limitation a
merger, consolidation, sale of all or substantially all of the Company's assets
or recapitalization of the Common Stock)
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in which the previously outstanding Common Stock shall be changed into or
exchanged for different securities of the Company or changed into or exchanged
for common stock or other securities of another corporation or interests in a
noncorporate entity or other property (including cash) or any combination of any
of the foregoing (each such transaction being hereinafter referred to as the
"Transaction") then, as a condition to the consummation of the Transaction,
lawful and adequate provisions shall be made so that, upon the basis and terms
and in the manner provided in this Section 2.9, the Holder, upon the exercise of
the Warrant, shall be entitled to receive, in lieu of the Common Stock issuable
upon such exercise prior to such consummation, the stock and other securities,
cash and property to which the Holder would have been entitled upon the
consummation of the Transaction if the Holder had exercised the Warrant
immediately prior thereto, subject to adjustments (subsequent to such
consummation) as nearly equivalent as possible to the adjustments provided for
in Section 2.
(b) Notwithstanding anything contained herein to the contrary, the
Company will not effect any Transaction unless, prior to the consummation
thereof, each corporation or entity (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the exercise of
the Warrant as provided herein shall assume, by written instrument delivered to,
and reasonably satisfactory to, the Holder, (I) the obligations of the Company
hereunder (and if the Company shall survive the consummation of such
Transaction, such assumption shall be in addition to, and shall not release the
Company from, any continuing obligations of the Company hereunder) and (II) the
obligation to deliver to the Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions, the Holder may be
entitled to receive, and such corporation or entity shall have similarly
delivered to the Holder an opinion of counsel for such corporation or entity,
which counsel shall be satisfactory to the Holder, stating that the Warrant
shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the applicable provisions of Section 2)
shall be applicable to the stock, securities, cash or property which such
corporation or entity may be required to deliver upon any conversion of any
Warrants or the exercise of any rights pursuant hereto.
(c) Upon any liquidation, dissolution or winding up of the Company
(and whether or not the Warrant is then exercisable), the Holder shall receive
such cash or property (less the Warrant Price) which the Holder would have been
entitled to receive upon the happening of such liquidation, dissolution or
winding up had the Warrant been exercised in full and the shares of Common Stock
in respect of such exercise issued immediately prior to the occurrence of such
liquidation, dissolution or winding-up.
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2.10. OTHER DILUTIVE EVENTS. In case any event shall occur as to which
the provisions of Section 2 are not strictly applicable but the failure to make
any adjustment would not fairly protect the exercise rights with respect to the
Warrant in accordance with the essential intent and principles of such Section,
then, in each such case, the Company shall appoint a firm of independent
certified public accountants of recognized national standing (which may be the
regular auditors of the Company), which shall give their opinion upon the
adjustment, if any, on a basis consistent with the essential intent and
principles established in Section 2, necessary to preserve, without dilution,
the exercise rights represented by the Warrant. Upon receipt of such opinion,
the Company will promptly mail a copy thereof to the Holder of the Warrant and
shall make the adjustments, if any, described therein.
2.11. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of
its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms hereof, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
reasonably necessary or appropriate in order to protect the rights of the
Holders of this Warrant against dilution in respect of which the Holders are not
fully protected by this Section 2 or other impairment. Without limiting the
generality of the foregoing, the Company
(a) will not permit the par value of any shares of Common Stock
receivable upon the exercise of the Warrant to exceed the amount payable
therefor upon such exercise,
(b) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the exercise of the Warrant from time to
time outstanding,
(c) will not take any action which results in any adjustment of the
Warrant Price if the total number of shares of Common Stock (or Other
Securities) issuable after such action upon the complete exercise of the
Warrant would exceed the total number of shares of Common Stock (or Other
Securities) then authorized by the Company's certificate of incorporation
and available for the purpose of issue upon such exercise, and
(d) will not (i) issue any equity securities (other than Common Stock
or Convertible Securities) that participate with the shares of Common Stock
in
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dividends, distributions and/or other rights ("Other Dilutive Securities"),
or (ii) declare or make dividends or distributions (whether of evidences of
indebtedness of the Company, cash, assets or securities, including, without
limitation, options, warrants or other rights to acquire Common Stock) in
respect of any Other Dilutive Securities or Convertible Securities, unless,
in each case, this Section 2 is first amended so as to provide the Holders
of the Warrant with full protection against dilution caused by or resulting
from such issuances, dividends or distributions.
2.12. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 2.
The following provisions shall be applicable to the making of adjustments to the
number of shares of Common Stock for which the Warrant is exercisable provided
for in this Section 2:
(i) COMPUTATION OF CONSIDERATION. To the extent that any shares of
Common Stock or any Convertible Securities or any warrants or other
rights to subscribe for or purchase any shares of Common Stock or any
Convertible Securities shall be issued for cash consideration, the cash
consideration received by the Company therefor shall be the amount of
the cash received by the Company therefor, or, if such shares of Common
Stock or Convertible Securities are offered by the Company for
subscription, the subscription price, or, if such shares of Common Stock
or Convertible Securities are sold to underwriters or dealers for public
offering without a subscription offering, the initial public offering
price (in any such case subtracting (A) any amounts paid or receivable
for accrued interest or accrued dividends and without taking into
account (B) any compensation, discounts or expenses paid or incurred by
the Company for and in the underwriting of, or otherwise in connection
with, the issuance thereof). To the extent that such issuance shall be
for a consideration other than cash, then, except as herein otherwise
expressly provided, the amount of such consideration shall be deemed to
be fair value of such consideration at the time of such issuance as
determined in good faith by the Board of Directors of the Company. In
case any shares of Common Stock or any Convertible Securities or any
warrants or other rights to subscribe for or purchase such shares of
Common Stock or Convertible Securities shall be issued in connection
with any merger in which the Company issues any securities, the amount
of consideration therefor shall be deemed to be the fair value, as
determined by an independent investment banking firm retained by the
Company, which firm may be an independent investment banking firm
regularly retained by the Company, of such portion of the assets and
business of the nonsurviving corporation as such firm shall determine to
be attributable to
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such shares of Common Stock, Convertible Securities, warrants or other
rights, as the case may be. The consideration for any shares of Common
Stock issuable pursuant to any warrants or other rights to subscribe for
or purchase the same shall be the consideration received by the Company
for issuing such warrants or other rights plus the additional
consideration payable to the Company upon exercise of such warrants or
other rights. The consideration for any shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration, if any, received by the Company for issuing warrants or
other rights to subscribe for or purchase such Convertible Securities,
plus the consideration paid or payable to the Company in respect of the
subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any shares of Common
Stock or Convertible Securities in payment or satisfaction of any
dividends upon any class of stock other than Common Stock, the Company
shall be deemed to have received for such shares of Common Stock or
Convertible Securities a consideration equal to the amount of such
dividend so paid or satisfied.
(ii) COMPUTATION OF ASSET VALUE. To the extent that any Assets shall
be distributed to all holders of the Company's outstanding Common Stock in
cash, the value of such Assets shall be the amount of cash so distributed,
or, if such Assets are securities offered by the Company for subscription,
the subscription price, or if such Assets are securities sold to
underwriters or dealers for public offering without a subscription
offering, the initial public offering price (in any such case adding any
accrued interest or dividends but without taking into account any
compensation, discounts or expenses paid or incurred by the Company in
connection therewith). To the extent that the Company shall so distribute
Assets other than cash, except as herein otherwise expressly provided, then
the value of such Assets shall be deemed to be fair value of such Assets at
the time of such distribution as determined in good faith by the Board of
Directors of the Company.
(iii) WHEN ADJUSTMENT TO BE MADE. The adjustments required by this
Section 2 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except that any adjustment of the
number of shares of Common Stock for which the Warrant is exercisable that
would otherwise be required may be postponed (except in the case of a
subdivision or combination of shares of the Common Stock, as provided for
in Section 2.2) up to but not beyond the date of exercise if such
adjustment either by itself or with other adjustments
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not previously made adds or subtracts less than 1% of the shares of
Common Stock for which the Warrant is exercisable immediately prior to the
making of such adjustment. Any adjustment representing a change of less
than such minimum amount (except as aforesaid) which is postponed shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Section 2 and not previously made, would
result in a minimum adjustment or on the date of exercise. For the purpose
of any adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
(iv) FRACTIONAL INTEREST; ROUNDING. In computing adjustments under
this Section 2, fractional interests in Common Stock shall be taken into
account to the nearest 1/10th of a share, and adjustments in the Warrant
Price shall be made to the nearest $.01.
(v) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record
of the holders of its Common Stock or Preferred Stock for the purpose of
entitling them to receive subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally
abandon its plan to deliver such subscription or purchase rights, then no
adjustment shall be required by reason of the taking of such record and any
such adjustment previously made in respect thereof shall be rescinded and
annulled.
(vi) ESCROW OF WARRANT STOCK. If the Holder exercises the Warrant
after any property becomes distributable by reason of the taking of any
record of the holders of Common Stock as described in this Section 2, but
prior to the occurrence of the event for which such record is taken, any
shares of Common Stock issuable upon exercise by reason of any adjustment
required by this Section 2 shall be deemed the last shares of Common Stock
for which the Warrant is exercised (notwithstanding any other provision to
the contrary herein). Such shares or other property shall be held in escrow
for the Holder by the Company to be issued to the Holder upon and to the
extent that the event actually takes place, upon payment of the Exercise
Price. Notwithstanding any other provision to the contrary herein, if the
event for which such record was taken fails to occur or is rescinded, then
such escrowed shares shall be canceled by the Company and escrowed property
returned.
(vii) SHAREHOLDER RIGHTS PLANS. Rights or warrants distributed by the
Company to all holders of Common Stock and Preferred Stock pursuant to a
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shareholder rights plan (or "poison pill") entitling the holders thereof to
subscribe for or purchase shares of the Company's capital stock, which
rights or warrants, until the occurrence of a specified event or events (a
"Trigger Event"), (X) are deemed to be transferred with the Common Stock in
respect of which they are issued, (Y) are not exercisable, and (Z) are also
issued in respect of future issuances of Common Stock, shall be deemed not
to have been distributed for purposes of Section 2.6 and 2.7 (and no
adjustment to the Warrant Price under those Sections shall be required)
until the occurrence of the earliest Trigger Event. If upon the occurrence
of any event such right or warrant becomes exercisable to purchase
different securities, evidences of indebtedness or other assets or entitles
its holder to purchase a different amount of the foregoing or to purchase
any of the foregoing at a different purchase price (an "Other Trigger
Event"), then the occurrence of each such Other Trigger Event shall be
deemed to be the date of issuance and Record Date with respect to a new
right or warrant (and a termination or expiration of the existing right or
warrant without exercise by the holder thereof to the extent not actually
exercised). In addition, in the event of any distribution (or deemed
distribution) of rights or warrants, or any Trigger Event or Other Trigger
Event with respect thereto, that resulted in an adjustment of the Warrant
Price under Section 2.6 or 2.7, (1) in the case of any such rights or
warrants which shall have been redeemed or repurchased without exercise by
the holders thereof, the Warrant Price shall be adjusted upon such
redemption or repurchase to give effect to such distribution, Trigger Event
or Other Trigger Event, as the case may be, as though it were an
extraordinary cash distribution equal to the per-share redemption or
repurchase price received by a holder of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights), made to
all holders of Common Stock on the date of such redemption or repurchase,
and (2) in the case of such rights or warrants all of which shall have
expired or been terminated without exercise, the Warrant Price shall be
readjusted as if such rights or warrants had never been issued.
3. NOTICE OF ADJUSTMENT. Whenever the number of shares of Common Stock
for which the Warrant is exercisable or the Warrant Price shall be adjusted
pursuant to Section 2, the Company shall forthwith prepare a certificate to be
executed by the chief financial officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment, the method by which the
adjustment was calculated, the number of shares of Common Stock for which the
Warrant is exercisable and the Warrant Price after giving effect to such
adjustment or change. The Company shall promptly cause a signed copy of such
certificate to be delivered to the Holder. The Company shall keep at the office
of
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the Company copies of all such certificates and cause the same to be
available for inspection during normal business hours by the Holder.
4. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS. In each case of any
adjustment or readjustment to the shares of Common Stock (or Other Securities)
issuable upon the exercise of the Warrant, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms of
the Warrant and cause independent public accountants of recognized national
standing selected by the Company (which may be the regular auditors of the
Company) to verify such computation and prepare a report setting forth such
adjustment or readjustment and showing in reasonable detail the method of
calculation thereof and the facts upon which such adjustment or readjustment is
based, including without limitation a statement of (A) the consideration
received or to be received by the Company for any shares of Common Stock issued
or sold or deemed to have been issued, (B) the number of shares of Common Stock
outstanding or deemed to be outstanding, and (C) the Warrant Price in effect
immediately prior to such issuance or sale and as adjusted and readjusted (if
required by Section 2) on account thereof. The Company shall forthwith mail a
copy of each such report to each Holder and shall, upon the written request at
any time of any Holder, furnish to such Holder a like report setting forth the
Warrant Price at the time in effect and showing in reasonable detail how it was
calculated. The Company shall also keep copies of all such reports at its
principal office and shall cause the same to be available for inspection at such
office during normal business hours by any Holder or any prospective purchaser
of a Warrant designated by the Holder.
5. NOTICES OF CORPORATE ACTION. In the event of
(a) any taking by the Company of a record of the holders of its Common
Stock or Preferred Stock for the purpose of determining the holders thereof
who are entitled to receive any dividend payable in, or other distribution
of, shares of Common Stock, or any other dividend (other than a regular
quarterly dividend payable in cash out of earned surplus in an amount not
exceeding 2% of the average of the Market Price of the Common Stock on the
fifteen trading days immediately preceding the date of the declaration of
such dividend) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of Common Stock or any Convertible
Securities, or to receive any other right,
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(b) any subdivision of outstanding shares of Common Stock into a
larger number of shares of Common Stock, or any combination of such shares
into smaller number of shares of Common Stock,
(c) any issuance of Contingent Stock, any capital reorganization of
the Company, any reclassification or recapitalization of the capital stock
of the Company or any consolidation or merger involving the Company and any
other Person or any transfer of all or substantially all the assets of the
Company to any other Person, or
(d) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall mail to each Holder a notice specifying (I) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right, (II) the date or expected date on which any such
subdivision, combination or issuance is to take place, and the amount of Common
Stock or Contingent Stock that shall be the subject of such subdivision,
combination or issuance and (III) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to be fixed, as of which the holders of record of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for the securities or other property deliverable
upon such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding-up. Such notice shall be
mailed at least 15 Business Days prior to the date specified in subdivisions
(i), (ii) and (iii) above.
6. RESTRICTIONS ON TRANSFER. (a) Other than as specifically approved
by a majority of the Non-Investor Directors, prior to the second anniversary of
the Closing Date, the Purchaser shall not, directly or indirectly, sell,
transfer or otherwise dispose of any Warrants (except to any Affiliate of the
Purchaser).
(b) Other than as specifically approved by a majority of the Non-
Investor Directors, prior to the fifth anniversary of the Closing Date,
Purchaser will not, directly or indirectly, sell, transfer or otherwise dispose
of the Warrant, in whole or in part, except (I) pursuant to a registered
underwritten public offering effected under the Registration Rights Agreement
with the intent to achieve a broad distribution, (II) in accordance with the
volume and manner-of-sale limitations of Rule 144 promulgated
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under the Securities Act of 1933 (the "Securities Act") (regardless of
whether such limitations are applicable), (III) in a transaction exempt from the
registration requirements of the Securities Act with any Person or group (within
the meaning of Section 13(d)(3) of the Securities and Exchange Act of 1934 (the
"Exchange Act")) of Persons, if, prior to and after giving effect to such sale,
such Person or group of Persons (X) does not or would not, to Purchaser's
knowledge after due inquiry, Beneficially Own (provided that for purposes of
this Section 6(b) a Person shall be deemed to Beneficially Own all shares that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time) 5% or more of the then
outstanding shares of Common Stock or (Y) is an investment company registered
under the Investment Company Act of 1940, as amended, or (IV) in connection with
a Buyout Transaction. Purported transfers of the Warrant that are not in
compliance with this Section 6(b) shall be of no force or effect.
(c) The provisions of Sections 6(a) and 6(b) shall terminate and be of
no further force or effect on the earliest to occur of (I) the fifth anniversary
of the Closing Date, (II) the date on which the percentage of the Total Voting
Power represented by the aggregate voting power of all Voting Securities then
owned by Purchaser (other than any Voting Securities acquired in violation of
the Investment Agreement) is greater than 50%, and (III) the first public
disclosure of a Third-Party Bid (provided, however, that if such Third-Party Bid
is thereafter abandoned, terminated or withdrawn, the provisions of Sections
6(a) and 6(b) hereof shall be reinstated, although any action taken or agreement
or arrangement entered into by Purchaser after such first public disclosure and
prior to such reinstatement (or the consummation of any such action, agreement
or arrangement, whether before or, unless such action, agreement or arrangement
shall be a tender offer or other public offer with respect to the Company, after
such reinstatement) shall not be deemed to breach Sections 6(a) and 6(b) hereof
as a result of such reinstatement).
(d) Prior to the seventh anniversary of the Closing Date, Purchaser
will not, directly or otherwise, dispose of the Warrant, or any portion thereof,
representing the right to acquire 15% or more of the then outstanding Common
Stock to any Person or group (within the meaning of Section 13(d)(3) of the
Exchange Act) without first offering the Company the right to make an offer to
purchase the Warrant proposed to be so sold, transferred or otherwise disposed
of. The provisions of the previous sentence shall terminate and be of no effect
on the earlier to occur of (I) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of the Investment Agreement) is greater than 50%, and (II) the first public
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disclosure of a Third-Party Bid (provided, however, that if such Third-Party Bid
is thereafter abandoned, terminated or withdrawn, the provisions of this Section
6(d) shall be reinstated, although any action taken or agreement or arrangement
entered into by Purchaser after such first public disclosure and prior to such
reinstatement (or the consummation of any such action, agreement or arrangement,
whether before or, unless such action, agreement or arrangement shall be a
tender offer or other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach this Section 6(d) as a result of
such reinstatement).
(e) Any shares issued upon the exercise of the Warrant shall be
considered "Shares" for purposes of the 1998 Investment Agreement and shall be
subject to the transfer restrictions stated in Article VII thereof.
(f) Except as otherwise permitted by this Section 6, the Warrant
originally issued pursuant to the 1999 Investment Agreement, each Warrant issued
upon direct or indirect transfer or in substitution for any Warrant pursuant to
Section 12 hereof, each certificate for Common Stock (or Other Securities)
issued upon the exercise of any Warrant and each certificate issued upon the
direct or indirect transfer of any such Common Stock (or Other Securities)
(other than, with respect to the first legend, shares of Common Stock (or Other
Securities), Warrants or Warrant Shares that are no longer subject to the
provisions of Section 6(a) and other than, with respect to the second legend,
shares of Common Stock (or Other Securities), Warrants or Warrant Shares which
have been transferred in a transaction registered under the Securities Act or
exempt from the registration requirements of the Securities Act pursuant to Rule
144 thereunder or any similar rule or regulation) shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
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(g) The restrictions imposed by Section 6(f) hereof upon the
transferability of Restricted Securities shall cease and terminate as to any
particular Restricted Securities (A) when such securities shall have been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering such Restricted Securities, (B) when,
in the opinion of counsel for the Holder, which counsel shall be reasonably
satisfactory to the Company, such restrictions are no longer required in order
to insure compliance with the Securities Act, or (C) when such securities have
been beneficially owned, by a Person who has not been an affiliate of the
Company for at least three months, for a period of at least one year (or such
shorter period as may be applicable under Rule 144 under the Securities Act or
any successor thereto), all as determined under Rule 144 under the Securities
Act. Whenever such restrictions shall terminate as to any Restricted Securities,
as soon as practicable thereafter and in any event within five days, the Holder
thereof shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing the
applicable legend set forth in Section 6(f) hereof.
7. REGISTRATION RIGHTS. The Warrant and all shares of Common Stock
(and Other Securities) issued upon the exercise of the Warrant are subject to
and entitled to the benefits of the registration rights provisions set forth in
the Registration Rights Agreement, dated as of June 10, 1998, between the
Company and the Purchaser, as amended from time to time (the "Registration
Rights Agreement").
8. AVAILABILITY OF INFORMATION. The Company shall comply with the
reporting requirements of sections 13 and 15(d) of the Exchange Act (whether or
not it shall be required to do so pursuant to such sections) and shall comply
with all public information reporting requirements of the Commission (including
Rule 144 promulgated by the Commission under the Securities Act) from time to
time in effect and relating to the availability of an exemption from the
Securities Act for the sale of any Restricted Securities. The Company shall
cooperate with each holder of any Restricted Securities in supplying such
information as may be necessary for such holder to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of any Restricted Securities. The Company shall furnish to the Holder, or
to any Holder of a portion of the Warrant, promptly upon their becoming
available, copies of all reports on Form 10-K and Form 10-Q and proxy statements
filed by the Company with the Commission, and copies of all regular and periodic
reports and all registration statements and prospectuses filed by the Company
with any securities exchange or with the Commission.
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9. RESERVATION OF STOCK, ETC. The Company shall at all times reserve
and keep available, solely for issuance and delivery upon exercise of the
Warrant, the number of shares of Common Stock (or Other Securities) from time to
time issuable upon exercise of the Warrant at the time outstanding. All shares
of Common Stock (or Other Securities) shall be duly authorized and, when issued
upon such exercise, shall be validly issued and, in the case of shares, fully
paid and nonassessable with no liability on the part of the holders thereof.
10. REPURCHASES OF STOCK. The Company shall not repurchase any shares
of Common Stock (or Other Securities) if as a result thereof the exercisability
of the Warrant may be impaired, restricted or otherwise limited.
11. LISTING ON SECURITIES EXCHANGES. The Company shall list on each
national securities exchange on which any Common Stock may at any time be
listed, and shall maintain such listing of, all shares of Common Stock from time
to time issuable upon the exercise of the Warrant, subject to official notice of
issuance upon the exercise of the Warrant. The Company shall also so list on
each national securities exchange, and shall maintain such listing of, any Other
Securities, if at the time any securities of the same class shall be listed on
such national securities exchange by the Company. In addition, at the request of
the Purchaser, the Company shall list on each national securities exchange on
which any Common Stock may at any time be listed, and shall maintain such
listing of, the Warrant.
12. OWNERSHIP, TRANSFER AND SUBSTITUTION OF THE WARRANT. 12.1.
OWNERSHIP OF WARRANT. The Company may treat the Person in whose name the
Warrant, or any Warrant or Warrants issued in substitution therefor, is
registered on the register kept at the principal office of the Company as the
owner and the Holder thereof for all purposes, notwithstanding any notice to the
contrary, except that, if and when any Warrant is properly assigned in blank,
the Company may (but shall not be obligated to) treat the bearer thereof as the
owner of such Warrant for all purposes, notwithstanding any notice to the
contrary. Subject to Section 6, a Warrant, if properly assigned, may be
exercised by a new Holder without first having a new Warrant issued.
12.2. TRANSFER AND EXCHANGE OF THE WARRANT. Upon the surrender
of the Warrant, properly endorsed, for registration of transfer or for exchange
at the principal office of the Company, the Company at its expense shall
(subject to compliance with Section 6, if applicable) execute and deliver to or
upon the order of the Holder thereof a new Warrant or Warrants of like tenor, in
the name of such Holder or as such Holder
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(upon payment by such Holder of any applicable transfer taxes) may
direct, calling in the aggregate on the face or faces thereof for the number of
shares of Common Stock called for on the face or faces of the Warrant or
Warrants so surrendered.
12.3. REPLACEMENT OF THE WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant
held by a Person other than the Purchaser, upon delivery of indemnity reasonably
satisfactory to the Company in form and amount or, in the case of any such
mutilation, upon surrender of such Warrant for cancellation at the principal
office of the Company, the Company at its expense shall execute and deliver, in
lieu thereof, a new Warrant of like tenor.
13. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
1998 INVESTMENT AGREEMENT: the meaning specified in the second
paragraph of the Warrant.
1999 INVESTMENT AGREEMENT: the meaning specified in the second
paragraph of the Warrant.
ADDITIONAL SHARES OF COMMON STOCK: all shares (including treasury
shares but excluding Contingent Stock) of Common Stock issued or sold by the
Company after the Closing Date, whether or not subsequently reacquired or
retired by the Company, other than (I) shares of Common Stock issued upon the
exercise of the Warrant and the Special Warrant; (II) shares issued or sold
pursuant to the exercise or conversion of options, warrants, convertible
securities, or other rights that were disclosed on the Revised Option Schedule;
(III) shares issued or sold to the Company's Employee Stock Purchase Plan, or
any successor plan thereto, to the extent such shares are issued or sold at a
purchase price not less than 85% of the Market Price; (IV) shares issued or sold
to Purchaser or its Affiliates; or (V) shares issued upon the conversion of, or
for the purchase of, any 2001 Notes or the 2003 Notes outstanding immediately
following the Distributions; or (VI) shares issued upon the conversion of the
Preferred Shares.
AFFILIATE: with respect to any Person, any Person that directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person.
ASSETS: the meaning specified in Section 2.3.
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BENEFICIALLY OWN: with respect to any securities shall mean having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
BUSINESS DAY: any day other than a Saturday or a Sunday or a day on
which commercial banking institutions in the City of New York are authorized by
law to be closed, PROVIDED that, in determining the period within which
certificates or Warrants are to be issued and delivered pursuant to Section 1.3
at a time when shares of Common Stock (or Other Securities) are listed or
admitted to trading on any national securities exchange or in the
over-the-counter market and in determining the Market Price of any securities
listed or admitted to trading on any national securities exchange or in the
over-the-counter market, "Business Day" shall mean any day when the principal
exchange in which securities are then listed or admitted to trading is open for
trading or, if such securities are traded in the over-the-counter market in the
United States, such market is open for trading, and PROVIDED FURTHER that any
reference to "days" (unless Business Days are specified) shall mean calendar
days.
BUYOUT TRANSACTION: a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such holder for the same consideration.
CLOSING DATE: the meaning specified in the second paragraph of the
Warrant.
COMMISSION: the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act or the Exchange Act,
whichever is the relevant statute for the particular purpose.
COMMON STOCK: the Company's Common Stock, as constituted on the date
hereof, any stock into which such Common Stock shall have been changed or any
stock resulting from any reclassification of such Common Stock, and all other
stock of any class or classes (however designated) of the Company the holders of
which have the right, without limitation as to amount, either to all or to a
share of the balance of current
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dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference.
COMPANY: the meaning specified in the opening paragraphs of the
Warrant.
CONTINGENT STOCK: shares of Common Stock issued after the Closing Date
pursuant to (I) the Amendment to Stock Purchase Agreement, dated as of June 20,
1996, by and between the Company and Eric Watson, as the same may be amended
from time to time, or (II) any security, option, warrant, call, subscription,
right, contract, commitment, arrangement or understanding in existence on
January 12, 1998 or June 10, 1998 but not disclosed on the Revised Option
Schedule.
CONVERTIBLE SECURITIES: any evidences of indebtedness (other than 2001
Notes and 2003 Notes), shares of stock (other than Common Stock) or other
securities directly or indirectly convertible into or exchangeable for
Additional Shares of Common Stock.
EXCHANGE ACT: the Securities Exchange Act of 1934, or any successor
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time. Reference to a particular section of the
Securities Exchange Act of 1934 shall include a reference to the comparable
section, if any, of any such successor statute.
EXERCISE PRICE: the meaning specified in Section 1.1.
HOLDER: the meaning specified in Section 1.1.
INITIAL EXERCISE SHARES: the meaning specified in the opening
paragraphs of the Warrant.
INVESTMENT AGREEMENT: the meaning specified in the second paragraph of
the Warrant.
MARKET PRICE: on any date specified herein, (A) in the case of
securities that have an existing public trading market, the amount per security
equal to (I) the last sale price of such security, regular way, on such date or,
if no such sale takes place on such date, the average of the closing bid and
asked prices thereof on such date, in each case as officially reported on the
principal national securities exchange on which the same are then listed or
admitted to trading, or (II) if no such security is then listed or admitted
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to trading on any national securities exchange but such security is
designated as a national market system security by the NASD, the last trading
price of such security on such date, or if such security is not so designated,
the average of the reported closing bid and asked prices thereof on such date as
shown by the NASD automated quotation system or, if no shares thereof are then
quoted in such system, as published by the National Quotation Bureau,
Incorporated or any successor organization, and in either case as reported by
any member firm of the New York Stock Exchange selected by the Company, and (B)
in the case of securities that do not have an existing public trading market and
in the case of other property, the higher of (I) the book value thereof as
determined by agreement between the Company and the Holder, or if the Company
and the Holder fail to agree, by any firm of independent public accountants of
recognized standing selected by the Board of Directors of the Company, as of the
last day of any month ending within 60 days preceding the date as of which the
determination is to be made and (II) the fair value thereof (W) determined by an
agreement between the Company and the Holder or (X) if the Company and the
Holder fail to agree, determined jointly by an independent investment banking
firm retained by the Company and by an independent investment banking firm
retained by the Holder, either of which firms may be an independent investment
banking firm regularly retained by the Company or the Holder or (Y) if the
Company or the Holder shall fail so to retain an independent investment banking
firm within five Business Days of the retention of such firm by the Holder or
the Company, as the case may be, determined solely by the firm so retained or
(Z) if the firms so retained by the Company and by the Holder shall be unable to
reach a joint determination within 15 Business Days of the retention of the last
firm so retained, determined by another independent investment banking firm
chosen by the first two such firms and which is not a regular investment banking
firm of the Company or the Holder.
NASD: the National Association of Securities Dealers, Inc.
NON-INVESTOR DIRECTOR: any member of the Board of Directors not
nominated by the Purchaser pursuant to Article IV of the Investment Agreement.
OTHER SECURITIES: any stock (other than Common Stock) and other
securities of the Company or any other Person (corporate or otherwise) which the
Holder at any time shall be entitled to receive, or shall have received, upon
the exercise of the Warrant, in lieu of or in addition to Common Stock, or which
at any time shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or other securities pursuant to Section 2.9 or
otherwise.
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PERSON: an individual, a partnership, an association, a joint venture,
a corporation, a business, a trust, an unincorporated organization or a
government or any department, agency or subdivision thereof.
PREFERRED SHARES: the shares of Series A Non-Voting Participating
Convertible Preferred Stock purchased by Purchaser pursuant to the 1999
Investment Agreement.
PREFERRED STOCK: the shares of preferred stock of the Company, par
value $.001 per share.
PUBLIC OFFERING: any offering of Common Stock to the public pursuant
to an effective registration statement under the Securities Act.
PURCHASER: the meaning specified in the first paragraph of the
Warrant.
REGISTRATION RIGHTS AGREEMENT: the meaning specified in Section 7 of
the Warrant.
RESTRICTED SECURITIES: (A) any Warrants bearing the applicable legend
set forth in Section 6(f), (B) any shares of Common Stock (or Other Securities)
which have been issued upon the exercise of Warrants and which are evidenced by
a certificate or certificates bearing the applicable legend set forth in such
section, and (C) unless the context otherwise requires, any shares of Common
Stock (or Other Securities) which are at the time issuable upon the exercise of
Warrants and which, when so issued, shall be evidenced by a certificate or
certificates bearing the applicable legend set forth in such section.
REVISED OPTION SCHEDULE: the schedule, dated June 10, 1998 and
delivered to the Purchaser on such date, listing options, warrants, convertible
securities and other rights relating to capital stock of the Company.
SECURITIES ACT: the Securities Act of 1933, or any successor statute,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect at the time. Reference to a particular section of the
Securities Act of 1933 shall include a reference to the comparable section, if
any, of any such successor statute.
SPECIAL WARRANT: the Common Stock Purchase Special Warrant issued
pursuant to the 1999 Investment Agreement.
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SUBSIDIARY: as to any Person, any corporation at least a majority of
the shares of stock of which having general voting power under ordinary
circumstances to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency) is, at the time as of which the determination is being made, owned
by such Person, or one or more of its Subsidiaries or by such Person and one or
more of its Subsidiaries.
"THIRD-PARTY BID" means an unsolicited bona fide tender offer or other
public offer by a Person other than Purchaser, an Affiliate thereof or the
Company or any of its Subsidiaries (a "THIRD PARTY") to purchase a number of
shares of Common Stock which, together with the shares of Common Stock
Beneficially Owned by such Third Party, would result in the Third Party being
the Beneficial Owner of 25% or more of the shares of Common Stock outstanding.
TOTAL VOTING POWER: at any time the total combined voting power in the
general election of directors of all the Voting Securities then outstanding.
TRANSACTION: the meaning specified in Section 2.9.
TRANSFER: unless the context otherwise requires, any sale, assignment,
pledge or other disposition of any security, or of any interest therein, which
could constitute a "sale" as that term is defined in Section 2(3) of the
Securities Act.
2001 NOTES: 5 1/2% convertible subordinated notes due 2001 issued
pursuant to an Indenture, dated as of February 7, 1996, between the Company and
State Street Bank and Trust Company.
2003 NOTES: 5 1/2% convertible subordinated notes due 2003 issued
pursuant to an Indenture, dated as of May 22, 1996, between the Company and
Chase Manhattan Bank, N.A.
VOTING SECURITIES: at any time shares of any class of capital stock of
the Company which are then entitled to vote generally in the election of
directors.
WARRANT: the meaning specified in the second paragraph of the Warrant.
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WARRANT PRICE: the meaning specified in Section 2.1.
WARRANT SHARES: the shares of Common Stock (and Other Securities)
issuable upon exercise of the Warrant.
14. REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of the Warrant are not and
shall not be adequate and that, to the fullest extent permitted by law, such
terms may be specifically enforced by a decree for the specific performance of
any agreement contained herein or by an injunction against a violation of any of
the terms hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained in the
Warrant shall be construed as conferring upon the Holder hereof any rights as a
stockholder of the Company or as imposing any liabilities on such Holder to
purchase any securities or as a stockholder of the Company, whether such
liabilities are asserted by the Company or by creditors or stockholders of the
Company or otherwise.
16. NOTICES. All notices and other communications under the Warrant,
except notices of the exercise of any Warrant (which shall be effected in the
manner provided in Section 1), shall be in writing and shall be mailed by
registered or certified mail, return receipt requested, addressed as follows or
to such other address as such party may have designated to the other in writing:
(a) if to the Purchaser, to it at:
CDR-PC Acquisition, L.L.C.
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware 19803
27
<PAGE>
with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention: Brian D. Finn
Telecopy No.: (212) 893-7061
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Franci J. Blassberg
Telecopy No.: (212) 909-6836
(b) if to any other Holder or any holder of any Common Stock (or Other
Securities), at the registered address of such Holder as set forth in
the register kept at the principal office of the Company,
or
(c) if to the Company, to it at:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: Mark D. Director
Telecopy No.: (202) 339-6727
28
<PAGE>
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention: George P. Stamas
Telecopy No.: (202) 663-6363
17. MISCELLANEOUS. The Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The agreements of the Company contained in the Warrant other than
those applicable solely to the Warrant and the Holder thereof shall inure to the
benefit of and be enforceable by any Holder or Holders at the time of any shares
of Common Stock (or Other Securities) issued upon the exercise of the Warrant,
whether so expressed or not. THE WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO ITS PRINCIPLES OR RULES OF CONFLICT OF LAWS TO THE EXTENT SUCH
PRINCIPLES OR RULES WOULD REQUIRE OR PERMIT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION). The section headings in the Warrant are for purposes of
convenience only and shall not constitute a part hereof.
18. EXPIRATION; NOTICE. The Company shall give the Holder no less than
45 days' nor more than 90 days' notice of the expiration of the right to
exercise the Warrant. The right to exercise the Warrant shall expire at 5:00
P.M., New York City time, on June 10, 2010, unless the Company shall fail to
give such notice as aforesaid, in which event the right to exercise the Warrant
shall not expire until 5:00 P.M., New York City time, on a date 45 days after
the date on which the Company shall give the Holder hereof notice of the
expiration of the right to exercise the Warrant.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Mark D. Director
--------------------------------
Name: Mark D. Director
Title: Executive Vice President
Administration, General
Counsel and Secretary
29
<PAGE>
FORM OF SUBSCRIPTION
(To be executed only upon exercise of Warrant)
To: U.S. Office Products Company
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant for, and purchases thereunder,
________* shares of Common Stock of U.S. Office Products Company, and
herewith makes payment [of $ ]** [by application, pursuant to
Section 1.1(b) of such Warrant, of [a portion of] the Warrant representing
a right to purchase ________* shares of Common Stock],*** and requests
that the certificates for such shares be issued in the name of, and
delivered to ______________ whose address is __________.
Dated: ______________
[HOLDER]****
- -------------------------
* Insert here the number of shares called for on the face of the Warrant
(or, in the case of a partial exercise, the portion thereof as to
which the Warrant is being exercised), in either case without making
any adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment
provisions of the Warrant, may be delivered upon exercise. In the case
of a partial exercise, a new Warrant or Warrants shall be issued and
delivered, representing the unexercised portion of the Warrant, to the
holder surrendering the same.
** Delete inapplicable language in brackets.
*** Delete inapplicable language in brackets.
**** Signature must conform in all respects to name of holder as specified
on the face of the Warrant.
30
<PAGE>
[Address]
By
---------------------------
Name:
Title:
31
<PAGE>
FORM OF ASSIGNMENT
(To be executed only upon transfer of Warrant)
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto ________________ the right
represented by such Warrant to purchase ______ shares of Common Stock of U.S.
Office Products Company to which such Warrant relates, and appoints ___________
Attorney to make such transfer on the books of U.S. Office Products Company
maintained for such purpose, with full power of substitution in the premises.
Dated:
-------------------
[HOLDER]*****
[Address]
By
-------------------------
Name:
Title:
Signed in the presence of:
- --------------------------
- --------------------------
***** Signature must conform in all respects to name of holder as specified on
the face of the Warrant.
32
<PAGE>
EXHIBIT 4.6
THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY
AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
U.S. Office Products Company
Common Stock Purchase Special Warrant
Expiring June 10, 2010
New York, N.Y.
April 23, 1999
No. SW-002
U.S. Office Products Company, a Delaware corporation (the
"Company"), for value received, hereby certifies that CDR-PC Acquisition,
L.L.C., a Delaware limited liability company (the "Purchaser"), or its permitted
assigns, is entitled to purchase from the Company 109,328 duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock, par value
$.001 per share, of the Company (the "Common Stock") at the purchase price of
$.01 per share, at any time or from time to time prior to 5:00 P.M., New York
City time, on June 10, 2010 (or such later date as may be determined pursuant to
Section 18) (the "Expiration Date"), all subject to the terms, conditions and
adjustments set forth below in this Warrant.
This Warrant is the amended and restated Common Stock Purchase
Special Warrant (the "Special Warrant", such term to include all Warrants issued
in substitution therefor), originally issued on June 10, 1998 (the "Closing
Date") in connection with the issue and sale by the Company of 9,092,106 shares
of its Common Stock pursuant to an Investment Agreement, dated as of January 12,
1998, between the Company and the Purchaser (as amended, the "1998 Investment
Agreement"), as amended and restated pursuant to the terms of an Investment
Agreement, dated as of March 30, 1999, between the Company and the Purchaser
(the "1999 Investment
<PAGE>
Agreement"). This Special Warrant as amended and restated evidences rights to
purchase 109,328 duly authorized, validly issued, fully paid and nonassessable
shares of Common Stock, par value $.001 per share, subject to adjustment as
provided herein. The number of shares of Common Stock that the Special Warrant
represents the right to purchase is the sum of the Part A Number and the Part B
Number. Upon issuance of the Special Warrant, the Part A Number is 109,328 and
the Part B Number is zero. Certain capitalized terms used in the Special Warrant
are defined in Section 13.
1. EXERCISE OF WARRANT. 1.1. VESTING. Upon issuance, the
Special Warrant shall be fully vested except that the holder of the Special
Warrant or any portion of hereof (the "Holder") shall not exercise more than the
portion of the Special Warrant representing a right to obtain a number of shares
of Common Stock equal to the Part B Number. If, at any time after the date
hereof and before the day immediately following the second anniversary of the
Closing Date, any of the 2001 Notes shall be converted into Common Stock, then
immediately following such conversion the Part A Number shall be decreased by
33.16% of the number of shares of Common Stock issued upon such conversion and
the Part B Number shall be increased by a like amount. As of the day immediately
following the second anniversary of the Closing Date, the Part B Number shall be
the sum of the Part A Number and the Part B Number existing immediately prior to
such time, and the Part A Number shall thereafter be zero.
1.2. MANNER OF EXERCISE. (a) Subject to the rights and
restrictions set forth above in Section 1.1, the Special Warrant may be
exercised by the Holder, in whole or in part, during normal business hours on
any Business Day by surrender of the Special Warrant, with the form of
subscription at the end hereof (or a reasonable facsimile thereof) (the
"Subscription Notice") duly executed by such Holder, to the Company at its
principal office (or, if such exercise shall be in connection with an
underwritten Public Offering of shares of Common Stock (or Other Securities)
subject to the Special Warrant, at the location at which the Company shall have
agreed to deliver the shares of Common Stock (or Other Securities) subject to
such offering), accompanied by payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount (such amount referred
to herein as the "Exercise Price") obtained by multiplying (i) the number of
shares of Common Stock (without giving effect to any adjustment provided for in
Section 2) designated in such Subscription Notice by (ii) $0.01, and such Holder
shall thereupon be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock (or Other
Securities) determined as provided in Section 2 hereof.
<PAGE>
(b) In lieu of tendering the Exercise Price to the Company,
the holder may elect to perform a "Cashless Exercise" of the Special Warrant, in
whole or in part, by surrendering the Special Warrant to the Company, with a
duly executed Subscription Notice marked "Cashless Exercise" and designating the
number of shares of Common Stock desired by the Holder out of the total for
which the Special Warrant is exercisable (without giving effect to any
adjustments provided for in Section 2). The Holder shall thereupon be entitled
to receive the number of duly authorized, validly issued, fully paid and
nonassessable shares of Common Stock (or Other Securities) having a value (at
the Market Price) that is equal to the excess of (i) the then Market Price per
share of Common Stock (or Other Securities) multiplied by the number of the
shares of Common Stock (or Other Securities) (determined as of the date
immediately preceding the date of any such Subscription Notice) into which the
Special Warrant, or portion thereof designated by the Holder, would have been
exercisable pursuant to Section 1.2(a) upon payment of the Exercise Price by the
Holder over (ii) the Exercise Price the Holder would have been required to pay
under Section 1.2(a) in respect of such an exercise.
1.3. WHEN EXERCISE DEEMED EFFECTED. Each exercise of the
Special Warrant shall be deemed to have been effected immediately prior to the
close of business on the Business Day on which the Special Warrant shall have
been surrendered to the Company as provided in Section 1.2, and at such time the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock (or Other Securities) shall be issuable upon such
exercise as provided in Section 1.2 shall be deemed to have become the holder or
holders of record thereof.
1.4. DELIVERY OF STOCK CERTIFICATES, ETC. As soon as
practicable after the exercise of the Special Warrant, in whole or in part, and
in any event within five Business Days thereafter (unless such exercise shall be
in connection with an underwritten Public Offering of shares of Common Stock (or
Other Securities) subject to the Special Warrant, in which event, concurrently
with such exercise), the Company at its expense (including the payment by it of
any taxes applicable to an issuer upon the issuance of shares, but excluding
transfer taxes) shall cause to be issued in the name of and delivered to the
Holder or, subject to Section 6, as such Holder (upon payment by such Holder of
any applicable transfer taxes) may direct,
(a) a certificate or certificates for the number of duly
authorized, validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be
entitled upon such exercise plus, in lieu of any fractional share to
which such Holder would otherwise be entitled, cash in an amount equal
to the same fraction of the Market Price per share of such Common
<PAGE>
Stock (or Other Securities) on the Business Day next preceding the date
of such exercise, and
(b) in case such exercise is in part only, a new Special
Warrant or Special Warrants of like tenor, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock
equal (without giving effect to any adjustment therein) to the number
of such shares called for on the face of the Special Warrant minus the
number of such shares designated by the Holder upon such exercise as
provided in Section 1.1.
1.5. COMPANY TO REAFFIRM OBLIGATIONS. The Company shall, at
the time of or at any time after each exercise of the Special Warrant, upon the
request of the Holder, acknowledge in writing its continuing obligation to
afford to such Holder all rights (including, without limitation, any right of
registration of the Special Warrant and of any shares of Common Stock (or Other
Securities) issuable upon exercise of the Special Warrant pursuant to Section 7)
to which such Holder shall continue to be entitled after such exercise in
accordance with the terms of the Special Warrant, PROVIDED that if any such
Holder shall fail to make any such request, the failure shall not affect the
continuing obligation of the Company to afford such rights to such Holder.
2. ADJUSTMENTS. 2.1. GENERAL. The Part A Number and the Part B
Number, comprising the number of shares of Common Stock for which the Special
Warrant is exercisable, shall be subject to adjustment from time to time as set
forth in this Section 2.
2.2. ADJUSTMENT TO PART A NUMBER. (a) If at any time prior to
the day immediately following the second anniversary of the Closing Date any
event causes the number of shares of Common Stock issuable upon conversion of
the then outstanding 2001 Notes to be increased, then the Part A Number
immediately after such increase shall be increased by the amount equal to 33.16%
of the difference between (i) the number of shares of Common Stock issuable upon
conversion of the 2001 Notes immediately prior to such event and (ii) the number
of shares of Common Stock issuable upon conversion of the 2001 Notes immediately
after such event.
(b) If at any time prior to the day immediately following the
second anniversary of the Closing Date any combination of the outstanding shares
of Common Stock into a smaller number of shares of Common Stock causes the
number of shares of Common Stock issuable upon conversion of the then
outstanding 2001 Notes to be decreased, then the Part A Number immediately after
such decrease shall be decreased by
<PAGE>
the amount equal to 33.16% of the difference between (i) the number of shares
of Common Stock issuable upon conversion of the 2001 Notes immediately after
such combination and (ii) the number of shares of Common Stock issuable upon
conversion of the 2001 Notes immediately prior to such combination.
(c) No adjustment to the Part A Number shall be made pursuant
to Section 2.2 after the second anniversary of the Closing Date.
2.3. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If at any
time the Company shall:
(i) issue or deliver any shares of Common Stock as a result of
the declaration or payment of a dividend of Common Stock payable in, or
other distribution to the holders of Common Stock of, shares of Common
Stock,
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the Part B Number shall be adjusted to equal the number of shares of Common
Stock which a record holder of the same number of shares of Common Stock for
which the Special Warrant is exercisable immediately prior to the happening of
such event would own or be entitled to receive after the happening of such
event.
2.4. EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS. If at any time
the Company shall distribute to all holders of its outstanding Common Stock
evidences of indebtedness of the Company, cash (other than a regular quarterly
dividend payable in cash out of earned surplus in an amount not exceeding 2% of
the average of the Market Price of the Common Stock on the fifteen trading days
immediately preceding the date of declaration of such dividend) or assets or
securities other than the Common Stock (any such evidences of indebtedness,
cash, assets or securities, the "Assets"), then, in each case, the Part B Number
then in effect shall be increased to the number determined by multiplying such
Part B Number by a fraction,
(a) the numerator of which shall be the Market Price then in
effect, and
(b) the denominator of which shall be the Market Price then in
effect less the value of such Assets applicable to one share of Common
Stock.
<PAGE>
Any adjustment required by this Section 2.4 shall be made
whenever such distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
2.5. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
(a) If at any time the Company shall (except as hereinafter
provided) issue or sell any Additional Shares of Common Stock without
consideration or in exchange for consideration in an amount per Additional Share
of Common Stock less than the Market Price at the time the Additional Shares of
Common Stock are issued, then the Part B Number immediately after such issuance
shall be equal to the Part B Number immediately prior to such issuance
multiplied by a fraction,
(i) the numerator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale, and
(ii) the denominator of which shall be the sum of (x) the
number of shares of Common Stock outstanding immediately prior to such
issue or sale plus (y) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
such Additional Shares of Common Stock so issued or sold would purchase
at the Market Price.
(b) The provisions of paragraph (a) of this Section 2.5 shall
not apply to any issuance of Additional Shares of Common Stock for which an
adjustment is provided under Section 2.3.
2.6. ISSUANCE OF CONTINGENT STOCK. If at any time after the
date hereof the Company shall issue any Contingent Stock, then the Part B Number
immediately after such issuance shall be increased by the amount equal to 33.16%
of the number of the shares of Contingent Stock so issued.
2.7. ISSUANCE OF WARRANTS OR OTHER RIGHTS. If at any time the
Company shall take a record of holders of Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Shares of Common Stock or any Convertible Securities,
whether or not such rights thereunder are immediately exercisable, and the price
per share for which Common Stock is issuable upon the
<PAGE>
exercise of such warrants or other rights or upon conversion or exchange of such
Convertible Securities shall be less than the Market Price in effect immediately
prior to the time of such issue or sale, then the Part B Number shall be
adjusted as provided in Section 2.5 on the basis that the maximum number of
shares of Common Stock issuable pursuant to all such warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and the Company
shall have received all of the consideration payable therefor, if any, as of the
date of the actual issuance of such warrants or other rights. No further
adjustments of the Part B Number shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon exercise of such warrants or
other rights or upon the actual issuance of such Common Stock upon such
conversion or exchange of such Convertible Securities.
2.8. ISSUANCE OF CONVERTIBLE SECURITIES. If at any time the
Company shall take a record of the holders of Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange shall be less than the Market Price in effect immediately prior to the
time of such issue or sale, then the Part B Number shall be adjusted as provided
in Section 2.5 on the basis that the maximum number of shares of Common Stock
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued and outstanding and the Company
shall have received all of the consideration payable therefor, if any, as of the
date of actual issuance of such Convertible Securities. No adjustment of the
Part B Number shall be made under this Section 2.8 upon the issuance of any
Convertible Securities which are issued pursuant to the exercise of any warrants
or other subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights
pursuant to Section 2.7. No further adjustments of the Part B Number shall be
made upon the actual issuance of such Common Stock upon conversion or exchange
of such Convertible Securities, and, if any issuance or sale of such Convertible
Securities is made upon exercise of any warrant or other right to subscribe for
or to purchase or any warrant or other right to purchase any such Convertible
Securities for which adjustments of the Part B Number have been or are to be
made pursuant to other provisions of this Section 2, no further adjustments of
the Part B Number shall be made by reason of such issuance or sale.
<PAGE>
2.9. SUPERSEDING ADJUSTMENT. If, at any time after any
adjustment of the number of shares of Common Stock for which the Warrant is
exercisable shall have been made pursuant to Section 2.7 or 2.8 as the result of
any issuance of warrants, rights or Convertible Securities,
(i) such warrants or rights, or the right of conversion or
exchange in such other Convertible Securities, shall expire, and all or
a portion of such warrants or rights, or the right of conversion or
exchange with respect to all or a portion of such other Convertible
Securities, as the case may be, shall not have been exercised, or
(ii) the consideration per share for which shares of Common
Stock are issuable pursuant to such warrants or rights, or the terms of
such other Convertible Securities, shall be increased solely by virtue
of provisions therein contained for an automatic increase in such
consideration per share upon the occurrence of a specified date or
event,
then such previous adjustment shall be rescinded and annulled and the shares of
Common Stock which were deemed to have been issued by virtue of the computation
made in connection with the adjustment so rescinded and annulled shall no longer
be deemed to have been issued by virtue of such computation. Thereupon, a
recomputation shall be made of the effect of such rights or options or other
Convertible Securities effective as of the date of such previous adjustment on
the basis of
(A) treating the number of shares of Common Stock or other
property, if any, theretofore actually issued or issuable pursuant to
the previous exercise of any such warrants or rights or any such right
of conversion or exchange, as having been issued on the date or dates
of any such exercise and for the consideration actually received and
receivable therefor, and
(B) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for which shares of Common Stock or other
property are issuable under such warrants or rights or other
Convertible Securities,
whereupon a new adjustment of the number of shares of Common Stock for which the
Special Warrant is exercisable shall be made effective as of the date of such
previous adjustment, which new adjustment shall supersede the previous
adjustment so rescinded
<PAGE>
and annulled. Any reduction in the number of shares of Common Stock for which
the Special Warrant is exercisable as a result of this Section 2.9 shall be
applied in its entirety to the number of shares of Common Stock for which the
Special Warrant is exercisable as of the date such new adjustment is made.
2.10. CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION,
ETC. (a) In case at any time (and whether or not the Special Warrant is then
exercisable) the Company shall be a party to any transaction (including without
limitation a merger, consolidation, sale of all or substantially all of the
Company's assets or recapitalization of the Common Stock) in which the
previously outstanding Common Stock shall be changed into or exchanged for
different securities of the Company or changed into or exchanged for common
stock or other securities of another corporation or interests in a noncorporate
entity or other property (including cash) or any combination of any of the
foregoing (each such transaction being hereinafter referred to as the
"Transaction") then, as a condition to the consummation of the Transaction,
lawful and adequate provisions shall be made so that, upon the basis and terms
and in the manner provided in this Section 2.10, the Holder, upon the exercise
of the Special Warrant, shall be entitled to receive, in lieu of the Common
Stock issuable upon such exercise prior to such consummation, the stock and
other securities, cash and property to which the Holder would have been entitled
upon the consummation of the Transaction if the Holder had exercised the Special
Warrant immediately prior thereto, subject to adjustments (subsequent to such
consummation) as nearly equivalent as possible to the adjustments provided for
in Section 2.
(b) Notwithstanding anything contained herein to the contrary,
the Company will not effect any Transaction unless, prior to the consummation
thereof, each corporation or entity (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the exercise of
the Special Warrant as provided herein shall assume, by written instrument
delivered to, and reasonably satisfactory to, the Holder, (i) the obligations of
the Company hereunder (and if the Company shall survive the consummation of such
Transaction, such assumption shall be in addition to, and shall not release the
Company from, any continuing obligations of the Company hereunder) and (ii) the
obligation to deliver to the Holder such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions, the Holder may be
entitled to receive, and such corporation or entity shall have similarly
delivered to the Holder an opinion of counsel for such corporation or entity,
which counsel shall be satisfactory to the Holder, stating that the Special
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the applicable provisions of Section 2)
shall be applicable to the stock, securities, cash or property
<PAGE>
which such corporation or entity may be required to deliver upon any
conversion of any Special Warrants or the exercise of any rights pursuant
hereto.
(c) Upon any liquidation, dissolution or winding up of the
Company (whether or not the Special Warrant is then exercisable), the Holder
shall receive such cash or property which the Holder would have been entitled to
receive upon the happening of such liquidation, dissolution or winding up (i)
had the Special Warrant been exercisable to obtain a number of shares equal to
the sum of (A) the sum of the Part A Number and the Part B Number and (B) 33.16%
of the number of shares of Contingent Stock that the Company then has a fixed
obligation to issue (to the extent the Persons entitled to receive such
Contingent Stock will participate in such liquidation, dissolution or winding up
as a result of such obligation), to the extent not already included in clause
(A), (ii) had the Special Warrant been exercised in full in respect of such
shares, and (iii) had the shares of Common Stock in respect of such exercise
been issued immediately prior to the occurrence of such liquidation, dissolution
or winding-up.
2.11. OTHER DILUTIVE EVENTS. In case any event shall occur as
to which the provisions of Section 2 are not strictly applicable but the failure
to make any adjustment would not fairly protect the exercise rights with respect
to the Special Warrant in accordance with the essential intent and principles of
such Section, then, in each such case, the Company shall appoint a firm of
independent certified public accountants of recognized national standing (which
may be the regular auditors of the Company), which shall give their opinion upon
the adjustment, if any, on a basis consistent with the essential intent and
principles established in Section 2, necessary to preserve, without dilution,
the exercise rights represented by the Special Warrant. Upon receipt of such
opinion, the Company will promptly mail a copy thereof to the Holder of the
Special Warrant and shall make the adjustments, if any, described therein.
2.12. NO DILUTION OR IMPAIRMENT. The Company will not, by
amendment of its certificate of incorporation or through any consolidation,
merger, reorganization, transfer of assets, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms hereof, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be reasonably necessary or appropriate in order to protect the
rights of the Holders of the Special Warrant against dilution in respect of
which the Holders are not fully protected by this Section 2 or other impairment.
Without limiting the generality of the foregoing, the Company
<PAGE>
(a) will not permit the par value of any shares of Common
Stock receivable upon the exercise of the Special Warrant to exceed the
amount payable therefor upon such exercise,
(b) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock on the exercise of the
Special Warrant from time to time outstanding,
(c) will not take any action which results in any adjustment
of the number of shares of Common Stock for which the Special Warrant
is then exercisable if the total number of shares of Common Stock (or
Other Securities) issuable after such action upon the complete exercise
of the Special Warrant would exceed the total number of shares of
Common Stock (or Other Securities) then authorized by the Company's
certificate of incorporation and available for the purpose of issue
upon such exercise, and
(d) will not (i) issue any equity securities (other than
Common Stock or Convertible Securities) that participate with the
shares of Common Stock in dividends, distributions and/or other rights
("Other Dilutive Securities"), or (ii) declare or make dividends or
distributions (whether of evidences of indebtedness of the Company,
cash, assets or securities, including, without limitation, options,
warrants or other rights to acquire Common Stock) in respect of any
Other Dilutive Securities or Convertible Securities, unless, in each
case, this Section 2 is first amended so as to provide the Holders of
the Special Warrant with full protection against dilution caused by or
resulting from such issuances, dividends or distributions.
2.13. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
SECTION 2. The following provisions shall be applicable to the making of
adjustments to the number of shares of Common Stock for which the Special
Warrant is exercisable provided for in this Section 2:
(i) COMPUTATION OF CONSIDERATION. To the extent that any
shares of Common Stock or any Convertible Securities or any warrants or
other rights to subscribe for or purchase any shares of Common Stock or
any Convertible Securities shall be issued for cash consideration, the
cash consideration received by the Company therefor shall be the amount
of the cash received by the Company therefor, or, if such shares of
Common Stock or Convertible Securities
<PAGE>
are offered by the Company for subscription, the subscription price,
or, if such shares of Common Stock or Convertible Securities are sold
to underwriters or dealers for public offering without a subscription
offering, the initial public offering price (in any such case
subtracting (A) any amounts paid or receivable for accrued interest or
accrued dividends and without taking into account (B) any compensation,
discounts or expenses paid or incurred by the Company for and in the
underwriting of, or otherwise in connection with, the issuance
thereof). To the extent that such issuance shall be for a consideration
other than cash, then, except as herein otherwise expressly provided,
the amount of such consideration shall be deemed to be fair value of
such consideration at the time of such issuance as determined by the
Board of Directors of the Company. In case any shares of Common Stock
or any Convertible Securities or any warrants or other rights to
subscribe for or purchase such shares of Common Stock or Convertible
Securities shall be issued in connection with any merger in which the
Company issues any securities, the amount of consideration therefor
shall be deemed to be the fair value, as determined by an independent
investment banking firm retained by the Company, which firm may be an
independent investment banking firm regularly retained by the Company,
of such portion of the assets and business of the nonsurviving
corporation as such firm shall determine to be attributable to such
shares of Common Stock, Convertible Securities, warrants or other
rights, as the case may be. The consideration for any shares of Common
Stock issuable pursuant to any warrants or other rights to subscribe
for or purchase the same shall be the consideration received by the
Company for issuing such warrants or other rights plus the additional
consideration payable to the Company upon exercise of such warrants or
other rights. The consideration for any shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration, if any, received by the Company for issuing warrants or
other rights to subscribe for or purchase such Convertible Securities,
plus the consideration paid or payable to the Company in respect of the
subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible
Securities. In case of the issuance at any time of any shares of Common
Stock or Convertible Securities in payment or satisfaction of any
dividends upon any class of stock other than Common Stock, the Company
shall be deemed to have received for such shares of Common Stock or
Convertible Securities a consideration equal to the amount of such
dividend so paid or satisfied.
<PAGE>
(ii) COMPUTATION OF ASSET VALUE. To the extent that any Assets
shall be distributed to all holders of the Company's outstanding Common
Stock in cash, the value of such Assets shall be the amount of cash so
distributed, or, if such Assets are securities offered by the Company
for subscription, the subscription price, or if such Assets are
securities sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price (in any such
case adding any accrued interest or dividends but without taking into
account any compensation, discounts or expenses paid or incurred by the
Company in connection therewith). To the extent that the Company shall
so distribute Assets other than cash, except as herein otherwise
expressly provided, then the value of such Assets shall be deemed to be
fair value of such Assets at the time of such distribution as
determined in good faith by the Board of Directors of the Company.
(iii) WHEN ADJUSTMENT TO BE MADE. The adjustments required by
this Section 2 shall be made whenever and as often as any specified
event requiring an adjustment shall occur, except that any adjustment
of the number of shares of Common Stock for which the Special Warrant
is exercisable that would otherwise be required may be postponed
(except in the case of a subdivision or combination of shares of the
Common Stock, as provided for in Section 2.2) up to but not beyond the
date of exercise if such adjustment either by itself or with other
adjustments not previously made adds or subtracts less than 1% of the
shares of Common Stock for which the Special Warrant is exercisable
immediately prior to the making of such adjustment. Any adjustment
representing a change of less than such minimum amount (except as
aforesaid) which is postponed shall be carried forward and made as soon
as such adjustment, together with other adjustments required by this
Section 2 and not previously made, would result in a minimum adjustment
or on the date of exercise. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.
(iv) FRACTIONAL INTEREST; ROUNDING. In computing adjustments
under this Section 2, fractional interests in Common Stock shall be
taken into account to the nearest 1/10th of a share.
(v) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a
record of the holders of its Common Stock or Preferred Stock for the
purpose of entitling them to receive subscription or purchase rights
and shall, thereafter and before the distribution to stockholders
thereof, legally abandon its plan to deliver such
<PAGE>
subscription or purchase rights, then no adjustment shall be required
by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
(vi) ESCROW OF WARRANT STOCK. If the Holder exercises the
Special Warrant after any property becomes distributable by reason of
the taking of any record of the holders of Common Stock as described in
this Section 2, but prior to the occurrence of the event for which such
record is taken, any shares of Common Stock issuable upon exercise by
reason of any adjustment required by this Section 2 shall be deemed the
last shares of Common Stock for which the Special Warrant is exercised
(notwithstanding any other provision to the contrary herein). Such
shares or other property shall be held in escrow for the Holder by the
Company to be issued to the Holder upon and to the extent that the
event actually takes place, upon payment of the Exercise Price.
Notwithstanding any other provision to the contrary herein, if the
event for which such record was taken fails to occur or is rescinded,
then such escrowed shares shall be cancelled by the Company and
escrowed property returned.
(vii) SHAREHOLDER RIGHTS PLANS. Rights or warrants distributed
by the Company to all holders of Common Stock and Preferred Stock
pursuant to a shareholder rights plan (or "poison pill") entitling the
holders thereof to subscribe for or purchase shares of the Company's
capital stock, which rights or warrants, until the occurrence of a
specified event or events (a "Trigger Event"), (x) are deemed to be
transferred with the Common Stock in respect of which they are issued,
(y) are not exercisable, and (z) are also issued in respect of future
issuances of Common Stock, shall be deemed not to have been distributed
for purposes of Section 2.7 and 2.8 (and no adjustment to the number of
shares issuable upon exercise of the Special Warrant under those
Sections shall be required) until the occurrence of the earliest
Trigger Event. If upon the occurrence of any event such right or
warrant becomes exercisable to purchase different securities, evidences
of indebtedness or other assets or entitles its holder to purchase a
different amount of the foregoing or to purchase any of the foregoing
at a different purchase price (an "Other Trigger Event"), then the
occurrence of each such Other Trigger Event shall be deemed to be the
date of issuance and Record Date with respect to a new right or warrant
(and a termination or expiration of the existing right or warrant
without exercise by the holder thereof to the extent not actually
exercised). In addition, in the event of any distribution (or deemed
distribution) of rights or warrants, or any Trigger Event or Other
Trigger Event with respect thereto, that resulted in an adjustment of
the number of shares issuable upon exercise of the Special Warrant
under
<PAGE>
Section 2.7 or 2.8, (1) in the case of any such rights or warrants
which shall have been redeemed or repurchased without exercise by the
holders thereof, the number of shares of Common Stock issuable upon
exercise of the Special Warrant shall be adjusted upon such redemption
or repurchase to give effect to such distribution, Trigger Event or
Other Trigger Event, as the case may be, as though it were an
extraordinary cash distribution equal to the per-share redemption or
repurchase price received by a holder of Common Stock with respect to
such rights or warrants (assuming such holder had retained such
rights), made to all holders of Common Stock on the date of such
redemption or repurchase, and (2) in the case of such rights or
warrants all of which shall have expired or been terminated without
exercise, the number of shares of Common Stock issuable upon exercise
of the Special Warrant shall be readjusted as if such rights or
warrants had never been issued.
3. NOTICE OF ADJUSTMENT. Whenever the number of shares of
Common Stock for which the Special Warrant is exercisable shall be adjusted
pursuant to Section 2, the Company shall forthwith prepare a certificate to be
executed by the chief financial officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment, the method by which the
adjustment was calculated, the number of shares of Common Stock for which the
Special Warrant is exercisable and the Exercise Price after giving effect to
such adjustment or change. The Company shall promptly cause a signed copy of
such certificate to be delivered to the Holder. The Company shall keep at the
office of the Company copies of all such certificates and cause the same to be
available for inspection during normal business hours by the Holder.
4. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS. In each case of
any adjustment or readjustment to the shares of Common Stock (or Other
Securities) issuable upon the exercise of the Special Warrant, the Company at
its expense shall promptly compute such adjustment or readjustment in
accordance with the terms of the Special Warrant and cause independent public
accountants of recognized national standing selected by the Company (which
may be the regular auditors of the Company) to verify such computation and
prepare a report setting forth such adjustment or readjustment and showing in
reasonable detail the method of calculation thereof and the facts upon which
such adjustment or readjustment is based, including without limitation a
statement of (a) the consideration received or to be received by the Company
for any shares of Common Stock issued or sold or deemed to have been issued,
and (b) the number of shares of Common Stock outstanding or deemed to be
outstanding. The Company shall forthwith mail a copy of each such report to
each Holder and shall, upon the written request at any time of any Holder,
furnish to such Holder a like report setting forth the number of shares of
<PAGE>
Common Stock for which the Special Warrant is then exercisable and showing in
reasonable detail how it was calculated. The Company shall also keep copies
of all such reports at its principal office and shall cause the same to be
available for inspection at such office during normal business hours by any
Holder or any prospective purchaser of the Special Warrant designated by the
Holder.
5. NOTICES OF CORPORATE ACTION. In the event of
(a) any taking by the Company of a record of the holders of
its Common Stock or Preferred Stock for the purpose of determining the
holders thereof who are entitled to receive any dividend payable in, or
other distribution of, shares of Common Stock, or any other dividend
(other than a regular quarterly dividend payable in cash out of earned
surplus in an amount not exceeding 2% of the average of the Market
Price of the Common Stock on the fifteen trading days immediately
preceding the date of the declaration of such dividend) or other
distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of Common Stock or any Convertible Securities or to
receive any other right,
(b) any subdivision of outstanding shares of Common Stock into
a larger number of shares of Common Stock, or any combination of such
shares into a smaller number of shares of Common Stock,
(c) any issuance of Contingent Stock, any capital
reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company or any consolidation or merger
involving the Company and any other Person or any transfer of all or
substantially all the assets of the Company to any other Person, or
(d) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall mail to each Holder a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right, (ii) the date or expected date on which any such
subdivision, combination or issuance is to take place, and the amount of Common
Stock or Contingent Stock that shall be the subject of such subdivision,
combination or issuance and (iii) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up is to take place and the time,
if any such time is to
<PAGE>
be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at
least 15 Business Days prior to the date specified in subdivisions (i), (ii) and
(iii) above.
6. RESTRICTIONS ON TRANSFER. (a) Other than as specifically
approved by a majority of the Non-Investor Directors, prior to the second
anniversary of the Closing Date, the Purchaser shall not, directly or
indirectly, sell, transfer or otherwise dispose of any Special Warrants (except
to any Affiliate of the Purchaser).
(b) Other than as specifically approved by a majority of the
Non-Investor Directors, prior to the fifth anniversary of the Closing Date,
Purchaser will not, directly or indirectly, sell, transfer or otherwise dispose
of the Special Warrant, in whole or in part, except (i) pursuant to a registered
underwritten public offering effected under the Registration Rights Agreement
with the intent to achieve a broad distribution, (ii) in accordance with the
volume and manner-of-sale limitations of Rule 144 promulgated under the
Securities Act of 1933 (the "Securities Act") (regardless of whether such
limitations are applicable), (iii) in a transaction exempt from the registration
requirements of the Securities Act with any Person or group (within the meaning
of Section 13(d)(3) of the Securities and Exchange Act of 1934 (the "Exchange
Act")) of Persons, if, prior to and after giving effect to such sale, such
Person or group of Persons (x) does not or would not, to Purchaser's knowledge
after due inquiry, Beneficially Own (provided that for purposes of this Section
6(b) a Person shall be deemed to Beneficially Own all shares that such Person
has the right to acquire, whether such right is exercisable immediately or only
after the passage of time) 5% or more of the then outstanding shares of Common
Stock or (y) is an investment company registered under the Investment Company
Act of 1940, as amended, or (iv) in connection with a Buyout Transaction.
Purported transfers of the Special Warrant that are not in compliance with this
Section 6(b) shall be of no force or effect.
(c) The provisions of Sections 6(a) and 6(b) shall terminate
and be of no further force or effect on the earliest to occur of (i) the fifth
anniversary of the Closing Date, (ii) the date on which the percentage of the
Total Voting Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities acquired in
violation of the Investment Agreement) is greater than 50%, and (iii) the first
public disclosure of a Third-Party Bid (provided, however, that if such
Third-Party Bid is thereafter abandoned, terminated or withdrawn, the provisions
of Sections 6(a) and 6(b) hereof shall be reinstated, although any action taken
or agreement
<PAGE>
or arrangement entered into by Purchaser after such first public disclosure and
prior to such reinstatement (or the consummation of any such action, agreement
or arrangement, whether before or, unless such action, agreement or arrangement
shall be a tender offer or other public offer with respect to the Company, after
such reinstatement) shall not be deemed to breach Sections 6(a) and 6(b) hereof
as a result of such reinstatement).
(d) Prior to the seventh anniversary of the Closing Date,
Purchaser will not, directly or otherwise, dispose of the Special Warrant, or
any portion thereof, representing the right to acquire 15% or more of the then
outstanding Common Stock to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) without first offering the Company the right to
make an offer to purchase the Special Warrant proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on earlier to occur of (i) the date on which
the percentage of the Total Voting Power represented by the aggregate voting
power of all Voting Securities then owned by Purchaser (other than any Voting
Securities acquired in violation of the Investment Agreement) is greater than
50%, and (ii) the first Public Disclosure of a Third-Party Bid (provided,
however, that if such Third-Party Bid is thereafter abandoned, terminated or
withdrawn, the provisions of this Section 6(d) shall be reinstated, although any
action taken or agreement or arrangement entered into by Purchaser after such
first public disclosure and prior to such reinstatement (or the consummation of
any such action, agreement or arrangement, whether before or, unless such
action, agreement or arrangement shall be a tender offer or other public offer
with respect to the Company, after such reinstatement) shall not be deemed to
breach this Section 6(d) as a result of such reinstatement).
(e) Any shares issued upon the exercise of the Special Warrant
shall be considered "Shares" for purposes of the 1998 Investment Agreement and
shall be subject to the transfer restrictions stated in Article VII thereof.
(f) Except as otherwise permitted by this Section 6, the
Special Warrant originally issued pursuant to the 1999 Investment Agreement,
each Special Warrant issued upon direct or indirect transfer or in substitution
for any Special Warrant pursuant to Section 12 hereof, each certificate for
Common Stock (or Other Securities) issued upon the exercise of any Special
Warrant and each certificate issued upon the direct or indirect transfer of any
such Common Stock (or Other Securities) (other than, with respect to the first
legend, shares of Common Stock (or Other Securities), Special Warrants or
Warrant Shares that are no longer subject to the provisions of Section 6(a) and
other than, with respect to the second legend, shares of Common Stock (or Other
Securities), Special Warrants or Warrant Shares which have been transferred in a
transaction registered under
<PAGE>
the Securities Act or exempt from the registration requirements of the
Securities Act pursuant to Rule 144 thereunder or any similar rule or
regulation) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE
CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
(g) The restrictions imposed by Section 6(f) hereof upon the
transferability of Restricted Securities shall cease and terminate as to any
particular Restricted Securities (a) when such securities shall have been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering such Restricted Securities, (b) when,
in the opinion of counsel for the Holder, which counsel shall be reasonably
satisfactory to the Company, such restrictions are no longer required in order
to insure compliance with the Securities Act, or (c) when such securities have
been beneficially owned, by a Person who has not been an affiliate of the
Company for at least three months, for a period of at least one year (or such
shorter period as may be applicable under Rule 144 under the Securities Act or
any successor thereto), all as determined under Rule 144 under the Securities
Act. Whenever such restrictions shall terminate as to any Restricted Securities,
as soon as practicable thereafter and in any event within five days, the Holder
thereof shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing the
applicable legend set forth in Section 6(f) hereof.
70 REGISTRATION RIGHTS. The Special Warrant and all shares of
Common Stock (and Other Securities) issued upon the exercise of the Special
Warrant are subject to and entitled to the benefits of the registration rights
provisions set forth in the Registration Rights Agreement, dated as of June 10,
1998, between the Company and the Purchaser, as amended from time to time (the
"Registration Rights Agreement").
<PAGE>
80 AVAILABILITY OF INFORMATION. The Company shall comply with
the reporting requirements of sections 13 and 15(d) of the Exchange Act (whether
or not it shall be required to do so pursuant to such sections) and shall comply
with all public information reporting requirements of the Commission (including
Rule 144 promulgated by the Commission under the Securities Act) from time to
time in effect and relating to the availability of an exemption from the
Securities Act for the sale of any Restricted Securities. The Company shall
cooperate with each holder of any Restricted Securities in supplying such
information as may be necessary for such holder to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of any Restricted Securities. The Company shall furnish to the Holder, or
to any Holder of a portion of the Special Warrant, promptly upon their becoming
available, copies of all reports on Form 10-K and Form 10-Q and proxy statements
filed by the Company with the Commission, and copies of all regular and periodic
reports and all registration statements and prospectuses filed by the Company
with any securities exchange or with the Commission.
90 RESERVATION OF STOCK, ETC. The Company shall at all times
reserve and keep available, solely for issuance and delivery upon exercise of
the Special Warrant, the number of shares of Common Stock (or Other Securities)
from time to time issuable upon exercise of the Special Warrant at the time
outstanding. All shares of Common Stock (or Other Securities) shall be duly
authorized and, when issued upon such exercise, shall be validly issued and, in
the case of shares, fully paid and nonassessable with no liability on the part
of the holders thereof.
100 REPURCHASES OF STOCK. The Company shall not repurchase any
shares of Common Stock (or Other Securities) if as a result thereof the
exercisability of the Special Warrant may be impaired, restricted or otherwise
limited.
110 LISTING ON SECURITIES EXCHANGES. The Company shall list on
each national securities exchange on which any Common Stock may at any time be
listed, and shall maintain such listing of, all shares of Common Stock from time
to time issuable upon the exercise of the Special Warrant, subject to official
notice of issuance upon the exercise of the Special Warrant. The Company shall
also so list on each national securities exchange, and shall maintain such
listing of, any Other Securities, if at the time any securities of the same
class shall be listed on such national securities exchange by the Company. In
addition, at the request of the Purchaser the Company shall list on each
national securities exchange on which any Common Stock may at any time be
listed, and shall maintain such listing of, the Special Warrant.
<PAGE>
120 OWNERSHIP, TRANSFER AND SUBSTITUTION OF THE SPECIAL
WARRANT. 12.1. OWNERSHIP OF SPECIAL WARRANT. The Company may treat the Person in
whose name the Special Warrant, or any Special Warrant or Special Warrants
issued in substitution therefor, is registered on the register kept at the
principal office of the Company as the owner and the Holder thereof for all
purposes, notwithstanding any notice to the contrary, except that, if and when
any Special Warrant is properly assigned in blank, the Company may (but shall
not be obligated to) treat the bearer thereof as the owner of such Special
Warrant for all purposes, notwithstanding any notice to the contrary. Subject to
Section 6, a Special Warrant, if properly assigned, may be exercised by a new
Holder without first having a new Special Warrant issued.
12.2. TRANSFER AND EXCHANGE OF THE SPECIAL WARRANT. Upon the
surrender of the Special Warrant, properly endorsed, for registration of
transfer or for exchange at the principal office of the Company, the Company at
its expense shall (subject to compliance with Section 6, if applicable) execute
and deliver to or upon the order of the Holder thereof a new Special Warrant or
Special Warrants of like tenor, in the name of such Holder or as such Holder
(upon payment by such Holder of any applicable transfer taxes) may direct,
calling in the aggregate on the face or faces thereof for the number of shares
of Common Stock called for on the face or faces of the Special Warrant or
Special Warrants so surrendered.
12.3. REPLACEMENT OF THE SPECIAL WARRANT. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Special Warrant and, in the case of any such loss, theft or
destruction of any Special Warrant held by a Person other than the Purchaser,
upon delivery of indemnity reasonably satisfactory to the Company in form and
amount or, in the case of any such mutilation, upon surrender of such Special
Warrant for cancellation at the principal office of the Company, the Company at
its expense shall execute and deliver, in lieu thereof, a new Special Warrant of
like tenor.
130 DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
1998 INVESTMENT AGREEMENT: the meaning specified in the second
paragraph of the Special Warrant.
1999 INVESTMENT AGREEMENT: the meaning specified in the second
paragraph of the Special Warrant.
<PAGE>
ADDITIONAL SHARES OF COMMON STOCK: all shares (including
treasury shares but excluding Contingent Stock) of Common Stock issued or sold
by the Company after the Closing Date, whether or not subsequently reacquired or
retired by the Company, other than (i) shares of Common Stock issued upon the
exercise of the Special Warrant and the Warrant; (ii) shares issued or sold
pursuant to the exercise or conversion of options, warrants, convertible
securities, or other rights that were disclosed on the Revised Option Schedule;
(iii) shares issued or sold to the Company's Employee Stock Purchase Plan, or
any successor plan thereto, to the extent such shares are issued or sold at a
purchase price not less than 85% of the Market Price; (iv) shares issued or sold
to Purchaser or its Affiliates; (v) shares issued upon the conversion of, or for
the purchase of, any 2001 Notes or the 2003 Notes outstanding immediately
following the Distributions; or (vi) shares issued upon conversion of the
Preferred Shares.
AFFILIATE: with respect to any Person, any Person that
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person.
ASSETS: the meaning specified in Section 2.4.
BENEFICIALLY OWN: with respect to any securities shall mean
having "beneficial ownership" of such securities (as determined pursuant to Rule
13d-3 under the Exchange Act), including pursuant to any agreement, arrangement
or understanding, whether or not in writing.
BUSINESS DAY: any day other than a Saturday or a Sunday or a
day on which commercial banking institutions in the City of New York are
authorized by law to be closed, PROVIDED that, in determining the period within
which certificates or Special Warrants are to be issued and delivered pursuant
to Section 1.3 at a time when shares of Common Stock (or Other Securities) are
listed or admitted to trading on any national securities exchange or in the
over-the-counter market and in determining the Market Price of any securities
listed or admitted to trading on any national securities exchange or in the
over-the-counter market, "Business Day" shall mean any day when the principal
exchange in which securities are then listed or admitted to trading is open for
trading or, if such securities are traded in the over-the-counter market in the
United States, such market is open for trading, and PROVIDED FURTHER that any
reference to "days" (unless Business Days are specified) shall mean calendar
days.
<PAGE>
BUYOUT TRANSACTION: a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that offers
each holder of Voting Securities (other than, if applicable, the Person
proposing such transaction) the opportunity to dispose of Voting Securities
Beneficially Owned by each such Holder for the same consideration or otherwise
contemplates the acquisition of Voting Securities Beneficially Owned by each
such Holder for the same consideration.
CLOSING DATE: the meaning specified in the second paragraph of
the Special Warrant.
COMMISSION: the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act or the
Exchange Act, whichever is the relevant statute for the particular purpose.
COMMON STOCK: the Company's Common Stock, as constituted on
the date hereof, any stock into which such Common Stock shall have been changed
or any stock resulting from any reclassification of such Common Stock, and all
other stock of any class or classes (however designated) of the Company the
holders of which have the right, without limitation as to amount, either to all
or to a share of the balance of current dividends and liquidating dividends
after the payment of dividends and distributions on any shares entitled to
preference.
COMPANY: the meaning specified in the opening paragraphs of
the Special Warrant.
CONTINGENT STOCK: shares of Common Stock issued after the
Closing Date pursuant to (i) the Amendment to Stock Purchase Agreement, dated as
of June 20, 1996, by and between the Company and Eric Watson, as the same may be
amended from time to time, or (ii) any security, option, warrant, call,
subscription, right, contract, commitment, arrangement or understanding in
existence on January 12, 1998 or June 10, 1998 but not disclosed on the Revised
Option Schedule.
CONVERTIBLE SECURITIES: any evidences of indebtedness (other
than 2001 Notes and 2003 Notes), shares of stock (other than Common Stock) or
other securities directly or indirectly convertible into or exchangeable for
Additional Shares of Common Stock.
EXCHANGE ACT: the Securities Exchange Act of 1934, or any
successor statute, and the rules and regulations of the Commission thereunder,
all as the same shall
<PAGE>
be in effect at the time. Reference to a particular section of the Securities
Exchange Act of 1934 shall include a reference to the comparable section, if
any, of any such successor statute.
EXERCISE PRICE: the meaning specified in Section 1.1.
HOLDER: the meaning specified in Section 1.1.
INVESTMENT AGREEMENT: the meaning specified in the second
paragraph of the Special Warrant.
MARKET PRICE: on any date specified herein, (a) in the case of
securities that have an existing public trading market, the amount per security
equal to (i) the last sale price of such security, regular way, on such date or,
if no such sale takes place on such date, the average of the closing bid and
asked prices thereof on such date, in each case as officially reported on the
principal national securities exchange on which the same are then listed or
admitted to trading, or (ii) if no such security is then listed or admitted to
trading on any national securities exchange but such security is designated as a
national market system security by the NASD, the last trading price of such
security on such date, or if such security is not so designated, the average of
the reported closing bid and asked prices thereof on such date as shown by the
NASD automated quotation system or, if no shares thereof are then quoted in such
system, as published by the National Quotation Bureau, Incorporated or any
successor organization, and in either case as reported by any member firm of the
New York Stock Exchange selected by the Company, and (b) in the case of
securities that do not have an existing public trading market and in the case of
other property, the higher of (i) the book value thereof as determined by
agreement between the Company and the Holder, or if the Company and the Holder
fail to agree, by any firm of independent public accountants of recognized
standing selected by the Board of Directors of the Company, as of the last day
of any month ending within 60 days preceding the date as of which the
determination is to be made and (ii) the fair value thereof (w) determined by an
agreement between the Company and the Holder or (x) if the Company and the
Holder fail to agree, determined jointly by an independent investment banking
firm retained by the Company and by an independent investment banking firm
retained by the Holder, either of which firms may be an independent investment
banking firm regularly retained by the Company or the Holder or (y) if the
Company or the Holder shall fail so to retain an independent investment banking
firm within five Business Days of the retention of such firm by the Holder or
the Company, as the case may be, determined solely by the firm so retained or
(z) if the firms so retained by the Company and by the Holder shall be unable to
reach a joint determination within
<PAGE>
15 Business Days of the retention of the last firm so retained, determined by
another independent investment banking firm chosen by the first two such firms
and which is not a regular investment banking firm of the Company or the Holder.
NASD: the National Association of Securities Dealers, Inc.
NON-INVESTOR DIRECTOR: any member of the Board of Directors
not nominated by the Purchaser pursuant to Article IV of the Investment
Agreement.
OTHER SECURITIES: any stock (other than Common Stock) and
other securities of the Company or any other Person (corporate or otherwise)
which the Holder at any time shall be entitled to receive, or shall have
received, upon the exercise of the Special Warrant, in lieu of or in addition to
Common Stock, or which at any time shall be issuable or shall have been issued
in exchange for or in replacement of Common Stock or other securities pursuant
to Section 2.10 or otherwise.
PERSON: an individual, a partnership, an association, a joint
venture, a corporation, a business, a trust, an unincorporated organization or a
government or any department, agency or subdivision thereof.
PREFERRED SHARES: the shares of Series A Non-Voting
Participating Convertible Preferred Stock purchased by Purchaser pursuant to the
1999 Investment Agreement.
PREFERRED STOCK: the shares of preferred stock of the Company,
par value $.001 per share.
PUBLIC OFFERING: any offering of Common Stock to the public
pursuant to an effective registration statement under the Securities Act.
PURCHASER: the meaning specified in the first paragraph of the
Special Warrant.
REGISTRATION RIGHTS AGREEMENT: the meaning specified in
Section 7 of the Special Warrant.
RESTRICTED SECURITIES: (a) any Special Warrants bearing the
applicable legend set forth in Section 6(f), (b) any shares of Common Stock (or
Other Securities) which have been issued upon the exercise of the Special
Warrants and which are evidenced by a certificate or certificates bearing the
applicable legend set forth in such
<PAGE>
section, and (c) unless the context otherwise requires, any shares of Common
Stock (or Other Securities) which are at the time issuable upon the exercise of
the Special Warrants and which, when so issued, shall be evidenced by a
certificate or certificates bearing the applicable legend set forth in such
section.
REVISED OPTION SCHEDULE: the schedule, dated June 10, 1998 and
delivered to the Purchaser on such date, listing options, warrants, convertible
securities and other rights relating to capital stock of the Company.
SECURITIES ACT: the Securities Act of 1933, or any successor
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time. Reference to a particular section of the
Securities Act of 1933 shall include a reference to the comparable section, if
any, of any such successor statute.
SPECIAL WARRANT: the meaning specified in the second paragraph
of the Special Warrant.
SUBSIDIARY: as to any Person, any corporation at least a
majority of the shares of stock of which having general voting power under
ordinary circumstances to elect a majority of the Board of Directors of such
corporation (irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency) is, at the time as of which the determination is being made,
owned by such Person, or one or more of its Subsidiaries or by such Person and
one or more of its Subsidiaries.
"THIRD-PARTY BID" means an unsolicited bona fide tender offer
or other public offer by a Person other than Purchaser, an Affiliate thereof or
the Company or any of its Subsidiaries (a "THIRD PARTY") to purchase a number of
shares of Common Stock which, together with the shares of Common Stock
Beneficially Owned by such Third Party, would result in the Third Party being
the Beneficial Owner of 25% or more of the shares of Common Stock outstanding.
TOTAL VOTING POWER: at any time the total combined voting
power in the general election of directors of all the Voting Securities then
outstanding.
TRANSACTION: the meaning specified in Section 2.10.
<PAGE>
TRANSFER: unless the context otherwise requires, any sale,
assignment, pledge or other disposition of any security, or of any interest
therein, which could constitute a "sale" as that term is defined in Section 2(3)
of the Securities Act.
2001 NOTES: 5 1/2% convertible subordinated notes due 2001
issued pursuant to an Indenture, dated as of February 7, 1996, between the
Company and State Street Bank and Trust Company.
2003 NOTES: 5 1/2% convertible subordinated notes due 2003
issued pursuant to an Indenture, dated as of May 22, 1996, between the Company
and Chase Manhattan Bank, N.A.
VOTING SECURITIES: at any time shares of any class of capital
stock of the Company which are then entitled to vote generally in the election
of directors.
WARRANT: the Common Stock Purchase Warrant issued pursuant to
the 1999 Investment Agreement.
WARRANT SHARES: the shares of Common Stock (and Other
Securities) issuable upon exercise of the Special Warrant.
140 REMEDIES. The Company stipulates that the remedies at law
of the Holder in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of the Special Warrant
are not and shall not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
150 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. Nothing contained
in the Special Warrant shall be construed as conferring upon the Holder hereof
any rights as a stockholder of the Company or as imposing any liabilities on
such Holder to purchase any securities or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors or
stockholders of the Company or otherwise.
160 NOTICES. All notices and other communications under the
Special Warrant, except notices of the exercise of any Special Warrant (which
shall be effected in the manner provided in Section 1, shall be in writing and
shall be mailed by registered or certified mail, return receipt requested,
addressed as follows or to such other address as such party may have designated
to the other in writing:
<PAGE>
(a) if to the Purchaser, to it at:
CDR-PC Acquisition, L.L.C.
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware 19803
with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention: Brian D. Finn
Telecopy No.: (212) 893-7061
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Franci J. Blassberg
Telecopy No.: (212) 909-6836
(b) if to any other Holder or any holder of any Common Stock
(or Other Securities), at the registered address of such
Holder as set forth in the register kept at the principal
office of the Company,
or
<PAGE>
(c) if to the Company, to it at:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: Mark D. Director
Telecopy No.: (202) 339-6727
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention: George P. Stamas
Telecopy No.: (202) 663-6363
170 MISCELLANEOUS. The Special Warrant and any term hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. The agreements of the Company contained in the Special
Warrant other than those applicable solely to the Special Warrant and the Holder
thereof shall inure to the benefit of and be enforceable by any Holder or
Holders at the time of any shares of Common Stock (or Other Securities) issued
upon the exercise of the Special Warrant, whether so expressed or not. THE
SPECIAL WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR
RULES OF CONFLICT OF LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE
OR PERMIT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION). The section
headings in the Special Warrant are for purposes of convenience only and shall
not constitute a part hereof.
<PAGE>
180 EXPIRATION; NOTICE. The Company shall give the Holder no
less than 45 days' nor more than 90 days' notice of the expiration of the right
to exercise the Special Warrant. The right to exercise the Special Warrant shall
expire at 5:00 P.M., New York City time, on June 10, 2010, unless the Company
shall fail to give such notice as aforesaid, in which event the right to
exercise the Special Warrant shall not expire until 5:00 P.M., New York City
time, on a date 45 days after the date on which the Company shall give the
Holder hereof notice of the expiration of the right to exercise the Special
Warrant.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Mark D. Director
--------------------------------
Name: Mark D. Director
Title: Executive Vice President
Administration, General Counsel and
Secretary
<PAGE>
FORM OF SUBSCRIPTION
(To be executed only upon exercise of the Special Warrant)
To: U.S. Office Products Company
The undersigned registered holder of the within Special
Warrant hereby irrevocably exercises such Special Warrant for, and purchases
thereunder, ________* shares of Common Stock of U.S. Office Products Company,
and herewith makes payment [of $_]** [by application, pursuant to Section 1.2(b)
of such Special Warrant, of [a portion of] the Special Warrant representing a
right to purchase ________* shares of Common Stock],*** and requests that the
certificates for such shares be issued in the name of, and delivered to
______________ whose address is __________.
Dated: ______________
[HOLDER]****
- ------------------------
* Insert here the number of shares called for on the face of the Special
Warrant (or, in the case of a partial exercise, the portion thereof as
to which the Special Warrant is being exercised), in either case
without making any adjustment for additional Common Stock or any other
stock or other securities or property or cash which, pursuant to the
adjustment provisions of the Special Warrant, may be delivered upon
exercise. In the case of a partial exercise, a new Special Warrant or
Special Warrants shall be issued and delivered, representing the
unexercised portion of the Special Warrant, to the holder surrendering
the same.
** Delete inapplicable language in brackets.
*** Delete inapplicable language in brackets.
**** Signature must conform in all respects to name of holder as specified
on the face of the Special Warrant.
<PAGE>
[Address]
By
----------------------------
Name:
Title:
<PAGE>
FORM OF ASSIGNMENT
(To be executed only upon transfer of the Special Warrant)
For value received, the undersigned registered holder of the
within Special Warrant hereby sells, assigns and transfers unto ________________
the right represented by such Special Warrant to purchase ______ shares of
Common Stock of U.S. Office Products Company Corporation to which such Special
Warrant relates, and appoints ___________ Attorney to make such transfer on the
books of U.S. Office Products Company maintained for such purpose, with full
power of substitution in the premises.
Dated: ______________
[HOLDER]*
[Address]
By
-------------------------------
Name:
Title:
Signed in the presence of:
- --------------------------
- --------------------------
* Signature must conform in all respects to name of holder as specified
on the face of the Special Warrant.
<PAGE>
Exhibit 4.8
AMENDMENTS TO THE REGISTRATION RIGHTS AGREEMENT
(i) Section 1(a) of the Registration Rights Agreement shall be amended by
adding a new paragraph, immediately following the first paragraph, as follows:
The Company is also a party to an Investment Agreement, dated as of
March 30, 1999, with the Purchaser (the "1999 INVESTMENT AGREEMENT"),
pursuant to which the Company agreed, in exchange for consideration of
$51 million in cash (I) to issue to Purchaser up to 73,350 newly
issued shares of Series A Non-Voting Participating Convertible
Preferred Stock, par value $.001 per share (the "PREFERRED SHARES"),
of the Company having the terms set forth in Exhibit I of the 1999
Investment Agreement, (II) to amend and restate the Warrants as set
forth in Exhibit II of the 1999 Investment Agreement, and (III) to
amend and restate the Special Warrants as set forth in Exhibit III of
the 1999 Investment Agreement.
(ii) Section 1(b) of the Registration Rights Agreement shall be restated in
its entirety as follows:
(b) This Agreement shall become effective with respect to
any Registrable Securities upon the issuance or sale of Registrable
Securities pursuant to the Investment Agreement or the 1999 Investment
Agreement. This Agreement shall remain in effect upon the assignment
or transfer of Registrable Securities by the Purchaser or a Holder to
an Affiliate, a Distributee or other successors, assigns and
transferees of Purchaser of such Holder pursuant to Section 4.4.
(iii) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Registrable Securities" in its entirety as
follows:
"REGISTRABLE SECURITIES" means (a) the Shares, (b) the Additional
Shares, (c) the Warrant Shares, (d) the Warrants, (e) the Special
Warrant Shares, (f) the Special Warrants, (g) the Preferred Shares,
(h) the Conversion Shares and (i) any securities issued or issuable
with respect to any Shares, Additional Shares, Warrants, Special
Warrants, Preferred Shares or Conversion Shares referred to in the
foregoing clauses (a) through (h), (i) upon any conversion or exchange
thereof, (ii) by way of stock dividend or other distribution, stock
split or reverse stock split or (iii) in connection with a combination
of shares, recapitalization, merger, consolidation, exchange offer or
other reorganization. As to any particular Registrable Securities,
once issued such securities shall cease to be Registrable Securities
when (A) a Registration Statement with respect to the sale of such
securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such
Registration Statement, (B) such securities shall have been
distributed to the public in reliance upon Rule 144, (C) subject to
the provi-
1
<PAGE>
sions of Section 4.1(b)(ii), such securities shall have been
otherwise transferred, new certificates for such securities not
bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of such securities
shall not require registration or qualification of such securities
under the Securities Act or any similar state law then in force or (D)
such securities shall have been acquired by the Company. In
determining the number of Registrable Securities outstanding at any
time or whether the Holders of the requisite number of Registrable
Securities have taken any action hereunder and in calculating the
number of Registrable Securities for all other purposes under this
Agreement, each Warrant and Special Warrant shall be deemed to have
been exercised (to the fullest extent then determinable) and each
Preferred Share shall be deemed to have been converted and such
calculation shall include the number of Warrant Shares and Special
Warrant Shares then deliverable upon the exercise of such Warrant or
Special Warrant and the number of Conversion Shares deliverable upon
conversion of the Preferred Shares (to the fullest extent then
determinable).
(iv) Section 2 of the Registration Rights Agreement shall be amended by
inserting, immediately following the definition of "Contingent Stock", a new
definition as follows:
"CONVERSION SHARES" means the shares of Common Stock issuable
upon conversion of the Preferred Shares.
(v) Section 2 of the Registration Rights Agreement shall be amended by
inserting, immediately following the definition of "Postponement Period", a new
definition as follows:
"PREFERRED SHARES" is defined in Section 1(a).
2
<PAGE>
(vi) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Special Warrants" as follows:
"SPECIAL WARRANTS" means warrants entitling the holder thereof to
purchase shares of Common Stock on the terms and subject to the
conditions set forth in Exhibit 1 of the Investment Agreement, and any
warrants of the Company received in exchange therefor, pursuant to the
1999 Investment Agreement or otherwise.
(vii) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Warrants" as follows:
"WARRANTS" means warrants entitling the holder thereof to
purchase one share of Common Stock for each Share and Special Warrant
purchased by the Purchaser pursuant to the Investment Agreement, on
the terms and subject to the conditions set forth in Exhibit 2
thereof, and any warrants of the Company received in exchange
therefor, pursuant to the 1999 Investment Agreement or otherwise.
(viii) Paragraph (a) of Section 3.1 of the Registration Rights Agreement
shall be restated in its entirety as follows:
(A) REQUESTS. Subject to the provisions of Section 3.6, at any
time or from time to time as of the date hereof, Holders of not less
than 25% of the then outstanding Registrable Securities shall have the
right to make written requests that the Company effect up to six
registrations under the Securities Act of all or part of the
Registrable Securities of the Holders making such request, which
requests shall specify the intended method of disposition thereof by
such Holders, including whether the registration requested is for an
underwritten offering. For a registration to be underwritten, a
majority of the Holders requesting registration (as measured by
ownership of Registrable Securities) must so request. The Company
shall not be required to effect more than [six] registrations under
this Section 3.1.
(ix) Clause C of Section 3.1(f)(iii) of the Registration Rights Agreement
shall be restated in its entirety as follows:
(C) third, to the extent that the number of shares registered
pursuant to clauses (A) and (B) is less than the largest number that
can be sold in an orderly manner in such offering within a price range
acceptable to the selling Holders, the securities requested to be
included by any other holders (if permitted by the Holders pursuant to
Section 3.1(f)(ii)).
3
<PAGE>
Exhibit 10.7
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (this "Second Amendment"),
dated as of this 28th day of June, 1999, is by and between US Office Products
Company, a Delaware corporation ("USOP"), and Michael J. Barnell ("Employee").
Employee and American Loose Leaf/Business Products, Inc., a Missouri
corporation ("ALL"), entered into an Employment Agreement dated as of August 9,
1996 (the "Agreement"), which was amended by an Amendment dated as of
August 1, 1997 (the "First Amendment"), which Amendment included an
assignment to and assumption by USOP of ALL's rights and obligations under
the Agreement. Employee and USOP now desire to make certain additional
amendments to the terms of the Agreement, as amended by the Amendment, to
recognize, among other things, (1) certain changes in Employee's role and
responsibilities, and (2) modifications to certain long-term incentives for
Employee. The term "Amended Agreement" shall be used to refer to the
Agreement, as amended by the First Amendment.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth in this Second Amendment, the parties hereto,
intending legally to be bound, hereby agrees as follows:
1. The second and third sentences of Section 2 of the Amended Agreement
are hereby deleted in their entirety, and in lieu thereof, the following
provisions are hereby inserted:
"Employee shall have such responsibilities, duties and authority as
are delegated to him from time to time by the Chief Executive Officer
of USOP or the Board of Directors of USOP (the "Board"). Employee
will report directly to the Chief Executive Officer of USOP.
Employee acknowledges and agrees that effective April 25, 1999, there
have been changes made to the organization of the North American
Office Products Group, and, as a result, his role and
responsibilities have been modified."
2. The amount of "$300,000" appearing in Section 3 of the Amended
Agreement, as the amount of Employee's annual base salary, is hereby deleted
and is replaced with the amount of "$350,000."
3. Section 6(f) of the Amended Agreement is hereby deleted in its
entirety, and in lieu thereof, the following is hereby inserted:
"(f) TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may
terminate his employment hereunder for "Good Reason". As used
herein, "Good Reason" shall mean the continuance, after ten (10) days'
prior written notice by Employee to USOP specifying the basis for
such Employee's having Good Reason to terminate this Agreement, of any
material breach of this Agreement by the Company, including the
failure to pay Employee on a timely basis the amounts to which he is
entitled under this Agreement. If, effective on or prior to June 4,
2000, Employee resigns or otherwise terminates his employment for any
reason other than Good Reason as defined in this Section 6(f),
Employee shall receive no severance compensation (except that the
special option vesting and exercise arrangements set forth in
Section 6(i) below shall be applicable after April 23, 2000). If,
effective after June 4, 2000, Employee resigns or otherwise
terminates his employment for any reason other than Good Reason, and
if Employee gives
<PAGE>
the Company at least 30 days' advance written notice of his intention to
resign (meaning that such notice may be given prior to June 4, 2000, so
long as Employee will remain employed and continue to perform his
obligations under this Agreement until sometime after June 4, 2000),
such termination shall be treated as a termination by the Company
without cause under Section 6(d) above and Employee shall be entitled to
severance in accordance with the provisions of such Section 6(d). If,
effective after June 4, 2000, Employee resigns or otherwise terminates
his employment for any reason other than Good Reason, but if Employee
fails to give the Company at least 30 days' advance written notice of
his intention to resign, Employee shall receive no severance
compensation (except that the special option vesting and exercise
arrangements set forth in Section 6(i) below shall be applicable after
April 23, 2000). If Employee resigns for Good Reason, Employee shall be
entitled to severance as if he had been terminated by the Company
without cause under Section 6(d) above and Employee shall be entitled
to severance in accordance with the provisions of such Section 6(d)
(and the special option vesting and exercise arrangements set forth in
Section 6(i) below shall be applicable after April 23, 2000)."
4. The following shall be added as a new last sentence in Section 6(h)
of the Amended Agreement:
"The provisions of this Section 6(h) shall not apply to (1) a
termination of employment by Employee that is effective after June 4,
2000 (but only if Employee gives the Company at least 30 days' advance
written notice of his intention to resign), or (2) a termination of
employment by the Company pursuant to Section 6(d) above."
5. A new Section 6(i) shall be added, to read in its entirety as follows:
"(i) SPECIAL OPTION VESTING AND EXERCISE. If Employee remains
employed by the Company through April 23, 2000, or if the Company
terminates Employee's employment without cause (pursuant to Section
6(d) above) on or prior to April 23, 2000, or if Employee terminates
for Good Reason (as specified in Section 6(f) above), then the
vesting requirements applicable to all of the options (the "Options")
that have been granted to Employee under the terms of the Company's
1994 Amended and Restated Long-Term Incentive Plan (the "Plan") as of
the date of this Second Amendment and that are unvested at such time
shall be waived and all such unvested Options shall be deemed to be
fully vested as of (A) the close of business (5 p.m. Washington, D.C.
time) on April 23, 2000, or (B) in the case of a prior termination
without cause by the Company, the close of business (5 p.m.
Washington, D.C. time) on the effective date of such termination. If
Employee remains employed by the Company through April 23, 2000, in
which event all of the Options shall be fully vested, and even if he
subsequently ceases to be employed by the Company for any reason
other than a termination "for cause" by the Company (pursuant to
Section 6(c) above), he shall be entitled to exercise the Options, in
whole or in part, at any time, from time to time, through the close
of stock market trading on April 30, 2004. In addition, if Employee's
employment with the Company is terminated by the Company without
cause (pursuant to Section 6(d) above) on or prior to the close of
business on April 23, 2000, in which event all of the Options shall
be fully vested, he shall be entitled to exercise the Options, in
whole or in part, at any
2
<PAGE>
time, from time to time, through the close of stock market trading on
April 30, 2004. In all other circumstances, the vesting requirements
and the post-employment exercise period for the Options shall remain
unchanged from their original terms, and all other terms of the
Options shall remain unchanged. Exhibit A attached hereto contains a
list of the Options.
6. Notices to Employee shall be addressed to him at 11103 Cripplegate Road,
Potomac, Maryland 20854.
7. This Second Amendment shall in all respects be governed and construed
according to the laws of the State of Delaware, without regard to its conflict
of laws principles.
8. Unless specifically amended by this Second Amendment, all of the
existing terms and provisions contained in the Agreement, as amended by the
First Amendment, shall continue to apply and be of full force and effect and
shall remain unchanged.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed as of the date first written above.
US OFFICE PRODUCTS COMPANY
By: /s/ Charles P. Pieper
-----------------------
Charles P. Pieper
Chief Executive Officer
EMPLOYEE:
/s/ Michael J. Barnell
- ----------------------
Michael J. Barnell
3
<PAGE>
MICHAEL J. BARNELL
11103 CRIPPLEGATE ROAD
POTOMAC, MD 20854
U.S. OFFICE PRODUCTS, INC. OPTIONEE STATEMENT RUN DATE 06/01/99
as of 06/02/99 Page No. 1
<TABLE>
<CAPTION>
Date of Options Options Option Date of Available
Grant Type of Grant Granted Outstanding Price Expir. Options Vested For Exercise
- ------- ------------- ------- ----------- ------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/11/98 NON-QUAL 12,760 12,760 $5.1750 04/28/07 893 (Current) 893
5,934 on 04/28/00
5,933 on 04/28/01
12/11/98 NON-QUAL 2,471 2,471 $5.1750 07/03/07 617 (Current) 617
617 on 07/03/99
618 on 07/03/00
619 on 07/03/01
12/11/98 NON-QUAL 2,976 2,976 $5.1750 07/03/07 744 (Current) 744
743 on 07/03/99
744 on 07/03/00
745 on 07/03/01
12/11/98 NON-QUAL 7,259 7,259 $5.1750 07/03/07 1,814 (Current) 1,814
1,815 on 07/03/99
1,815 on 07/03/00
1,815 on 07/03/01
02/05/99 NON-QUAL 150,000 150,000 $6.1000 02/05/09 0 (Current) 0
37,500 on 02/05/00
37,500 on 02/05/01
37,500 on 02/05/02
37,500 on 02/05/03
------------------------- ---------
Shares 175,466 175,466 4,068
</TABLE>
<PAGE>
Exhibit 10.8
LOANOUT AGREEMENT
This LOANOUT AGREEMENT is dated as of February 23, 1999
(the "AGREEMENT"), by and among U.S. Office Products Company, a Delaware
corporation (the "COMPANY"), and Clayton, Dubilier & Rice, Inc., a Delaware
corporation ("CD&R"),
W I T N E S S E T H:
WHEREAS, the Company and CD&R are parties to a Consulting
Agreement, dated as of June 10, 1998 (the "CONSULTING AGREEMENT"), and to an
Indemnification Agreement, dated as of June 10, 1998 (the "INDEMNIFICATION
AGREEMENT"), among CDR-PC Acquisition, L.L.C., the Company, CD&R and Clayton &
Dubilier & Rice Fund V Limited Partnership;
WHEREAS, the Company desires to obtain the services of Mr.
Charles P. Pieper ("PIEPER"), an employee of CD&R, to perform the functions of
Chief Executive Officer of the Company, and CD&R is willing to make such
services available to the Company upon and subject to the terms and conditions
hereof; and
WHEREAS, this Agreement has been approved by the Board of
Directors of the Company, including a majority of the disinterested directors;
NOW, THEREFORE, in consideration of the foregoing premises and
the respective agreements hereinafter set forth and the mutual benefits to be
derived here from, the parties hereto hereby agree as follows:
1. SERVICES, ETC.
CD&R shall make the services of Pieper available to the
Company, and the Company shall make use of the services of Pieper to serve as
Chief Executive Officer of the Company, commencing and effective as of
February 23, 1999, until the expiration of the Term (as defined in Section 2
hereof). Pieper shall be available to render such services on a basis
mutually agreeable to the Company, CD&R and Pieper. Without limiting the
foregoing, Pieper will continue to serve as an employee of CD&R and may serve
as an officer or director of CD&R or other corporations or entities and
devote such time to performing such services as Pieper, in his sole
discretion, shall deem necessary or appropriate. The services of Pieper to be
made available to the Company and its subsidiaries hereunder shall be deemed
part of the services provided by CD&R pursuant to the Consulting Agreement.
No separate or additional consideration shall be payable hereunder for the
services of Pieper, beyond that payable under the Consulting Agreement.
<PAGE>
2
2. TERM.
(a) This Agreement shall be effective as of February 23,
1999. The term of this Agreement (the "TERM") shall commence on February 23,
1999 and shall terminate on the earliest to occur of (i) the termination of
the Consulting Agreement, (ii) the date that is ten (10) business days
following delivery of written notice of such termination by any party hereto
to the other parties hereto, (iii) the election of a successor Chief
Executive Officer of the Company by the Board of Directors of the Company in
accordance with its by-laws, and (iv) Pieper's death, permanent disability or
resignation from his employment with CD&R.
(b) The expiration of the Term shall not affect the continuing
effectiveness of the Consulting Agreement or the Indemnification Agreement, each
of which shall continue to be in full force and effect and enforceable in
accordance with their respective terms. Without limiting the foregoing, the
Company shall continue to, and shall be obligated to, pay and reimburse all
fees, expenses and other amounts as and when due under the Consulting Agreement
and the Indemnification Agreement and perform all their other obligations
thereunder.
3. INDEMNIFICATION.
All performance by, and all actions or omissions of, CD&R or
Pieper under or in respect of this Agreement shall be deemed to be pursuant to
the Consulting Agreement, and each of CD&R and Pieper shall be entitled to the
benefits of the indemnification and other provisions of the Consulting Agreement
and the Indemnification Agreement.
4. INDEPENDENT CONTRACTOR STATUS.
CD&R and the Company agree that the furnishing of Pieper's
services hereunder by CD&R is solely as an independent contractor, with CD&R
retaining control over and responsibility for its own operations and personnel,
including Pieper. Neither CD&R nor any of its directors, officers, employees or
agents (including Pieper) shall, solely by virtue of this Agreement or the
arrangements hereunder, be considered employees, principals, partners,
co-venturers or agents of the Company.
5. NOTICES.
<PAGE>
3
Any notice or other communication required or permitted to be
given or made under this Agreement by one party to the other parties shall be in
writing and shall be deemed to have been duly given and to be effective (i) on
the date of delivery if delivered personally or (ii) when sent if sent by
prepaid telegram, or mailed first-class, postage prepaid, by registered or
certified mail or confirmed facsimile transmission, as follows (or to such other
address as shall be given in writing by one party to the other parties in
accordance herewith):
If to the Company to:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
ATTN: Mark D. Director
Telephone: (202) 339-6700
Telecopy: (202) 339-6727
With a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
ATTN: George P. Stamas
Telephone: (202) 663-6000
Facsimile: (202) 663-6363
<PAGE>
4
If to CD&R to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attn: Brian D. Finn
Telephone: (212) 407-5200
Telecopy: (212) 407-5252
With a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attn: Franci J. Blassberg
Telephone: (212) 909-6000
Telecopy: (212) 909-6836
6. GENERAL.
(a) ENTIRE AGREEMENT. This Agreement together with the
Consulting Agreement and the Indemnification Agreement (i) contain the complete
and entire understanding and agreement of CD&R and the Company with respect to
the subject matter hereof, and (ii) supersede all prior and contemporaneous
understandings, conditions and agreements, oral or written, express or implied,
in respect of the subject matter hereof, including but not limited to in respect
of the furnishing of the services of Pieper in connection with the subject
matter hereof. There are no representations or warranties of Pieper or CD&R in
connection with this Agreement or the services to be made available hereunder,
except as expressly made and contained in this Agreement.
(b) HEADINGS. The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning or interpretation
of this Agreement.
<PAGE>
5
(c) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original and all of which
shall together constitute one and the same instrument.
(d) BINDING EFFECT; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties to this Agreement and their
respective successors and assigns, PROVIDED that neither CD&R nor the Company
may assign any of its rights or obligations under this Agreement without the
express written consent of the other parties hereto.
(e) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER, AND IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS LAWS THAT
WOULD REQUIRE THE APPLICATION OF THE LAW OF ANOTHER JURISDICTION. EACH OF THE
COMPANY AND CD&R HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK AND THE FEDERAL COURTS OF THE UNITED STATES OF
AMERICA LOCATED IN THE STATE, CITY AND COUNTY OF NEW YORK SOLELY IN RESPECT OF
THE INTERPRETATION AND ENFORCEMENT OF THE PROVISIONS OF THIS AGREEMENT, AND THE
PARTIES HERETO HEREBY IRREVOCABLY AGREE THAT (i) THE SOLE AND EXCLUSIVE
APPROPRIATE VENUE FOR ANY ACTION, SUIT OR PROCEEDING RELATING TO SUCH
INTERPRETATION AND ENFORCEMENT SHALL BE IN SUCH A COURT, (ii) ALL CLAIMS WITH
RESPECT TO SUCH PROVISIONS SHALL BE HEARD AND DETERMINED EXCLUSIVELY IN SUCH A
COURT, (iii) ANY SUCH COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER THE PERSON OF
SUCH PARTIES AND OVER THE SUBJECT MATTER OF ANY DISPUTE RELATING TO SUCH
PROVISIONS AND (iv) EACH HEREBY WAIVES, AND AGREES NOT TO ASSERT, ANY AND ALL
OBJECTIONS AND DEFENSES BASED ON FORUM, VENUE OR PERSONAL OR SUBJECT MATTER
JURISDICTION AS THEY MAY RELATE TO SUCH AN ACTION, SUIT OR PROCEEDING BEFORE
SUCH A COURT IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 6(e), PROVIDED
THAT ENFORCEMENT OF A JUDGMENT RENDERED BY SUCH A COURT MAY BE SOUGHT IN ANY
COURT OF COMPETENT JURISDICTION FOR THE ENFORCEMENT THEREOF. EACH OF THE COMPANY
AND CD&R HEREBY CONSENT TO AND GRANT ANY SUCH COURT JURISDICTION OVER THE PERSON
OF SUCH PARTIES AND OVER THE SUBJECT
<PAGE>
6
MATTER OF ANY SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN
CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION
5, OR IN SUCH OTHER MANNER AS MAY BE PERMITTED BY LAW, SHALL BE VALID AND
SUFFICIENT SERVICE THEREOF.
(f) WAIVER OF JURY TRIAL. Each party hereto acknowledges and
agrees that any controversy that may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore it hereby irrevocably
and unconditionally waives any right it may have to a trial by jury in respect
of any litigation directly or indirectly arising out of or relating to this
Agreement, or the breach, termination or validity of this Agreement, or the
transactions contemplated by this Agreement. Each party certifies and
acknowledges that (i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party would not, in the
event of litigation, seek to enforce the foregoing waiver, (ii) it understands
and has considered the implications of this waiver, (iii) it makes this waiver
voluntarily, and (iv) it has been induced to enter into this Agreement by, among
other things, the mutual waivers and certifications contained in this Section
6(f).
(g) AMENDMENT; WAIVERS. No amendment, modification, supplement
or discharge of this Agreement, and no waiver hereunder, shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, supplement, discharge or waiver is
sought (and in the case of the Company, approved by resolution of the Board of
Directors of the Company). Any such waiver shall constitute a waiver only with
respect to the specific matter described in such writing and shall in no way
impair the rights of the party granting such waiver in any other respect or at
any other time. Neither the waiver by any party hereto of a breach of or a
default under any of the provisions of this Agreement, nor the failure by any
party, on one or more occasions, to enforce any of the provisions of this
Agreement or to exercise any right or privilege hereunder, shall be construed as
a waiver of any other breach or default of a similar nature, or as a waiver of
any of such provisions, rights or privileges hereunder. The rights and remedies
herein provided are cumulative and are not exclusive of any rights or remedies
that any party may otherwise have at law or in equity or otherwise.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
U.S. Office Products Company
<PAGE>
7
By /s/ Mark D. Director
-------------------------------------
Name: Mark D. Director
Title: Executive Vice President -
Administration and Secretary
CLAYTON, DUBILIER & RICE, INC.
By /s/ Brian D. Finn
-------------------------------------
Name: Brian D. Finn
Title: Executive Vice President
<PAGE>
Exhibit 10.12
FIRST AMENDMENT
FIRST AMENDMENT, dated as of August 21, 1998 (this "AMENDMENT"), to the
Credit Agreement (the "CREDIT AGREEMENT"), dated as of June 9, 1998, among U.S.
OFFICE PRODUCTS COMPANY, a Delaware corporation (the "BORROWER"), BLUE STAR
GROUP LIMITED, a New Zealand corporation ("BLUE STAR GROUP"), the several banks
and other financial institutions from time to time parties to the Credit
Agreement (the "LENDERS"), BANKERS TRUST COMPANY, a New York banking
corporation, as syndication agent (in such capacity, the "SYNDICATION AGENT"),
MERRILL LYNCH CAPITAL CORPORATION, a Delaware corporation, as documentation
agent for the Lenders hereunder (in such capacity, the "DOCUMENTATION AGENT")
and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative
agent for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower; and
WHEREAS, the Borrower has requested, and upon the effectiveness of this
Amendment, the Lenders have agreed, that certain provisions of the Credit
Agreement be amended or waived upon the terms and conditions set forth below to
allow the Borrower to (i) make Asset Sales in excess of $20,000,000 in the
aggregate in each of the 1999 and 2000 fiscal years and (ii) repurchase up to
$50,000,000 of common stock of the Borrower; and
WHEREAS, in consideration of the amendments provided for herein, the
Borrower is willing to reduce the Revolving Credit Commitments by up to
$50,000,000 as provided for herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. Terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement. Unless
otherwise indicated, all Section and subsection references are to the Credit
Agreement.
SECTION 2. DEFINED TERMS. Subsection 1.1 is hereby amended by adding the
following language after the word "credits" in item (g) of the definition of
"Consolidated EBITDA":
"(other than any gain realized in connection with a Permitted Receivables
Securitization)",
<PAGE>
2
PROVIDED, HOWEVER, that the foregoing shall not apply to a determination of the
Leverage Ratio for use in computing the Applicable Margin.
SECTION 3. AMENDMENT OF SUBSECTION 8.1(b). Subsection 8.1(b) is hereby
amended by (a) deleting the word "second" which erroneously appears in the last
line of each of the second, third, fourth, fifth and sixth Test Periods and (b)
substituting therefor, in each case, the word "third".
SECTION 4. AMENDMENT OF SUBSECTION 8.6(g). Subsection 8.6(g) is hereby
amended by (a) deleting such subsection in its entirety and (b) substituting
therefor the following:
"(g) (i) any sales or other Dispositions by the Borrower or any of
its Subsidiaries of any property the Net Cash Proceeds of which do not
exceed $20,000,000 in the aggregate per annum and the non-cash portion of
which does not exceed 25% of the consideration therefor; PROVIDED that in
the case of any such Asset Sale an amount equal to 100% of the Net Cash
Proceeds of such sale LESS the Reinvested Amount with respect thereto is
applied in accordance with subsection 4.4(c); and
(ii) any sales or other Dispositions by the Borrower or any of its
Subsidiaries of any property in the 1999 or 2000 fiscal year of the
Borrower of which the non-cash portion of each of such sales or other
Dispositions does not exceed 25% of the consideration therefor, PROVIDED
that in the case of any such Asset Sale, an amount equal to 100% of the
Net Cash Proceeds thereof (without any deduction for any Reinvested
Amount in respect thereof) is applied in accordance with subsection
4.4(c)."
SECTION 5. AMENDMENT OF SUBSECTION 8.7. Subsection 8.7 is hereby amended
by (a) deleting the word "and" at the end of paragraph (c) thereof, (b) deleting
the period at the end of paragraph (d) thereof and substituting therefor "; and"
and (c) adding the following paragraph (e) thereto:
"(e) so long as no Default or Event of Default shall have occurred
and be continuing or would result therefrom, payments by the Borrower to
repurchase or otherwise acquire Capital Stock of the Borrower (including
any options, warrants or other rights in respect thereof) not otherwise
permitted by the preceding clauses of this subsection 8.7, from Persons
other than CD&R, CD&R Fund V and CDR-PC Acquisition in an aggregate
amount not to exceed $50,000,000."
SECTION 6. AMENDMENT TO SUBSECTION 8.9(k). Subsection 8.9(k) is hereby
amended by deleting "20%" in the fourth line of the paragraph and substituting
therefor "25%" in order to make subsection 8.9(k) consistent with subsection
8.6(g).
<PAGE>
3
SECTION 7. REVOLVING CREDIT REDUCTION. In consideration of the execution
and delivery of the Amendment by the Required Basic Lenders, the Borrower hereby
irrevocably and unconditionally (a) gives notice of a reduction on March 31,
1999 in the Revolving Credit Commitments pursuant to subsection 2.4 by the
amount equal to $50,000,000 minus the Net Cash Proceeds received on account of
any Permitted Receivables Securitizations and Asset Sales during the period from
the date hereof to and including March 31, 1999 that, in each case, is
accompanied by an equivalent reduction in the Revolving Credit Commitments or
prepayment of the Tranche A Term Loans pursuant to subsection 4.4 and (b) agrees
that until such date (or, if earlier, the date on which the aggregate of such
reductions in the Revolving Credit Commitments and prepayments of the Tranche A
Term Loans equals $50,000,000) it will not borrow Revolving Credit Loans or
Swing Line Loans or request Letters of Credit to be issued under the Revolving
Credit Commitments if as a result thereof the Aggregate Outstanding Revolving
Credit will be greater than $200,000,000.
SECTION 8. REPRESENTATIONS AND WARRANTIES. After giving affect to this
Amendment, the Borrower hereby confirms, reaffirms and restates in all material
respects the representations and warranties set forth in Section 5 of the Credit
Agreement as if made on and as of the date hereof except for any representation
or warranty made as of the earlier date, which representation or warranty shall
have been true and correct in all material respects as of such earlier date.
SECTION 9. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective upon receipt by the Administrative Agent of counterparts of this
Amendment, duly executed and delivered by (a) the Borrower and Blue Star Group,
and (b) the Required Basic Lenders.
SECTION 10. PAYMENT OF EXPENSES. The Borrower agrees to pay or reimburse
the Administrative Agent for all of its reasonable out-of-pocket costs and
expenses incurred in connection with this Amendment, any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
SECTION 11. CONTINUING EFFECT OF CREDIT AGREEMENT. Except as expressly
amended herein, the Credit Agreement shall continue to be, and shall remain, in
full force and effect in accordance with its terms.
SECTION 12. GOVERNING LAW; COUNTERPARTS. THIS AMENDMENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This
Amendment may be executed by the parties hereto in any number of separate
counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. The execution and delivery of the
Amendment by any Lender shall be binding upon each of its successors and assigns
(including Transferees of its commitments and Loans in whole or in part prior to
effectiveness hereof) and
<PAGE>
4
binding in respect of all of its commitments and Loans, including any acquired
subsequent to its execution and delivery hereof and prior to the effectiveness
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Thomas Morgan
---------------------------
Thomas Morgan
Title: President and CEO
BLUE STAR GROUP LIMITED
By: /s/ Eric Watson
---------------------------
Eric Watson
Title: CEO/Chairman
THE CHASE MANHATTAN BANK, as
Administrative Agent, Swing
Line Lender, Issuing Lender and Lender
By: /s/ William J. Caggiano
---------------------------
William J. Caggiano
Title: Managing Director
<PAGE>
5
BANKERS TRUST COMPANY, as Syndication
Agent and Lender
By: /s/ Patricia Hogan
---------------------------
Patricia Hogan
Title: Principal
MERRILL LYNCH CAPITAL CORPORATION,
as Documentation Agent and Lender
By: /s/ Carol J.E. Feeley
---------------------------
Carol J.E. Feeley
Title: Director
BARCLAYS BANK PLC
By:
Title:
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
By: [Illegible]
---------------------------
Title: Vice President
CITICORP USA, INC.
By: /s/ Carla Devillers
---------------------------
Carla Devillers
Title: Attorney-in-fact
BHF - BANK AKTIENGESELLSCHAFT
By: /s/ John Skyler
---------------------------
John Skyler
Title: V.P.
By: /s/ Thomas J. Scifo
---------------------------
Thomas J. Scifo
Title: A.V.P.
<PAGE>
6
NATIONSBANK, N.A.
By: /s/ Michael R. Heredia
---------------------------
Michael R. Heredia
Title: Senior Vice President
THE BANK OF NEW YORK
By: /s/ Ronald R. Ready
---------------------------
Ronald R. Ready
Title: V.P.
GENERAL ELECTRIC CAPITAL CORPORATION
By:
Title:
NATIONAL BANK OF CANADA, A CANADIAN
CHARTERED BANK
By: [Illegible]
Title: V.P.
By: /s/ Michael E. Wick
---------------------------
Michael E. Wick
Title: V.P./Manager
SOUTHERN PACIFIC BANK
By: /s/ Cheryl Wasilewski
---------------------------
Cheryl Wasilewski
Title: Vice President
<PAGE>
7
CREDIT AGRICOLE INDOSUEZ
By: /s/ Craig Welch
---------------------------
Craig Welch
Title: First Vice President
By: /s/ Rene LeBlanc
---------------------------
Rene LeBlanc
Title: Vice President-
Team Leader
FIRST UNION NATIONAL BANK
By: /s/ Joan Anderson
---------------------------
Joan Anderson
Title: V.P.
THE MITSUBISHI TRUST & BANKING
CORPORATION
By:
Title:
CITY NATIONAL BANK
By:
Title:
CHIAO TUNG BANK CO., LTD., NEW YORK
AGENCY
By: /s/ Kuang-Si Shiu
---------------------------
Kuang-Si Shiu
Title: S.V.P. and General
Manager
<PAGE>
8
HELLER FINANCIAL, INC.
By:
Title:
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN
By:
Title:
By:
Title:
HIBERNIA NATIONAL BANK
By: /s/ William P. Harrington
---------------------------
William P. Harrington
Title: Senior V.P.
THE SAKURA BANK LIMITED
By:
Title:
FIRST COMMERCIAL BANK, NEW YORK
By: /s/ Vincent T.C. Chen
---------------------------
Vincent T.C. Chen
Title: Senior V.P. and
General Manager
<PAGE>
9
NATIONAL CITY BANK
By: /s/ Robert C. Rowe
---------------------------
Robert C. Rowe
Title: V.P.
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skavia
---------------------------
Peter L. Skavia
Title: V.P.
THE SUMITOMO BANK, LIMITED
By: /s/ John C. Kissinger
---------------------------
John C. Kissinger
Title: General Manager
BANKBOSTON, N.A.
By:
Title:
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By: /s/ Ray Vadalna
---------------------------
Ray Vadalna
Title: Senior V.P.
<PAGE>
Exhibit 10.13
SECOND AMENDMENT
SECOND AMENDMENT, dated as of April 15, 1999 (this "AMENDMENT"), to
the Credit Agreement, dated as of June 9, 1998 (the "CREDIT AGREEMENT"), as
amended by the First Amendment dated as of August 21, 1998, each among U.S.
OFFICE PRODUCTS COMPANY, a Delaware corporation (the "BORROWER"), BLUE STAR
GROUP LIMITED, a New Zealand corporation ("BLUE STAR GROUP"), the several banks
and other financial institutions from time to time parties to the Credit
Agreement (the "LENDERS"), BANKERS TRUST COMPANY, a New York banking
corporation, as syndication agent (in such capacity, the "SYNDICATION AGENT"),
MERRILL LYNCH CAPITAL CORPORATION, a Delaware corporation, as documentation
agent for the Lenders hereunder (in such capacity, the "DOCUMENTATION AGENT"),
and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative
agent for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT").
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to
make, and have made, certain loans and other extensions of credit to the
Borrower; and
WHEREAS, the Borrower has requested, and upon the effectiveness of
this Amendment, the Lenders have agreed, that certain provisions of the Credit
Agreement be amended or waived upon the terms and conditions set forth below;
and
WHEREAS, in consideration of the amendments provided for herein, the
Borrower is willing, among other things, to reduce the Multi-Draw Term Loan
Commitments by $150,000,000 as provided for herein;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. Terms defined in the Credit Agreement and
used herein shall have the meanings given to them in the Credit Agreement.
Unless otherwise indicated, all Schedule, Section and subsection references are
to the Credit Agreement.
SECTION 2. DEFINED TERMS. Subsection 1.1 is hereby amended by (a)
adding the following new definition thereto:
A>ADDITIONAL EQUITY INVESTMENT=: the purchase by the Equity Investors
and/or their Affiliates, upon or after the effectiveness of the Second
Amendment to this Agreement, dated as of April 15, 1999, of equity
securities of the Borrower resulting in the payment to the Borrower of
gross cash proceeds of at least $50,000,000.; and proxyment to equal; and
<PAGE>
(b) adding the following language after the parenthetical in clause
(g) of the definition of AConsolidated EBITDA:
A, including, without limitation, any non-recurring charges, (i)
incurred during fiscal years 1999, 2000 and 2001 of the Borrower, up
to an aggregate amount in fiscal year 1999 not to exceed $5,000,000
and in each of fiscal years 2000 and 2001 not to exceed $15,000,000,
as a result of the out-of-pocket costs and expenses paid to third
party consultants in connection with the restructuring of the Borrower
and (ii) incurred during fiscal years 1999, 2000 and 2001 of the
Borrower, up to an aggregate amount not to exceed $9,000,000, as a
result of cash contributions to Mail Boxes Etc. to finance the
acquisition, implementation and start-up operation of tracking,
communications and data systems to support the Mail Boxes Etc.
franchisees and headquarters operations
;PROVIDED, HOWEVER, that the foregoing amendment shall not be effective with
respect to any determination of the Leverage Ratio for use in computing the
Applicable Margin.
SECTION 3. AMENDMENT TO SUBSECTION 8.1(A). Subsection 8.1(a) is hereby
amended by (a) deleting the portion of the table appearing therein beginning
with the first quarter indicated below in its entirety and (b) substituting in
lieu thereof the following table:
<TABLE>
<CAPTION>
TEST PERIOD RATIO
<S> <C>
First day of the fourth quarter beginning
in January/February 1999 - second to
last day of the fourth quarter
ending in April 2000 1.15 to 1.00
Last day of the fourth quarter ending
in April 2000 - second to last day of the fourth
quarter ending in April 2001 1.25 to 1.00
Last day of the fourth quarter ending
in April 2001 - second to last day of the second
quarter ending in October 2001 1.50 to 1.00
Last day of the second quarter ending
in October 2001 - last day of the third
quarter ending in January 2002 2.25 to 1.00
First day of the fourth quarter beginning
in January/February 2002 - last day of the third
quarter ending in January 2005 2.50 to 1.00
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Thereafter 2.75 to 1.00
</TABLE>
; PROVIDED that, if the Additional Equity Investment is consummated on or prior
to September 30, 1999, subsection 8.1(a) shall be automatically further amended,
effective as of the date of consummation of the Additional Equity Investment, by
(a) deleting the portion of the table appearing therein beginning with the first
quarter indicated below in its entirety and (b) substituting in lieu thereof the
following table:
<TABLE>
<CAPTION>
TEST PERIOD RATIO
<S> <C>
Last day of the second quarter ending
in October 2001 - second to last day of the fourth
quarter ending in April 2002 1.50 to 1.00
Last day of the fourth quarter ending
in April 2002 - second to last day of the second
quarter ending in October 2002 1.70 to 1.00
Last day of the second quarter ending
in October 2002 - last day of the third
quarter ending in January 2005 2.50 to 1.00
Thereafter 2.75 to 1.00
</TABLE>
SECTION 4. AMENDMENT TO SUBSECTION 8.1(b). Subsection 8.1(b) is hereby
amended by (a) deleting the portion of the table appearing therein beginning
with the first quarter indicated below in its entirety and (b) substituting in
lieu thereof the following table:
<TABLE>
<CAPTION>
TEST PERIOD RATIO
<S> <C>
First day of the fourth quarter beginning
in January/February 1999 - second to
last day of the fourth
quarter ending in April 2000 9.90 to 1.00
Last day of the fourth quarter ending
in April 2000 - second to last day of the fourth
quarter ending in April 2001 8.90 to 1.00
Last day of the fourth quarter ending
in April 2001 - second to last day of the first
quarter ending in July 2001 7.50 to 1.00
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Last day of the first quarter ending
in July 2001 - second to last day of the second
quarter ending in October 2001 7.25 to 1.00
Last day of the second quarter ending
in October 2001 - last day of the third
quarter ending in January 2002 5.00 to 1.00
First day of the fourth quarter beginning
in January/February 2002 - last day of the third
quarter ending in January 2003 4.50 to 1.00
Thereafter 4.00 to 1.00
</TABLE>
; PROVIDED that, if the Additional Equity Investment is consummated on or prior
to September 30, 1999, subsection 8.1(b) shall be automatically further amended,
as of the date of the consummation of the Additional Equity Investment, by (a)
deleting the portion of the table appearing therein beginning with the first
quarter indicated below in its entirety and (b) substituting in lieu thereof the
following table:
<TABLE>
<CAPTION>
TEST PERIOD RATIO
<S> <C>
Last day of the second quarter ending
in October 2001 - second to last day of the third
quarter ending in January 2002 7.25 to 1.00
Last day of the third quarter ending
in January 2002 - second to last day of the fourth
quarter ending in April 2002 6.75 to 1.00
Last day of the fourth quarter ending
in April 2002 - second to last day of the second
quarter ending in October 2002 6.25 to 1.00
Last day of the second quarter ending
in October 2002 - second to last day of the third
quarter ending in January 2003 4.50 to 1.00
Thereafter 4.00 to 1.00
</TABLE>
SECTION 5. AMENDMENT TO SUBSECTION 8.2(n). Subsection 8.2(n)
is hereby amended by (a) deleting the reference to the amount "$25,000,000"
therein and (b) substituting in lieu thereof a reference to the amount
A$35,000,000.
<PAGE>
SECTION 6. AMENDMENT OF SUBSECTION 8.6(G). Subsection 8.6(g) is hereby
amended by (a) deleting such subsection in its entirety and (b) substituting in
lieu thereof the following:
A(g) (i) in addition to sales or other Dispositions permitted by
paragraphs (ii) and (iii) of this paragraph (g), any sales or other
Dispositions by the Borrower or any of its Subsidiaries of any property the
Net Cash Proceeds of which do not exceed $20,000,000 in the aggregate per
annum and the non-cash portion of which does not exceed 25% (or 50% with
respect to sales or other Dispositions by the Borrower in fiscal years 2000
and 2001 of the Borrower, PROVIDED that the aggregate non-cash proceeds of
such sales or other Dispositions under this paragraph (i) and paragraph
(ii) of this paragraph (g) in excess of 25% shall not exceed $10,000,000 in
either such fiscal year) of the consideration therefor, PROVIDED that in
the case of any Asset Sale an amount equal to 100% of the Net Cash Proceeds
of such sale LESS the Reinvested Amount with respect thereto is applied in
accordance with subsection 4.4(c);
(ii) any sales or other Dispositions by the Borrower or any of its
Subsidiaries of any property in the 1999, 2000 or 2001 fiscal years of the
Borrower of which the non-cash portion of each of such sales or other
Dispositions does not exceed 25% (or 50% with respect to sales or other
Dispositions by the Borrower in fiscal years 2000 and 2001 of the Borrower,
PROVIDED that the aggregate non-cash proceeds of such sales or other
Dispositions under paragraph (i) of this paragraph (g) and this paragraph
(ii) in excess of 25% shall not exceed $10,000,000 in either such fiscal
year) of the consideration therefor, PROVIDED that in the case of any such
Asset Sale, an amount equal to 100% of the Net Cash Proceeds thereof
(without any deduction for any Reinvested Amount in respect thereof) is
applied in accordance with subsection 4.4(c); and
(iii) notwithstanding anything to the contrary set forth in paragraphs
(i) and (ii) above, any sale or other Disposition by the Borrower of any of
the assets set forth on Schedule 1 hereto, PROVIDED that the non-cash
portion of each of such sale or other Disposition does not exceed 50% of
the consideration therefor, and PROVIDED, FURTHER, that in the case of any
such Asset Sale, an amount equal to 100% of the Net Cash Proceeds thereof
(without any deduction for any Reinvested Amount in respect thereof) is
applied in accordance with subsection 4.4(c)
SECTION 7. AMENDMENT OF SUBSECTION 8.7(E). Subsection 8.7(e) is hereby
amended by adding to the beginning thereof the following: Aso long as the
Borrower would be in compliance with the covenants set forth in subsections
8.1(a) and 8.1(b) if the covenants were in the same form as they existed upon
the effectiveness of the First Amendment, dated as of August 21, 1999, to this
Agreement, and.
SECTION 8. AMENDMENT OF SUBSECTION 8.8. Subsection 8.8 is hereby
amended by (a) deleting the second proviso therein in its entirety and (b)
substituting in lieu thereof the following:
<PAGE>
APROVIDED that (w) notwithstanding anything to the contrary set forth
above, (i) in fiscal year 1999 of the Borrower, the Borrower and its
consolidated Subsidiaries may make Capital Expenditures in an aggregate amount
not to exceed $55,000,000 and (ii) in each of fiscal years 2000 and 2001 of the
Borrower, the Borrower and its consolidated Subsidiaries may make Capital
Expenditures in an aggregate amount not to exceed $65,000,000, (x)
notwithstanding anything to the contrary set forth above, upon the consummation
of the Additional Equity Investment, (1) in fiscal year 2002 of the Borrower,
the Borrower and its consolidated Subsidiaries may make Capital Expenditures in
an aggregate amount not to exceed $65,000,000 and (2) the Borrower may make
additional Capital Expenditures (which may be made in any one fiscal year or
over more than one fiscal year) in an aggregate amount not to exceed an amount
equal to (A) the Net Cash Proceeds of the Additional Equity Investment MINUS (B)
the sum of (X) the aggregate amount of acquisitions made pursuant to subsection
8.10 in reliance upon such Net Cash Proceeds and (Y) the aggregate amount
expended by the Borrower to repurchase Senior Subordinated Notes, (y) 100% of
the unused amount of any Capital Expenditures permitted to be made during each
of fiscal years 1999, 2000 and 2001 and not made during such fiscal year may be
carried over and expended during the next succeeding fiscal year (and any amount
so carried over to be deemed the first amount applied and expended for Capital
Expenditures during such next succeeding fiscal year), and (z) 50% of the unused
amount of any Capital Expenditures permitted to be made during each subsequent
fiscal year and not made during such fiscal year may be carried over and
expended during the next succeeding fiscal year (and any amount so carried over
shall be deemed the first amount applied and expended for Capital Expenditures
during such next succeeding fiscal year)."
SECTION 9. AMENDMENT TO SUBSECTION 8.10. Subsection 8.10 is hereby
amended by (a) deleting each reference to the amounts A$25,000,000" and
A$50,000,000" therein, (b) substituting in lieu thereof a reference to
A$10,000,000" and (c) adding to the end of subsection 8.10 the following:
ANotwithstanding anything to the contrary contained herein, (i) during
fiscal years 2000 and 2001 of the Borrower the aggregate consideration
(excluding common equity) paid by the Borrower or any of its
Subsidiaries for any acquisition permitted hereunder, together with
the aggregate consideration (excluding common equity) paid by the
Borrower or any of its Subsidiaries for all such acquisitions during
such fiscal years shall not exceed $50,000,000 (PLUS, upon the
consummation of the Additional Equity Investment, an aggregate amount
not to exceed an amount equal to (a) the Net Cash Proceeds of the
Additional Equity Investment MINUS (b) the sum of (x) the amount of
Capital Expenditures made pursuant to subsection 8.8 in reliance upon
the Net Cash Proceeds of the Additional Equity Investment and (y) the
aggregate amount expended by the Borrower to repurchase Senior
Subordinated Notes) and (ii) if the Additional Equity Investment is
made, upon the consummation of the Additional Equity Investment,
during fiscal year 2002 of the Borrower the
<PAGE>
aggregate consideration (excluding common equity) paid by the Borrower
or any of its Subsidiaries for any acquisition permitted hereunder,
together with the aggregate consideration (excluding common equity)
paid by the Borrower or any of its Subsidiaries for all such
acquisitions during such fiscal year, shall not exceed $40,000,000
(PLUS, an aggregate amount not to exceed an amount equal to (a) the
Net Cash Proceeds of the Additional Equity Investment MINUS (b) the
sum of (x) the amount of Capital Expenditures made pursuant to
subsection 8.8 in reliance upon the Net Cash Proceeds of the
Additional Equity Investment and (y) the aggregate amount expended by
the Borrower to repurchase Senior Subordinated Notes PLUS (c) any
amount permitted to be used for such acquisitions in fiscal years 2000
and 2001 and not so used)
SECTION 10. WAIVER OF SUBSECTION 8.17. Subsection 8.17 is hereby
waived to permit the Borrower to use the Net Cash Proceeds of the Additional
Equity Investment to repurchase the Senior Subordinated Notes for an aggregate
purchase price not to exceed the amount equal to (A) the Net Cash Proceeds of
the Additional Equity Investment MINUS (B) the sum of (x) the aggregate amount
of acquisitions made pursuant to subsection 8.10 in reliance upon such Net Cash
Proceeds and (y) the aggregate amount of Capital Expenditures made pursuant to
subsection 8.8 in reliance upon such Net Cash Proceeds.
SECTION 11. REDUCTION OF MULTI-DRAW TERM LOAN COMMITMENTS. In
consideration of the execution and delivery of this Amendment by the Required
Basic Lenders, the Borrower, pursuant to subsection 2.11, hereby irrevocably and
unconditionally gives notice of a reduction, subject to and effective upon the
effectiveness of this Amendment (whether or not Section 10 hereof shall become
effective), in the Multi-Draw Term Loan Commitments by $150,000,000.
SECTION 12. REPRESENTATIONS AND WARRANTIES. After giving effect to
this Amendment, the Borrower hereby confirms, reaffirms and restates in all
material respects the representations and warranties set forth in Section 5 of
the Credit Agreement as if made on and as of the date hereof except for any
representation or warranty made as of the earlier date, which representation or
warranty shall have been true and correct in all material respects as of such
earlier date.
SECTION 13. CONDITIONS TO EFFECTIVENESS. (a) This Amendment (other
than Section 10 hereof) shall become effective upon (a) receipt by the
Administrative Agent of counterparts of this Amendment, duly executed and
delivered by (i) the Borrower and Blue Star Group and (ii) the Required Basic
Lenders and (b) receipt by the Administrative Agent from the Borrower for the
account of each Lender that duly executes and delivers this Amendment of
amendment fees equal to (x) 0.50% of the aggregate of such Lender=s Revolving
Credit Commitment, Multi-Draw Term Loan Commitment (after giving effect to the
reduction described in Section 11 above) and (y) 0.25% of such Lender=s Tranche
B Term Loans, if any (it being understood that the Borrower shall be under no
obligation to pay the fee referred to in this clause (y) to any Tranche B Term
Loan Lender executing this Amendment unless and until the
<PAGE>
waiver set forth in Section 10 hereof shall become effective) ; PROVIDED, that
Section 10 hereof shall not become effective until consent by the Required
Lenders, whether such consent is granted pursuant to this Amendment or
otherwise, it being understood that each Lender which executes this Amendment is
so consenting with respect to such Lender=s Revolving Credit Commitment,
Multi-Draw Term Loan Commitment (before giving effect to the reduction described
in Section 11 above) and Tranche A Term Loans.
(b) Section 10 of this Amendment shall become effective, if at all,
simultaneously with (and not after) the effectiveness of the other provisions of
this Amendment upon the satisfaction of the conditions stated in paragraph (a)
above and the receipt by the Administrative Agent of counterparts of the Consent
to Section 10 of Second Amendment, dated as of the date hereof, duly executed
and delivered by (i) the Borrower and Blue Star Group and (ii) a sufficient
number of Tranche B Term Loan Lenders which, with the Basic Lenders executing
this Amendment, would constitute the Required Lenders, it being understood that
each Lender which executes this Amendment is so consenting with respect to such
Lender=s Revolving Credit Commitment, Multi-Draw Term Loan Commitment (before
giving effect to the reduction described in Section 11 above), Tranche A Term
Loans and Tranche B Term Loans.
SECTION 14. CONSUMMATION OF ADDITIONAL EQUITY INVESTMENT. Upon
consummation of the Additional Equity Investment, the Borrower shall deliver to
the Administrative Agent a certificate acknowledging such consummation duly
executed by a Responsible Officer of the Borrower.
SECTION 15. PAYMENT OF EXPENSES. The Borrower agrees to pay or
reimburse the Administrative Agent for all of its reasonable out-of-pocket costs
and expenses incurred in connection with this Amendment, any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
SECTION 16. CONTINUING EFFECT OF CREDIT AGREEMENT. Except as expressly
amended herein, the Credit Agreement shall continue to be, and shall remain, in
full force and effect in accordance with its terms.
SECTION 17. GOVERNING LAW; COUNTERPARTS. THIS AMENDMENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This
Amendment may be executed by the parties hereto in any number of separate
counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. The execution and delivery of this
Amendment by any Lender shall be binding upon each of its successors and assigns
(including Transferees of its commitments and Loans in whole or in part prior to
effectiveness hereof) and binding in respect of all of its commitments and
Loans, including any acquired subsequent to its execution and delivery hereof
and prior to the effectiveness hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ John C. Sorensen
-------------------------------
Title: VP-Finance
BLUE STAR GROUP LIMITED
By: /s/ Maurice G. Kidd
-------------------------------
Title: Director
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a Lender
By /s/ William J. Caggiano
-------------------------------
Name: William J. Caggiano
Title: Managing Director
BANKBOSTON, N.A., as a Lender
By /s/ Richard D. Hill
-------------------------------
Name: Richard D. Hill
Title: Managing Director
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Lender
By /s/ Michael D. McKay
-------------------------------
Name: Michael D. McKay
Title: Sr. Vice President
BANKERS TRUST COMPANY, as Syndication
Agent and as a Lender
By /s/ James Reilly
-------------------------------
Name: James Reilly
Title: Vice President
BARCLAYS BANK PLC, as a Lender
By /s/ John Giannone
-------------------------------
Name: John Giannone
Title: Director
BHF - BANK AKTIENGESELLSCHAFT, as a
Lender
By /s/ Thomas J. Scifo
-------------------------------
Name: Thomas J. Scifo
Title: VP
By /s/ Perry Forman
-------------------------------
Name: Perry Forman
Title: VP
BALANCED HIGH-YIELD FUND I LTD.
By: BHF-BANK AKTIENGESELLSCHAFT,
acting through its New York Branch,
as attorney-in-fact
By /s/ Thomas J. Scifo
-------------------------------
Name: Thomas J. Scifo
Title: VP
By /s/ Perry Forman
-------------------------------
Name: Perry Forman
Title: VP
CIBC, INC., as a Lender
By /s/ Koren Volk
-------------------------------
Name: Koren Volk
Title: Authorized Signatory
CITICORP USA, INC., as a Lender
By /s/ Mark R. Floyd
-------------------------------
Name: Mark R. Floyd
Title: Attorney-in-fact
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN, as a Lender
By /s/ Anca Trifan
-------------------------------
Name: Anca Trifan
Title: Vice President
By /s/ John S. Runnion
-------------------------------
Name: John S. Runnion
Title: First Vice President
FIRST COMMERCIAL BANK, NEW YORK,
as a Lender
By /s/ Jia-Shyang Ou
-------------------------------
Name: Jia-Shyang Ou
Title: Deputy General Manager
FIRST UNION NATIONAL BANK, as a Lender
By /s/ Joan Anderson
-------------------------------
Name: Joan Anderson
Title: Vice President
GENERAL ELECTRIC CAPITAL
CORPORATION, as a Lender
By /s/ Janet K. Williams
-------------------------------
Name: Janet K. Williams
Title: Duly Authorized Signatory
HELLER FINANCIAL, INC., as a Lender
By /s/ Linda W. Wolf
-------------------------------
Name: Linda W. Wolf
Title: Senior Vice President
HIBERNIA NATIONAL BANK, as a Lender
By /s/ Cheryl H. Denenea
-------------------------------
Name: Cheryl H. Denenea
Title: Vice President
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION, as a Lender
By /s/ Jamie Harney
-------------------------------
Name: Jamie Harney
Title: Vice President
NATIONSBANK, N.A., as a Lender
By /s/ Robert C. Rowe
-------------------------------
Name: Robert C. Rowe
Title: Senior Vice President
NATIONAL CITY BANK, as a Lender
By /s/ Robert C. Rowe
-------------------------------
Name: Robert C. Rowe
Title: Senior Vice President
PNC BANK, N.A., as a Lender
By /s/ Caroline R. Walsh
-------------------------------
Name: Caroline R. Walsh
Title: Vice President
FLEET BUSINESS CREDIT CORPORATION,
as a Lender
By /s/ Timothy J. Broderick
-------------------------------
Name: Timothy J. Broderick
Title: Senior Vice President
SOUTHERN PACIFIC BANK, as a Lender
By /s/ Cheryl A. Wasilewski
-------------------------------
Name: Cheryl A. Wasilewski
Title: Senior Vice President
THE BANK OF NEW YORK, as a Lender
By /s/ Edward J. DeSalvo
-------------------------------
Name: Edward J. DeSalvo
Title: Vice President
THE MITSUBISHI TRUST & BANKING
CORPORATION, as a Lender
By /s/ Toshihiro Hayashi
-------------------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
MERRILL LYNCH CAPITAL CORPORATION,
as Documentation Agent and as a Lender
By /s/ Carol J. Feeley
-------------------------------
Name: Carol J. Feeley
Title: Director
<PAGE>
Schedule 1
Permitted Sales or Dispositions
Affordable Interior Systems, Inc.
McWhorter=s, Inc.
Blue Star Technology Group
Mid-Continent Division of Rainen Business Interiors
<PAGE>
EXHIBIT 10.14
CONSENT TO SECTION 10 OF SECOND AMENDMENT
CONSENT TO SECTION 10 OF SECOND AMENDMENT, dated as of April 15,
1999 (this "CONSENT"), to the Credit Agreement, dated as of June 9, 1998
(the "CREDIT AGREEMENT"), as amended by the First Amendment, dated as of
August 11, 1998, each among U.S. OFFICE PRODUCTS COMPANY, a Delaware
corporation ( the "BORROWER"), BLUE STAR GROUP LIMITED, a New Zealand
corporation ("BLUE STAR GROUP"), the several banks and other financial
institutions from time to time parties to the Credit Agreement (the
"LENDERS"), BANKERS TRUST COMPANY, a New York banking corporation, as
syndication agent (in such capacity, the "SYNDICATION AGENT"), MERRILL LYNCH
CAPITAL CORPORATION, a Delaware corporation, as documentation agent for the
Lenders hereunder (in such capacity, the "DOCUMENTATION AGENT"), and THE
CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent
for the Lenders hereunder (in such capacity, the "ADMINISTRATIVE AGENT").
WITNESSETH:
WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed
to make, and have made, certain loans and other extensions of credit to the
Borrower; and
WHEREAS, the Borrower is requesting the consent of the Basic Lenders
to the Second Amendment, dated the date hereof (the "SECOND AMENDMENT"),
amending the Credit Agreement in several respects; and
WHEREAS, Section 10 of the Second Amendment constitutes a waiver of
Section 8.17 of the Credit Agreement; and
WHEREAS, pursuant to Section 12.1(a) of the Credit Agreement, the
consent of the Required Lenders is required to effect any waiver of Section
8.17 of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. Terms defined in the Credit Agreement and
used herein shall have the meanings given to them in the Credit Agreement and
the following term shall have the following meaning:
"ADDITIONAL EQUITY INVESTMENT": the purchase by the Equity Investors
and/or their Affiliates, upon or after the effectiveness of the Second
Amendment to this Agreement, dated as of April 15, 1999, of equity
securities of the Borrower resulting in the payment to the Borrower of
gross cash proceeds of at least $50,000,000.
<PAGE>
Unless otherwise indicated, all Schedule, Section and subsection references
are to the Credit Agreement.
SECTION 2. WAIVER OF SUBSECTION 8.17. Subsection 8.17 is hereby waived
to permit the Borrower to use the Net Cash Proceeds of the Additional Equity
Investment to repurchase the Senior Subordinated Notes for an aggregate
purchase price not to exceed the amount equal to (A) the Net Cash Proceeds of
the Additional Equity Investment MINUS (B) the sum of (x) the aggregate
amount of acquisitions made pursuant to subsection 8.10 in reliance upon such
Net Cash Proceeds and (y) the aggregate amount of Capital Expenditures made
pursuant to subsection 8.8 in reliance upon such Net Cash Proceeds.
SECTION 3. REPRESENTATIONS AND WARRANTIES. After giving effect to this
Consent, the Borrower hereby confirms, reaffirms and restates in all material
respects the representations and warranties set forth in Section 5 of the
Credit Agreement as if made on and as of the date hereof except for any
representation or warranty made as of the earlier date, which representation
or warranty shall have been true and correct in all material respects as of
such earlier date.
SECTION 4. CONDITIONS TO EFFECTIVENESS. This Consent to Section 10 of
the Second Amendment shall become effective, if at all, simultaneously with
(and not after) the effectiveness of the Second Amendment upon (a) receipt by
the Administrative Agent of counterparts of this Consent, duly executed and
delivered by the Borrower and Blue Star Group, (b) the consent of the
Required Lenders (whether such consent is contained in the Second Amendment
or in this Consent) and (c) receipt by the Administrative Agent from the
Borrower for the account of each Tranche B Term Loan Lender that duly
executes and delivers this Consent of an amendment fee equal to 0.25% of such
Lender's Tranche B Term Loans (it being understood that the Borrower shall be
under no obligation to pay such fee to any Tranche B Term Loan Lender
executing this Consent unless and until the consent of the Required Lenders
shall have been obtained).
SECTION 5. PAYMENT OF EXPENSES. The Borrower agrees to pay or
reimburse the Administrative Agent for all of its reasonable out-of-pocket
costs and expenses incurred in connection with this Consent, any other
documents prepared in connection herewith and the transactions contemplated
hereby, including, without limitation, the reasonable fees and disbursements
of counsel to the Administrative Agent.
SECTION 6. CONTINUING EFFECT OF CREDIT AGREEMENT. Except as expressly
amended herein, the Credit Agreement shall continue to be, and shall remain,
in full force and effect in accordance with its terms.
SECTION 7. GOVERNING LAW: COUNTERPARTS. THIS CONSENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. This
Consent may be executed by the parties hereto in any number of separate
counterparts, and all of said counterparts taken together shall be deemed to
<PAGE>
constitute one and the same instrument. The execution and delivery of this
Consent by any Lender shall be binding upon each of its successors and
assigns (including Transferees of its commitments and Loans in whole or in
part prior to effectiveness hereof) and binding in respect of all of its
commitments and Loans, including any acquired subsequent to its execution and
delivery hereof and prior to the effectiveness hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Consent to
be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ John C. Sorensen
------------------------------
Title: John C. Sorensen
VP Finance
BLUE STAR GROUP LIMITED
By: /s/ Maurice G. Kidd
------------------------------
Title: Maurice G. Kidd
Director
<PAGE>
BAY HARBOUR PARTNERS LTD., as a Lender
By: /s/ JEFFREY B. WERTHEIM
------------------------------
Name: Jeffrey B. Wertheim
Title: Vice President
<PAGE>
ALLSTATE INSURANCE COMPANY, as a Lender
By: /s/ JERRY D. ZINKULA
------------------------------
Name: Jerry D. Zinkula
Title: Authorized Signatory
By: /s/ CHARLES D. MIRES
------------------------------
Name: Charles D. Mires
Title: Authorized Signatory
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY, as a
Lender
By: /s/ JERRY D. ZINKULA
------------------------------
Name: Jerry D. Zinkula
Title: Authorized Signatory
By: /s/ CHARLES D. MIRES
------------------------------
Name: Charles D. Mires
Title: Authorized Signatory
<PAGE>
ARCHIMEDES FUNDING II, Ltd.
By: ING Capital Advisors, LLC
As Collateral Manager
By: /s/ STEVEN GORSKI
------------------------------
Name: Steven Gorski
Title: Vice President &
Senior Credit Analyst
<PAGE>
ARES LEVERAGED INVESTMENT FUND, L.P.,
as a Lender
By: ARES Management, L.P.
By: /s/ MERRITT S. HOOPER
------------------------------
Name: Merritt S. Hooper
Title: V.P.
<PAGE>
ARES LEVERAGED INVESTMENT FUND, II, L.P.,
as a Lender
By: ARES Management II, L.P.
By: /s/ MERRITT S. HOOPER
------------------------------
Name: Merritt S. Hooper
Title: V.P.
<PAGE>
FIRST DOMINION FUNDING, I, as a Lender
By: /s/ ANDREW MARSHANK
------------------------------
Name: Andrew Marshank
Title:
<PAGE>
PACIFICA PARTNERS LLP, as a Lender
By: /s/ Michael J. Bagevich
------------------------------
Name: Michael J. Bagevich
Title: Senior Vice President
<PAGE>
PARIBAS CAPITAL FUNDING LLC, as a Lender
By: /s/ JEFFREY J. YOULE
------------------------------
Name: Jeffrey J. Youle
Title: Director
<PAGE>
PILGRIM AMERICA HIGH INCOME
INVESTMENTS LTD.
By: Pilgrim Investments, Inc.
as its investment manager
By: /s/ JEFFREY A. BAKALAR
------------------------------
Name: Jeffrey A. Bakalar
Title: Vice President
<PAGE>
PAM CAPITAL FUNDING, L.P.
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ MARK K. OKADA CFA
------------------------------
Name: Mark K. Okada CFA
Title: Executive Vice President
Highland Capital Management L.P.
Pamco Cayman Ltd.
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ MARK K. OKADA CFA
------------------------------
Name: Mark K. Okada CFA
Title: Executive Vice President
Highland Capital Management L.P.
ML CBO IV (Cayman)
By: Highland Capital Management, L.P.
as Collateral Manager
By: /s/ MARK K. OKADA CFA
------------------------------
Name: Mark K. Okada CFA
Title: Executive Vice President
Highland Capital Management L.P.
<PAGE>
ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.
By: Pilgrim Investments, Inc.
as its investment manager
By: /s/ JEFFREY A. BAKALAR
------------------------------
Name: Jeffrey A. Bakalar
Title: Vice President
<PAGE>
MOUNTAIN CLO TRUST, as a Lender
By: /s/ TEIJI TERAMOTO
------------------------------
Name: Teiji Teramoto
Title: Authorized Signatory
<PAGE>
TCW LEVERAGED INCOME TRUST II, L.P.
By: TCW Advisers (Bermuda), Ltd.
as General Partner
By: /s/ MARK L. GOLD
------------------------------
Name: Mark L. Gold
Title: Managing Director
By: TCW Investment Management Company
as Investment Adviser
By: /s/ JONATHAN R. INSULL
------------------------------
Name: Jonathan R. Insull
Title: Vice President
<PAGE>
CYPRESSTREE INVESTMENT FUND, LLC, as a
Lender
By: CypressTree Investment Management
Company, Inc. its Managing Member
By: /s/ DAVID M. LOCHIATTO
------------------------------
Name: David M. Lochiatto
Title: Associate
<PAGE>
CYPRESSTREE INVESTMENT PARTNERS, II,
as a Lender
By: CypressTree Investment Management
Company, Inc. as Portfolio Manager
By: /s/ DAVID M. LOCHIATTO
------------------------------
Name: David M. Lochiatto
Title: Associate
<PAGE>
MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ GEORGE D. PELOSE
------------------------------
Name: George D. Pelose
Title: Authorized Signatory
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ GEORGE D. PELOSE
------------------------------
Name: George D. Pelose
Title: Authorized Signatory
MERRILL LYNCH GLOBAL INVESTMENT SERIES:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ GEORGE D. PELOSE
------------------------------
Name: George D. Pelose
Title: Authorized Signatory
<PAGE>
AERIES FINANCE LTD., as a Lender
By: /s/ ANDREW IAN WIGNALL
------------------------------
Name: Andrew Ian Wignall
Title: Director
<PAGE>
AMARA-1 FINANCE LTD., as a Lender
By: /s/ ANDREW IAN WIGNALL
------------------------------
Name: Andrew Ian Wignall
Title: Director
AMARA-2 FINANCE LTD., as a Lender
By: /s/ ANDREW IAN WIGNALL
------------------------------
Name: Andrew Ian Wignall
Title: Director
<PAGE>
CAPTIVA FINANCE LTD., as a Lender
By: /s/ [ILLEGIBLE]
------------------------------
Name:
Title:
<PAGE>
CERES FINANCE LTD., as a Lender
By: /s/ [ILLEGIBLE]
------------------------------
Name:
Title:
<PAGE>
STRATA FUNDING LTD., as a Lender
By: /s/ [ILLEGIBLE]
------------------------------
Name:
Title:
<PAGE>
KZH CYPRESSTREE-1 LLC, as a Lender
By: /s/ VIRGINIA CONWAY
------------------------------
Name: Virginia Conway
Title: Authorized Agent
KZH CYPRESSTREE-2 LLC, as a Lender
By: /s/ VIRGINIA CONWAY
------------------------------
Name: Virginia Conway
Title: Authorized Agent
<PAGE>
KZH SHENKMAN LLC, as a Lender
By: /s/ VIRGINIA CONWAY
------------------------------
Name: Virginia Conway
Title: Authorized Agent
KZH SOLEIL-2 LLC, as a Lender
By: /s/ VIRGINIA CONWAY
------------------------------
Name: Virginia Conway
Title: Authorized Agent
<PAGE>
MORGAN STANLEY SENIOR FUNDING, INC.
as a Lender
By: /s/ CHRISTOPHER A. PUCILLO
------------------------------
Name: Christopher A. Pucillo
Title: Vice President
<PAGE>
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST, as a Lender
By: /s/ Sheila Finnerty
------------------------------
Name: Sheila Finnerty
Title: Vice President
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST,
as a Lender
By: /s/ JEFFREY W. MAILLET
------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
VAN KAMPEN SENIOR INCOME TRUST,
as a Lender
By: /s/ JEFFREY W. MAILLET
------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
<PAGE>
VAN KAMPEN SENIOR FLOATING RATE FUND,
as a Lender
By: /s/ JEFFREY W. MAILLET
------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
VAN KAMPEN CLO II, LIMITED, as a Lender
By: VAN KAMPEN MANAGEMENT INC., as
Collateral Manager
By: /s/ JEFFREY W. MAILLET
------------------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President &
Director
<PAGE>
Exhibit 10.20
AMENDMENTS TO THE 1998 INVESTMENT AGREEMENT
(i) Paragraph (a) of the penultimate recital to the 1998 Investment
Agreement shall be restated in its entirety as follows as follows:
(a) Purchaser wishes to purchase from the Company,
and the Company wishes to sell to Purchaser, shares of Common
Stock and warrants having the terms and conditions set forth
in Exhibit 1 (as such warrants are amended from time to time,
whether pursuant to the Investment Agreement, dated as of
March 30, 1999, between the Company and Purchaser (the "1999
Investment Agreement") or otherwise, the "Special Warrants")
entitling the holder thereof to purchase shares of Common
Stock together representing 24.9% of the shares of Common
Stock as of the Closing Date (as herein defined) that would be
outstanding after giving effect to the issuance of such shares
(and assuming the conversion into Common Stock of all of the
Company's issued and outstanding 5 1/2% Convertible
Subordinated Notes Due 2001 issued pursuant to an Indenture,
dated as of February 7, 1996, between the Company and State
Street Bank and Trust Company (the "2001 Notes") that are
outstanding on the Closing Date, and after giving effect to
the issuance of any Contingent Stock (as defined herein)), and
warrants entitling the holder thereof to purchase one share of
Common Stock for each share and Special Warrant so purchased
on the terms and subject to the conditions set forth in
Exhibit 2 (as such warrants are amended from time to time,
whether pursuant to the 1999 Investment Agreement or
otherwise, the "Warrants"), and
(ii) Paragraph (b) of Section 4.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(b) Purchaser shall be entitled to nominate three directors
for election, PROVIDED:
(i) if the total number of shares of Common Stock
represented by the Shares, the Special Warrants and the
Warrants ("Purchaser's Total Securities") declines by more
than 33_% but less than 66_% from Purchaser's Total Securities
at Closing by reason of sales or other dispositions of Common
Stock, Warrants or Special Warrants by Purchaser, Purchaser
shall have the right to nominate two directors;
(ii) if Purchaser's Total Securities declines by 66_%
or more from Purchaser's Total Securities at Closing, but
Purchaser's Percentage Interest remains at least 5% of the
outstanding Voting Securities, by reason of
1
<PAGE>
sales or other dispositions of Common Stock, Warrants or
Special Warrants by Purchaser, Purchaser shall have the right
to nominate one director;
(iii) for the purpose of calculating Purchaser's
Total Securities as of any time after the closing under the
1999 Investment Agreement (but not for the purpose of
calculating Purchaser's Total Securities at Closing), each
Preferred Share owned by Purchaser shall be treated as if it
were 100 Shares.
(iv) in the event that the size of the Board of
Directors shall be increased, Purchaser shall have the right
to at least proportionate representation on the Board
following such increase based on the composition of the Board
as between Investor Directors and Non-Investor Directors
immediately prior to such increase; PROVIDED that in no event
shall the Board consist of more than 12 directors; and
(v) if the chief executive officer of the Company is
not then a member of the Board of Directors or a nominee for
membership thereon, the Purchaser shall be entitled to approve
an additional nominee to the Board of Directors.
(iii) Paragraph (a) of Section 6.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(a) Except as permitted by Section 6.01(b) or
6.01(c), neither Purchaser nor its Affiliates will directly or
indirectly acquire any securities (including by exercise of
the Warrants or Special Warrants) or take any other action
that would cause (i) the percentage of the Total Voting Power
represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 26.7% or
(ii) the aggregate voting power of all Equity Securities then
held by Purchaser (on an as converted basis) to equal or
exceed 50%.
(iv) Paragraph (c) of Section 6.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(c) This Section 6.01 shall terminate and be of no
further force or effect on the earliest to occur of (i) the
fifth anniversary of the Closing, (ii) the date on which the
percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by
Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%, and (iii)
the first public disclosure of a Third-Party Bid (provided,
however, that if such Third-Party Bid is
2
<PAGE>
thereafter abandoned, terminated or withdrawn, the provisions
of this Section 6.01 shall be reinstated, although any action
taken or agreement or arrangement entered into by Purchaser
after such first public disclosure and prior to such
reinstatement (or the consummation of any such action,
agreement or arrangement, whether before or, unless such
action, agreement or arrangement shall be a tender offer or
other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach this Section 6.01
as a result of such reinstatement).
(v) The first paragraph of Section 6.02 of the 1998 Investment
Agreement shall be restated in its entirety as follows:
SECTION 6.02 ADDITIONAL LIMITATIONS. (a) Except as
permitted by Section 6.02(b), during the five-year period
beginning on the date of this Agreement, Purchaser shall not,
and shall not permit its Affiliates to:
(vi) Section 6.02 of the 1998 Investment Agreement shall be amended by
adding a section (b) as follows:
(b) The limitations set forth in Section 6.02 (a)
hereof shall not apply (x) in connection with a Buyout
Transaction that is not solicited or proposed by Purchaser or
its Affiliates, (y) following the first public disclosure of a
Third-Party Bid (provided, however, that if such Third-Party
Bid is thereafter abandoned, terminated or withdrawn, the
provisions of Section 6.02 (a) hereof shall be reinstated,
although any action taken or agreement or arrangement entered
into by Purchaser after such first public disclosure and prior
to such reinstatement (or the consummation of any such action,
agreement or arrangement, whether before or, unless such
action, agreement or arrangement shall be a tender offer or
other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach the provisions of
Section 6.02 (a) hereof as a result of such reinstatement), or
(z) as specifically approved by a majority of the Non-Investor
Directors
(vii) Paragraphs (c) and (d) of Section 7.01 of the 1998 Investment
Agreement shall be restated in their entirety as follows:
(c) The provisions of clauses (a) and (b) of this
Article VII shall terminate and be of no further force or
effect on the earliest to occur of (i) the fifth anniversary
of the Closing, (ii) the date on which the percentage of the
Total Voting Power represented by the aggregate voting power
of all Voting Securities then owned by Purchaser (other than
any Voting Securities acquired in violation of this Agreement)
is greater than 50%, and (iii) the first public disclosure of
a Third-Party Bid (provided,
3
<PAGE>
however, that if such Third-Party Bid is thereafter abandoned,
terminated or withdrawn, the provisions of clauses (a) and (b)
of this Article VII shall be reinstated, although any action
taken or agreement or arrangement entered into by Purchaser
after such first public disclosure and prior to such
reinstatement (or the consummation of any such action,
agreement or arrangement, whether before or, unless such
action, agreement or arrangement shall be a tender offer or
other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach the provisions of
clauses (a) and (b) of this Article VII as a result of such
reinstatement).
(d) Prior to the seventh anniversary of the Closing,
the Purchaser will not, directly or otherwise dispose of
Shares representing 15% or more of the then outstanding Common
Stock, to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) without first offering the
Company the right to make an offer to purchase the Shares
proposed to be so sold, transferred or otherwise disposed of.
The provisions of the previous sentence shall terminate and be
of no effect on the earlier to occur of (i) the date on which
the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by
Purchaser (other than any Voting Securities acquired in
violation of this Agreement) is greater than 50%, and (ii) the
first public disclosure of a Third Party Bid (provided,
however, that if such Third-Party Bid is thereafter abandoned,
terminated or withdrawn, the provisions of this Section 7.01
(d) shall be reinstated, although any action taken or
agreement or arrangement entered into by Purchaser after such
first public disclosure and prior to such reinstatement (or
the consummation of any such action, agreement or arrangement,
whether before or, unless such action, agreement or
arrangement shall be a tender offer or other public offer with
respect to the Company, after such reinstatement) shall not be
deemed to breach this Section 7.01 (d) as a result of such
reinstatement).
(viii) Section 8.10 of the 1998 Investment Agreement shall be restated
in its entirety as follows:
Section 8.10 TAX STANDSTILL. Except as permitted by
Section 6.01(b) or 6.01(c) and except for acquisitions of
Securities from the Company, during the period ending two
years after the date of the Distributions, (i) Purchaser shall
not acquire any Securities or take any other action that would
cause Purchaser's Percentage Interest to equal or exceed 50%,
(ii) none of Purchaser, the Fund or CD&R shall act in concert
with any other Person to acquire any Securities if aggregating
such
4
<PAGE>
acquisition with the Purchaser's holdings would cause the
Purchaser's Percentage Interest to equal or exceed 50%, and
(iii) none of Purchaser, the Fund or CD&R shall solicit the
acquisition of any Securities, PROVIDED that the provision by
the Fund to its limited partners of customary reports and
information, and customary communication with such limited
partners on behalf of the Fund, with respect to the Fund's
investment in the Company that, in either case, do not
recommend any such acquisition, shall not be treated as a
solicitation by the Purchaser within the meaning of this
clause (iii). The limitations contained in this Section 8.10
shall terminate upon the first public disclosure of a
Third-Party Bid (provided, however, that if such Third-Party
Bid is thereafter abandoned, terminated or withdrawn, the
provisions of this Section 8.10 shall be reinstated, although
any action taken or agreement or arrangement entered into by
Purchaser after such first public disclosure and prior to such
reinstatement (or the consummation of any such action,
agreement or arrangement, whether before or, unless such
action, agreement or arrangement shall be a tender offer or
other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach this Section 8.10
as a result of such reinstatement).
5
<PAGE>
(ix) Section 12.02 of the 1998 Investment Agreement shall be amended by
inserting, immediately following the definition of "Pre-Distribution
Transactions", a new definition as follows:
"PREFERRED SHARES" means the shares of Series A
Non-Voting Participating Convertible Preferred Stock of the
Company, par value $.001 per share, purchased by Purchaser
pursuant to an Investment Agreement, dated as of March 30,
1999, between the Company and Purchaser.
(x) Section 12.02 of the 1998 Investment Agreement shall be amended by
restating the definition of "Pro Rata Share", as follows:
"PRO RATA SHARE" means the fraction of an entire
issuance of New Securities, the numerator of which shall be
the sum of (a) the number of shares of Common Stock owned or
receivable upon exercise of the Warrants and the Special
Warrants by Purchaser and its Affiliates (other than the
Company and its Subsidiaries) immediately prior to such
issuance of such New Securities and (b) the number of shares
of Common Stock into which the Preferred Shares owned by
Purchaser and its Affiliates are convertible, and the
denominator of which shall be the sum of (x) the aggregate
number of shares of Common Stock outstanding immediately prior
to such issuance of such New Securities and receivable upon
exercise of the Warrants and the Special Warrants and (y) the
number of shares of Common Stock into which such Preferred
Shares are convertible.
(xi) Section 12.02 of the 1998 Investment Agreement shall be amended by
inserting, immediately following the definition of "Termination Fee", a new
definition as follows:
"THIRD-PARTY BID" means an unsolicited bona fide
tender offer or other public offer by a Person other than
Purchaser, an Affiliate thereof or the Company or any of its
Subsidiaries (a "THIRD PARTY") to purchase a number of shares
of Common Stock which, together with the shares of Common
Stock Beneficially Owned by such Third Party, would result in
the Third Party being the Beneficial Owner of 25% or more of
the shares of Common Stock outstanding.
6
<PAGE>
Exhibit 10.21
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT AGREEMENT
between
U.S. OFFICE PRODUCTS COMPANY
and
CDR-PC ACQUISITION, L.L.C.
Dated as of March 30, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Issuance of Preferred Shares and Exchange of Warrants; Amendment of 1998
Investment Agreement and Registration Rights Agreement...................................................2
1.01 Issuance of Preferred Shares and Exchange of Warrants; Amendment of 1998
Investment Agreement and Registration Rights Agreement............................................2
1.02 Time and Place of the Closing......................................................................2
1.03 Transactions at the Closing........................................................................2
ARTICLE II Representations and Warranties..............................................................3
2.01 Representations and Warranties of the Company......................................................3
(a) Corporate Organization....................................................................3
(b) Corporate Authority.......................................................................4
(c) No Violations; Consents and Approvals.....................................................4
(d) Capital Stock.............................................................................5
(e) Subsidiaries..............................................................................6
(f) SEC Filings...............................................................................7
(g) Company Financial Statements..............................................................7
(h) Undisclosed Liabilities...................................................................8
(i) Absence of Certain Events and Changes.....................................................8
(j) Compliance with Applicable Laws...........................................................8
(k) Title to Assets...........................................................................9
(l) Litigation................................................................................9
(m) Contracts................................................................................10
(n) Taxes....................................................................................11
(o) Employee Benefit Plans and Related Matters; ERISA........................................13
(p) Environmental Matters....................................................................15
(q) Status of Preferred Shares and 1999 Warrant Shares.......................................15
(r) Intellectual Property....................................................................16
(s) Brokers or Finders.......................................................................17
(t) Disclosure...............................................................................17
(u) No Solicitation by Purchaser.............................................................17
(v) Fairness Opinion.........................................................................17
2.02 Representations and Warranties of Purchaser.......................................................18
(a) Organization.............................................................................18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(b) Authority................................................................................18
(c) Conflicting Agreements and Other Matters.................................................18
(d) Acquisition for Investment...............................................................18
(e) Brokers or Finders.......................................................................19
(f) Limited Partner Consent..................................................................19
ARTICLE III Transfer of Preferred Shares...............................................................19
3.01 Transfer of Preferred Shares......................................................................19
ARTICLE IV Covenants and Additional Agreements.........................................................21
4.01 Covenants of the Company..........................................................................21
(a) Reasonable Efforts.......................................................................21
(b) No Acquisitions..........................................................................21
(c) No Dispositions..........................................................................21
(d) Other Transactions.......................................................................21
(e) Employee Benefits........................................................................23
(f) Certificate of Designation...............................................................23
4.02 No Solicitation...................................................................................23
4.03 Access and Information............................................................................24
4.04 Further Actions...................................................................................24
4.05 Further Assurances................................................................................25
4.06 Preferred Share Voting Rights.....................................................................25
4.07 Schedule Delivery.................................................................................25
ARTICLE V Conditions Precedent.........................................................................26
5.01 Conditions to Each Party's Obligations............................................................26
(a) Approvals................................................................................26
(b) No Litigation, Injunctions, or Restraints................................................26
(c) Credit Facility Obligations..............................................................26
5.02 Conditions to the Obligations of the Company......................................................26
(a) Representations and Warranties...........................................................26
(b) Opinion of Company's Counsel.............................................................27
5.03 Conditions to the Obligations of Purchaser........................................................27
(a) Representations and Warranties...........................................................27
(b) Performance of Obligations of the Company................................................27
(c) Opinion of Purchaser's Counsel...........................................................27
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
(d) Purchaser's Expenses.....................................................................28
(e) Other Parties............................................................................28
(f) Corporate Proceedings....................................................................28
(g) Material Adverse Effect..................................................................28
(h) Opinion of the Company's Counsel. ......................................................28
(i) Limited Partner Consent..................................................................28
(j) Schedules................................................................................28
(k) Fairness Opinion.........................................................................29
ARTICLE VI Termination................................................................................29
6.01 Termination.......................................................................................29
6.02 Effect of Termination.............................................................................30
ARTICLE VII Indemnification............................................................................30
7.01 Indemnification of Purchaser......................................................................30
7.02 Indemnification Procedures........................................................................31
7.03 Survival of Representations and Warranties........................................................32
7.04 Other Indemnities.................................................................................32
ARTICLE VIII Interpretation; Definitions................................................................32
8.01 Definitions.......................................................................................32
ARTICLE IX Miscellaneous..............................................................................39
9.01 Severability......................................................................................39
9.02 Specific Enforcement..............................................................................40
9.03 Entire Agreement..................................................................................40
9.04 Counterparts......................................................................................40
9.05 Notices...........................................................................................40
9.06 Amendments; Waivers, etc..........................................................................42
9.07 Cooperation.......................................................................................42
9.08 Successors and Assigns............................................................................43
9.09 Expenses and Remedies.............................................................................43
9.10 Transfer of Preferred Shares, 1999 Warrants and 1999 Special Warrants.............................43
9.11 Governing Law.....................................................................................44
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
9.12 Publicity.........................................................................................44
9.13 No Third Party Beneficiaries......................................................................44
9.14 Consent to Jurisdiction...........................................................................44
9.15 Replacement of Share Certificates.................................................................45
</TABLE>
v
<PAGE>
Exhibit I Form of Certificate of Designation
Exhibit II Form of 1999 Warrant
Exhibit III Form of 1999 Special Warrant
Exhibit IV Amendments to the 1998 Investment Agreement
Exhibit V Amendments to the Registration Rights Agreement
vi
<PAGE>
THIS INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of March 30,
1999, is entered into between CDR-PC Acquisition, L.L.C., a Delaware limited
liability company ("PURCHASER"), and U.S. Office Products Company, a Delaware
corporation (the "COMPANY").
WHEREAS the Company and Purchaser are parties to an investment
agreement, dated as of January 12, 1998 (as amended by an amendment thereto
dated February 3, 1999, the "1998 INVESTMENT AGREEMENT"), pursuant to which the
Company sold to Purchaser, and Purchaser purchased, (I) 9,092,106 shares (the
"SHARES") of common stock of the Company, par value $0.001 per share (the
"COMMON STOCK"), and warrants (the "1998 SPECIAL WARRANTS") representing the
right to acquire a number of shares of Common Stock equal to the difference
between (X) 24.9% of the sum of (A) the outstanding shares of Common Stock as of
June 10, 1998 (the "1998 CLOSING DATE") after giving effect to the issuance of
the Shares and the exercise of the 1998 Special Warrants, and assuming the
conversion into Common Stock of all the 2001 Notes outstanding on the Closing
Date and (B) the number of any shares issued pursuant to certain contingent
obligations of the Company, and (Y) 24.9% of the number of outstanding shares of
Common Stock as of the 1998 Closing Date after giving effect to the issuance of
the Shares, and (II) warrants (the "1998 WARRANTS") entitling the holder thereof
to purchase one share of Common Stock for each Share and Special Warrant so
purchased;
WHEREAS, the Company and Purchaser are parties to a registration
rights agreement, dated as of June 10, 1998 (the "REGISTRATION RIGHTS
AGREEMENT"), entered into pursuant to the 1998 Investment Agreement;
WHEREAS, in light of the Company's operating performance and financing
and capital needs, the Board of Directors of the Company has determined that it
would be in the best interests of the Company and its shareholders for the
Company to raise additional equity capital, and, in connection therewith:
(a) the Company wishes, in exchange for consideration of $51 million
in cash, to (I) issue to Purchaser 73,261.79 newly issued shares of Series
A Non-Voting Participating Convertible Preferred Stock, par value $.001 per
share (the "PREFERRED SHARES"), of the Company having the terms set forth
in the certificate of designation attached hereto as Exhibit I (the
"CERTIFICATE OF DESIGNATION"), (II) amend and restate the 1998 Warrants (as
so amended and restated, the "1999 WARRANTS") to reduce the exercise price
and make certain other conforming changes, as set forth in the form of 1999
Warrant attached hereto as Exhibit II,
<PAGE>
and (III) amend and restate the 1998 Special Warrants (as so amended and
restated, the "1999 SPECIAL WARRANTS") to make certain conforming changes,
as set forth in the form of 1999 Special Warrant attached hereto as Exhibit
III; and
(b) the Company and Purchaser wish to amend the 1998 Investment
Agreement and the Registration Rights Agreement as provided herein; and
WHEREAS, the Company and Purchaser intend that the transactions
described in clause (a) of the preceding recital qualify as a "reorganization"
described in section 368(a)(1)(E) of the Code, and that this Agreement qualify
as a "plan of reorganization" within the meaning of section 368 of the Code and
the Treasury Regulations thereunder;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein set forth, the parties agree as follows:
ARTICLE I
ISSUANCE OF PREFERRED SHARES AND AMENDMENT OF
WARRANTS; AMENDMENT OF 1998 INVESTMENT AGREEMENT AND
REGISTRATION RIGHTS AGREEMENT
SECTION I.1 ISSUANCE OF PREFERRED SHARES AND AMENDMENT OF WARRANTS;
AMENDMENT OF 1998 INVESTMENT AGREEMENT AND REGISTRATION RIGHTS AGREEMENT. Upon
the terms and subject to the conditions set forth herein, (A) the Company
agrees, for aggregate consideration of $51 million (the "CASH CONSIDERATION"),
to (I) issue to Purchaser 73,261.79 Preferred Shares, (II) amend and restate the
1998 Warrants as set forth in Exhibit II, and (III) amend and restate the 1998
Special Warrants as set forth in Exhibit III, and (B) the Company and Purchaser
agree to amend the 1998 Investment Agreement and the Registration Rights
Agreement, effective as of the Closing (as hereinafter defined), as provided in
Exhibits IV and V, respectively.
SECTION I.2 TIME AND PLACE OF THE CLOSING. The closing (the
"CLOSING") shall take place at the offices of Debevoise & Plimpton, 875 Third
Avenue, New York, New York, 10022, at 10:00 A.M., New York time, on April 16,
1999, or at such other place, time and date as the parties may agree. The
"CLOSING DATE" shall be the date the Closing occurs.
2
<PAGE>
SECTION I.3 TRANSACTIONS AT THE CLOSING. At the Closing, subject to
the terms and conditions of this Agreement:
(a) The Company shall (I) issue to Purchaser the Preferred Shares, and
(II) deliver to Purchaser a certificate representing the Preferred Shares,
a certificate representing the 1999 Warrants and a certificate representing
the 1999 Special Warrants, in each case registered in the name of
Purchaser;
(b) Purchaser shall (I) pay to the Company the Cash Consideration, by
wire transfer of immediately available funds to an account or accounts
designated by the Company at least five business days prior to the Closing
Date, and (II) deliver to the Company the certificates representing the
1998 Warrants and the 1998 Special Warrants; and
(c) The amendments to the 1998 Investment Agreement and the
Registration Rights Agreement provided for in Section 1.01(b) shall become
effective.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION II.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As of the
date hereof and as of the Closing Date, the Company hereby represents and
warrants to Purchaser as follows:
(a) CORPORATE ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Each Subsidiary of the Company having assets or annual
revenues of $500,000 or more or which is otherwise material to the business
of the Company and its Subsidiaries, taken as a whole (each a "MATERIAL
SUBSIDIARY"), is duly organized and validly existing and, if applicable, is
in good standing, under the laws of the jurisdiction of its incorporation
or organization. The Company and each of its Subsidiaries is duly qualified
or licensed and, if applicable, is in good standing as a foreign
corporation, in each jurisdiction in which the properties owned, leased or
operated, or the business conducted, by it require such qualifica-
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tion or licensing, except for any such failures so to qualify or be in good
standing which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole. Each
of the Material Subsidiaries has the requisite power and authority to carry
on its businesses as they are now being or will be (immediately following
the Closing) conducted. The Company has heretofore made available to
Purchaser complete and correct copies of the Certificate of Incorporation
of the Company (the "COMPANY CHARTER") and the By-laws of the Company (the
"COMPANY BY-LAWS") and the certificate of incorporation and by-laws, or the
com parable organizational documents, of each of the Material Subsidiaries,
each as amended to date and currently in full force and effect.
(b) CORPORATE AUTHORITY. The Company has the requisite corporate power
and authority to execute, deliver and perform this Agreement, to issue the
Preferred Shares and to consummate the other transactions contemplated
hereby. The execution, delivery and performance by the Company of this
Agreement, the issuance of the Preferred Shares and the consummation of the
other transactions contemplated hereby have been duly authorized by the
Company's Board of Directors, and no other corporate proceedings on the
part of the Company or its shareholders are necessary to authorize this
Agreement or for the Company to issue the Preferred Shares or to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms (assuming that it is a valid and binding obligation of
Purchaser).
(c) NO VIOLATIONS; CONSENTS AND APPROVALS. (i) The execution, delivery
and performance by the Company of this Agreement, the issuance by the
Company of the Preferred Shares, the amendment of the 1998 Warrants and the
1998 Special Warrants and the consummation by the Company of the other
transactions contemplated hereby will not (A) result in a violation or
breach of the Company Charter or the Company By-laws or (B) result in a
violation or breach of (or give rise to any right of termination,
amendment, modification, vesting, revocation, cancellation, acceleration,
increased payments or any adjustments pursuant to any antidilution
provision under), or constitute a default (with or without due notice or
lapse of time or both) under, or result in the creation of any lien,
charge, encumbrance or security interest of any kind (a "LIEN") or any
obligation to create any Lien upon any of the properties or assets of the
Company or any of its Subsidiaries under, (1) subject to the governmental
filings and other
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matters referred to in clause (ii) below, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, contract, agreement,
obligation, instrument, offer, commitment, understanding or other
arrangement (each a "CONTRACT") or of any license, waiver, exemption,
order, franchise, permit or concession (each a "PERMIT") to which the
Company or any of its Subsidiaries is a party or by which any of their
respective properties or assets may be bound, or (2) subject to the
governmental filings and other matters referred to in clause (ii) below,
any judgment, order, decree, statute, law, regulation or rule applicable to
the Company or any of its Subsidiaries, except, in the case of clause (B),
for violations, breaches, defaults, rights of cancellation, termination,
revocation vesting, or acceleration or Liens that, individually and in the
aggregate, would not have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations,
registrations, declarations or filings as may be required under, and other
applicable requirements of the Exchange Act, and filings under state
securities or "BLUE SKY" laws and filings or consents referred to in
Schedule 2.01(c)(ii), no consent, approval, order or authorization of, or
registration, declaration or filing with, any government or any court,
administrative agency or commission or other governmental authority or
agency, federal, state, local or foreign (a "GOVERNMENTAL ENTITY"), is
required with respect to the Company or any of its Subsidiaries in
connection with the execution, delivery or performance by the Company of
this Agreement or the consummation by the Company of the transactions
contemplated hereby (except where the failure to obtain such consents,
approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole).
(d) CAPITAL STOCK. As of the date hereof, the authorized capital stock
of the Company consists of (I) 500,000,000 shares of Common Stock, of which
an aggregate of 36,069,413 shares of Common Stock were issued and
outstanding as of the close of business on March 8, 1999, and (II) 500,000
shares of preferred stock, $0.001 par value per share, of which none were
issued and outstanding as of the date hereof. As of the close of business
on March 30, 1999, there were out standing under the Company's 1994
Long-Term Incentive Plan, the 1994 Amended and Restated Long-Term Incentive
Plan, the 1996 Non-Employee Directors' Stock Plan, the 1997A Stock Option
Plan for Employees of Mail Boxes
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Etc., the 1997B Stock Option Plan for Employees of Mail Boxes Etc. and the
1997 Stock Option Plan for former Non-Employee Directors of Mail Boxes Etc.
(collectively, the "COMPANY STOCK PLANS") options to acquire an aggregate
of 4,225,000 shares of Common Stock (subject to adjustment on the terms set
forth therein) of which 25,000 are subject to allocation pursuant to option
pools, as set forth on Schedule 2.01(d)(ii). As of the close of business on
October 24, 1998, there were outstanding under the Company Stock Plans no
shares of restricted stock and 12,821 deferred shares had been reserved for
issuance pursuant to the 1996 Non-Employee Directors Stock Plan. As of the
close of business on March 30, 1999, the Company had no shares of Common
Stock reserved for issuance of restricted stock. All of the outstanding
shares of Common Stock have been duly authorized and validly issued, and
are fully paid and nonassessable. As of the date hereof the Company has
outstanding $4.614 million in 5 1/2% Convertible Subordinated Notes Due
2003 issued pursuant to an Indenture, dated as of May 22, 1996, between the
Company and The Chase Manhattan Bank, N.A. (the "2003 NOTES") and $12.761
million in 5 1/2% Convertible Subordinated Notes Due 2001 issued pursuant
to an Indenture, dated as of February 7, 1996, between the Company and
State Street Bank and Trust Company (the "2001 NOTES"), convertible into
shares of Common Stock at any time prior to maturity at a conversion price
of $64.36 and $38.70 per share, respectively. Except as set forth on
Schedule 3.01(d), and except for such rights of Purchaser pursuant to
Section 5.01 of the 1998 Investment Agreement, there are no preemptive or
similar rights on the part of any holders of any class of securities of the
Company or any of its Subsidiaries. Except for the Common Stock, the 1998
Warrants, the 1998 Special Warrants, the 2003 Notes and the 2001 Notes, the
Company has outstanding no bonds, debentures, notes or other obligations or
securities the holders of which have the right to vote (or are convertible
or exchangeable into or exercisable for securities having the right to
vote) with the stockholders of the Company on any matter. Except as set
forth above or on Schedule 2.01(d), and except for the 1998 Warrants and
the 1998 Special Warrants, as of the date of this Agreement, there are no
securities convertible into or exchangeable for, or options, warrants,
calls, subscriptions, rights, contracts, commitments, arrangements or
understandings of any kind to which the Company or any of its Subsidiaries
is a party or by which any of them is bound obligating the Company or any
of its Subsidiaries contingently or otherwise to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock
or other voting securities of the Company or any of its Subsidiaries.
Except with respect to the withholding of exercise price or withholding
taxes under any Company Stock Plan, there are no
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outstanding Contracts of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries. Schedule 2.01(d)(iii) lists all shares
of capital stock of the Company and options to acquire such shares that
have been acquired, since June 10, 1998, by any officer of the Company who
is subject to reporting obligations under Section 16 of the Exchange Act or
by any director of the Company.
(e) SUBSIDIARIES. (i) Schedule 2.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Company's
Subsidiaries. The Company has no equity interests with a value of $100,000
or more in any Person other than the Company's Subsidiaries listed on
Schedule 2.01(e), and there are no commitments on the part of the Company
or any Material Subsidiary to contribute additional capital in respect of
any equity interest in any Person. Each of the outstanding shares of
capital stock of each of the Company's Subsidiaries has been duly
authorized and validly issued, and is fully paid and nonassessable. Except
as set forth on Schedule 2.01(e)(i), all of the outstanding shares of
capital stock of each of the Company's Subsidiaries are owned, either
directly or indirectly, by the Company free and clear of all Liens, except
for Liens in favor of the banks party to a Credit Agreement, dated June 9,
1998, between the Company, The Chase Manhattan Bank and the other parties
thereto, as amended by the First Amendment thereto dated as of August 21,
1998 (the "CREDIT AGREEMENT").
(ii) Schedule 2.01(e)(ii) contains a complete and correct list of all
Material Subsidiaries of the Company.
(f) SEC FILINGS. The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the
SEC under the Securities Act and the Exchange Act since June 30, 1996 (the
"COMPANY SEC DOCUMENTS"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (I) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applic able, and the rules and regulations thereunder
and (II) did not, at the time it was filed, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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(g) COMPANY FINANCIAL STATEMENTS. (i) The Company has heretofore
furnished to Purchaser complete and correct copies of the consolidated
balance sheets of the Company as of April 25, 1998, April 26, 1997 and
April 30, 1996, and consolidated statements of income, consolidated
statements of cash flow and consolidated statements of stockholders' equity
for the years ended April 25, 1998, April 26, 1997 and April 30, 1996,
(such financial statements, including the notes thereto, the "COMPANY
FINANCIAL STATEMENTS"), together with the report of the Company's
independent accountants thereon. The Company Financial Statements present
fairly in all material respects the consolidated financial position of the
Company and its consolidated Subsidiaries as of their respective dates, and
each of the consolidated statements of income, consolidated statements of
cash flow and consolidated statements of stockholders' equity included in
the Company Financial Statements (including any related notes and
schedules) fairly presents in all material respects the income, cash flows
and stockholders equity, as the case may be, of the Company and its
consolidated Subsidiaries for the periods set forth therein, in each case
in accordance with GAAP applied on a consistent basis throughout the
periods presented therein except as indicated in the notes thereto.
(ii) Except for matters disclosed on Schedule 2.01(h)(iv) with respect
to balance sheet information only, the financial statements, including the
unaudited consolidated balance sheet (the "BALANCE SHEET") and the
unaudited consolidated statement of income, filed by the Company in its
Quarterly Report on Form 10-Q for the period ended January 23, 1999 (the
"UNAUDITED COMPANY FINANCIAL STATEMENTS") have been prepared in all
material respects in accordance with GAAP consistently applied and on that
basis fairly present the consolidated financial condition and results of
operations of the Company as of the date thereof and for the period
indicated, except that the Unaudited Company Financial Statements omit
footnote disclosures required by GAAP and are subject to normal, recurring
year-end closing and audit adjustments.
(h) UNDISCLOSED LIABILITIES. Except (I) for the items listed in
Schedule 2.01(h), (II) as and to the extent disclosed or reserved against
on the Balance Sheet, or in the footnotes thereto, (III) as incurred after
the date of the Balance Sheet in the ordinary course of Business consistent
with prior practice and not prohibited by this Agreement, and (IV) for
matters disclosed on Schedule 2.01(h)(iv) with respect to balance sheet
information only, neither the Company nor any of its Subsidiaries has any
liabilities or obligations of any nature, whether
8
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known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due, that, individually or in the aggregate, are or would
be material to the Company and its Subsidiaries, taken as a whole. Except
as disclosed on Schedule 2.01(h), there are no liabilities or obligations
of the Company or any of its Subsidiaries, contingent or otherwise, to any
Person with respect to the value of the Common Stock.
(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to
the date hereof and any amendments filed with respect thereto prior to the
date hereof (the "FILED COMPANY SEC DOCUMENTS") or as otherwise
contemplated or permitted by this Agreement, and except for any items
referred to in Schedule 2.01(i) or Schedule 2.01(h)(iv), since January 23,
1999, the Company and its Subsidiaries have conducted their respective
businesses in the ordinary course consistent with past practice and there
has not been any event, change or development which, individually or in
the aggregate, would have or result in a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.
(j) COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed in the Filed
Company SEC Documents, each of the Company and its Subsidiaries is in
compliance with all statutes, laws, regulations, rules, judgments, orders
and decrees of all Governmental Entities applicable to it, and neither the
Company nor any of its Subsidiaries has received any notice alleging
noncompliance except, with reference to all the foregoing, where the
failure to be in compliance would not, individually or in the aggregate,
have a Material Adverse Effect on the Company and its Subsidiaries, taken
as a whole. This Section 2.01(j) does not relate to employee benefits
matters (for which Section 2.01(o) is applicable), environmental matters
(for which Section 2.01(p) is applicable) or tax matters (for which Section
2.01(n) is applicable). Each of the Company and its Subsidiaries has all
Permits that are required in order to permit it to carry on its business as
it is presently conducted, except where the failure to have such Permits or
rights would not, individually or in the aggregate, have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole. All such
Permits are in full force and effect and each of the Company and its
Subsidiaries is in compliance with the terms of such Permits, except where
the failure to be in full force and effect or in compliance would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.
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(k) TITLE TO ASSETS. (i) Except as set forth in Schedule 2.01(k)(i),
each of the Company and its Subsidiaries owns and has good and valid title
to, or a valid leasehold interest in, or otherwise has sufficient and
legally enforceable rights to use, all of the properties and assets (real,
personal or mixed, tangible or intangible), used by or held for use by it
in connection with the conduct of, or otherwise material to, their
respective businesses (the "ASSETS"), including Assets reflected on the
Balance Sheet or acquired since the date thereof, except for Assets
disposed of in the ordinary course of business consistent with past
practice and in accordance with this Agreement and except for such defects
in title which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole, in
each case free and clear of any Liens except for Permitted Liens. This
Section 2.01(k) does not relate to intellectual property (for which Section
2.01(r) is applicable).
(ii) Except as referred to in Schedule 2.01(k)(ii), each of the
Company and its Subsidiaries has (A) good and insurable title to its owned
real properties and (B) valid and subsisting leasehold interests in its
leased real properties, in each case, free and clear of any Liens, except
for (1) Permitted Liens and (2) easements, covenants, rights-of-way, other
matters of record and other matters subject to which the leases of such
real properties are granted.
(l) LITIGATION. Except as disclosed in the Filed Company SEC Documents
or referred to on Schedule 2.01(l), as of the date hereof there are no
civil, criminal or administrative actions, suits or proceedings pending or,
to the knowledge of the Company, threatened, against the Company or any of
its Subsidiaries that, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole. Except as disclosed in the Company SEC
Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against the Company or any of its
Subsidiaries that, insofar as can reasonably be foreseen, individually or
in the aggregate, in the future would have a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.
(m) CONTRACTS. (i) Schedule 2.01(m) contains a complete and correct
list, as of the date hereof, of all Contracts (other than the 1998
Transaction Agreements) that are of the types listed in clauses (A) through
(H) below to which the Company or any of its Subsidiaries is a party (the
"MATERIAL CONTRACTS"):
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(A) employment, consulting, severance, and other material
Contracts relating to or for the benefit of current, future or former
employees, officers or directors (excluding sales persons) of the
Company or any of its Subsidiaries requiring annual base payments
going forward in excess of $250,000;
(B) Contracts relating to the borrowing of money or obtaining of
or extension of credit (other than in the ordinary course of
business), including letters of credit, guarantees and material
security agreements;
(C) joint venture, partnership and similar Contracts (excluding
joint purchasing arrangements with no minimum purchase requirements),
involving a sharing of profits or expenses, that are material or
involve any obligation on the part of the Company or any of its
Subsidiaries to commit capital (excluding commitments not exceeding
$100,000 in the aggregate);
(D) Contracts prohibiting or materially restricting the ability
of the Company or any of its Subsidiaries to conduct its business, to
engage in any business or operate in any geographical area or to
compete with any Person;
(E) Contracts that are material to the business, operations,
results of operations, condition (financial or otherwise), assets or
properties of the Company and it Subsidiaries, taken as a whole;
(F) any employment agreement (and any other agreement involving
annual payments in excess of $150,000) with change of control or
"event risk" provisions relating to the Company or any of its
Subsidiaries;
(G) any employment agreement or other agreement requiring the
Company or any of its Subsidiaries to compensate any employee for any
tax imposed as a result of any excess parachute payment under Section
280G of the Code; and
(H) contracts providing for future payments that are conditioned,
in whole or in part, on the future performance of the Company or any
of its Subsidiaries.
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(ii) All Material Contracts are legal, valid, binding, in full force
and effect and enforceable against each party thereto, except to the extent
that any failure to be enforceable would not, individually or in the
aggregate, reasonably be expected to have or result in a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole, PROVIDED that
no representation is made as to the enforceability of any non-competition
provision in any employment agreements. Except as set forth in Schedule
2.01(m), there does not exist under any Material Contract any violation,
breach or event of default, or event or condition that, after notice or
lapse of time or both, would constitute a violation, breach or event of
default thereunder, on the part of the Company or any of its Subsidiaries
or, to the knowledge of the Company, any other Person, other than such
violations, breaches or events of default as would not, individually or in
the aggregate, have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole. Except as set forth in Schedule 2.01(m),
the enforceability of all Material Contracts will not be adversely affected
in any manner by the execution, delivery or performance of this Agreement,
and no Material Contract contains any change in control or other terms or
conditions that will become applicable or inapplicable as a result of the
consummation of the transactions contemplated by this Agreement.
(n) TAXES. (i) Except as set forth on Schedule 2.01(n), (A) all Tax
Returns required to be filed by or on behalf of the Company or any of its
Subsidiaries have been filed except to the extent that a failure to file
would not, individually or in the aggregate, have a Material Adverse Effect
on the Company and its Subsidiaries, taken as a whole; (B) all such Tax
Returns filed are complete and accurate in all respects, other than any
incompletenesses or any inaccuracies that would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and its
Subsidiaries, taken as a whole, and all Taxes shown to be due on such Tax
Returns have been paid; (C) no written claim (other than a claim that has
been finally settled) has been made by a taxing authority that the Company
or any of its Subsidiaries is subject to an obligation to file Tax Returns
or to pay or collect Taxes imposed by any jurisdiction in which the Company
or such Subsidiary does not file Tax Returns or pay or collect Taxes, other
than any such claim that would not have a Material Adverse Effect on the
Company or such Subsidiary or for which adequate reserves have been
provided on the Balance Sheet; (D) there is no deficiency with respect to
any Taxes which would, individually or in the aggregate, have a Material
Adverse Effect on the Company
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and its Subsidiaries, taken as a whole, other than any such deficiency for
which adequate reserves have been provided on the Balance Sheet; and (E)
all material assessments for Taxes due with respect to completed and
settled examinations or concluded litigation have been paid which,
individually or in the aggregate (with respect to the Company or any of its
Subsidiaries), exceed $100,000. As used in this Agreement, "TAXES" shall
include all federal, state, local and foreign income, franchise, property,
sales, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, including interest and penalties, and additions thereto;
and "TAX RETURNS" shall mean all federal, state, local and foreign tax
returns, declarations, statements, reports, schedules, forms and
information returns relating to Taxes.
(ii) Except as set forth in Schedule 2.01(n), each of the Company and
its Subsidiaries has duly and timely withheld all Taxes required to be
withheld in connection with its business and assets, and such withheld
Taxes have been either duly and timely paid to the proper governmental
authorities or properly set aside in accounts for such purpose, except to
the extent that any failure to do so would not have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
(iii) Except as set forth in Schedule 2.01(n) and except for the Tax
Allocation Agreement, (A) neither the Company nor any of its Subsidiaries
is a party to or bound by or has any obligation under any Tax allocation,
sharing, indemnification or similar agreement or arrangement (other than
any agreement for the acquisition of one or more of the Subsidiaries) with
any Person other than the Company or any of its Subsidiaries, which might
result in a Material Adverse Effect to the Company or any of its
Subsidiaries which entered into such agreement or arrangement; and (B)
neither the Company nor any of its Subsidiaries is or has been at any time
a member of any group of companies filing a consolidated, combined or
unitary income tax return other than any such group (1) the common parent
of which is the Company or any of its Subsidiaries or (2) the common parent
of which has not held any asset other than shares of one or more of the
Company's Subsidiaries.
(iv) Except as set forth in Schedule 2.01(n), (A) all taxable periods
of each of the Company and its Subsidiaries ending before December 31, 1993
are closed or no longer subject to audit; (B) neither the Company nor any
of its Subsidiaries is currently under any audit by any taxing authority
as to which such
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<PAGE>
taxing authority has asserted in writing any claim which, if adversely
determined, could have a Material Adverse Effect on the Company or any
of its Subsidiaries; and (C) no waiver of the statute of limitations is
in effect with respect to any taxable year of the Company or any of its
Subsidiaries.
(o) EMPLOYEE BENEFIT PLANS AND RELATED MATTERS; ERISA. (i) EMPLOYEE
BENEFIT PLANS. Each Employee Benefit Plan that provides for equity-based
compensation or that has associated costs that are expected to be material
to the Company and its Subsidiaries, taken as a whole and that is expected
to provide for contributions to be made by the Company or any of its
Subsidiaries or their Employees after the date hereof or to permit the
accrual of additional benefits by any Employee of the Company or any of its
Subsidiaries after the date hereof is either listed on Schedule 2.01(o) or
has been filed with the SEC as a material contract (collectively, the
"PLANS"). Except as set forth on Schedule 2.01(o), neither the Company nor
any of its Subsidiaries has communicated to any Employee any intention or
commitment to modify any Plan or to establish or implement any other
employee or retiree benefit or compensation plan or arrangement which
would, if it existed on the date hereof, be a Plan.
(ii) QUALIFICATION. Except to the extent that failure to meet the
requirements of section 401(a) of the Code would not result in any material
liability as to which adequate reserves have not been established, each
Employee Benefit Plan intended to be qualified under section 401(a) of the
Code, and the trust (if any) forming a part thereof, (A) has received a
favorable determination letter from the IRS as to its qualification under
the Code and to the effect that each such trust is exempt from taxation
under section 501(a) of the Code, and nothing has occurred since the date
of such determination letter that could adversely affect such qualification
or tax-exempt status or (B) a timely application for such a favorable
determination letter was filed and the Company has no reason to believe
that such a favorable determination letter will not be granted.
(iii) COMPLIANCE; LIABILITY. (A) No liability has been or is
reasonably expected to be incurred under or pursuant to Title I or IV of
ERISA or the penalty, excise Tax or joint and several liability provisions
of the Code relating to employee benefit plans that is or would be material
to the Company and its Subsidiaries, taken as a whole.
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(B) Each of the Employee Benefit Plans has been operated and
administered in all respects in compliance with its terms, all applicable
laws and all applicable collective bargaining agreements, except for any
failures so to comply that, individually and in the aggregate, could not
reasonably be expected to result in a material liability or obligation on
the part of the Company or any of its Subsidiaries that would be material
to the Company and its Subsidiaries, taken as a whole. There are no pending
or threatened claims by or on behalf of any of the Employee Benefit Plans,
by any Employee or otherwise involving any such Employee Benefit Plan or
the assets of any Employee Benefit Plan (other than routine claims for bene
fits, all of which have been fully reserved for on the regularly prepared
balance sheets of the Company) which would reasonably be expected to result
in any liability to the Company or any of its Subsidiaries.
(C) Except to the extent that it would not give rise to a liability or
obligation on the part of the Company or any of its Subsidiaries that would
be material to the Company and its Subsidiaries, taken as a whole, no
Employee is or will become entitled to post-employment benefits of any kind
by reason of employment with the Company or any of its Subsidiaries,
including, without limita tion, death or medical benefits (whether or not
insured), other than (X) coverage mandated by section 4980B of the Code,
(Y) retirement benefits payable under any Plan qualified under section
401(a) of the Code or (Z) accrued deferred compensation. The consummation
of the transactions contemplated by this Agreement will not result in an
increase in the amount of compensation or benefits or the acceleration of
the vesting or timing of payment of any compensation or benefits payable to
or in respect of any Employee by the Company or any of its Subsidiaries.
(iv) EMPLOYEES, LABOR MATTERS, ETC. Except as set forth on Schedule
2.01(o), neither the Company nor any of its Subsidiaries is a party to or
bound by any collective bargaining agreement, and there are no labor unions
or other organizations representing, purporting to represent or attempting
to represent any employees employed by the Company or any of its
Subsidiaries. Since April 25, 1998, there has not occurred or been
threatened any strike, slowdown, picketing, work stoppage, concerted
refusal to work overtime or other similar labor activity with respect to
any employees of the Company or any of its Subsidiaries. Except as set
forth on Schedule 2.01(o), there are no labor disputes currently subject to
any grievance procedure, arbitration or litigation and there is no petition
pending or threatened with respect to any employee of the Company or any of
its
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Subsidiaries. Each of the Company and its Subsidiaries has complied with
all applicable Laws pertaining to the employment or termination of
employment of their respective em ployees, including, without limitation,
all such laws relating to labor relations, equal employment opportunities,
fair employment practices, prohibited discrimination or distinction and
other similar employment activities, except for any failures so to comply
that would not, individually or in the aggregate, reasonably be expected to
result in any material liability to the Company and its Subsidiaries, taken
as a whole.
(p) ENVIRONMENTAL MATTERS. Except as disclosed in the Filed Company
SEC Documents or as set forth on Schedule 2.01(p) and except for such
matters that would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and its Subsidiaries, taken as a whole, (I)
each of the Company and its Subsidiaries is in compliance with all
applicable Environmental Laws (as defined below), (II) each of the Company
and its Subsidiaries has all Permits required under Environmental Laws for
the operation of their respective businesses as presently conducted
("ENVIRONMENTAL PERMITS"), (III) neither the Company nor any of its
Subsidiaries has received notice from any Governmental Entity asserting
that the Company or any of its Subsidiaries may be in violation of, or
liable under, any Environmental Law, and (IV) there are no actions,
proceedings or claims pending (or, to the knowledge of the Company or any
of its Subsidiaries, threatened) seeking to impose any liability on the
Company or any of its Subsidiaries in respect of any Environmental Laws,
Environmental Permits or Hazardous Substances.
For purposes of this Agreement, "ENVIRONMENTAL LAW" means any federal,
state, local or foreign law, statute, regulation or decree relating to (X)
the protection of the environment or (Y) the use, storage, treatment,
generation, transportation, processing, handling, release or disposal of
Hazardous Substances, in each case as in effect on the date hereof.
"HAZARDOUS SUBSTANCE" means any waste, substance, material, pollutant or
contaminant listed, defined, designated or classified as hazardous, toxic
or radioactive, or otherwise regulated, under any Environmental Law.
(q) STATUS OF PREFERRED SHARES AND 1999 WARRANT SHARES. The Preferred
Shares being issued at the Closing have been duly authorized by all
necessary corporate action on the part of the Company (except for the
filing with the Secretary of State of the State of Delaware of the
Certificate of Designation), and
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at Closing such Preferred Shares will have been validly issued and,
assuming payment therefor has been made, will be fully paid and
nonassessable, and the issuance of such Preferred Shares will not be
subject to preemptive or other subscription rights of any other stockholder
of the Company. The Company has validly reserved for issuance a number of
shares of Common Stock that will be sufficient to permit the conversion in
full of the Preferred Shares into shares of Common Stock, and, upon
conversion of the Preferred Shares, such shares of Common Stock (the
"CONVERSION SHARES") will be validly issued and outstanding, fully paid and
nonassessable. The 1999 Warrant Shares and the 1999 Special Warrant Shares
have been duly authorized by all necessary corporate action on the part of
the Company, and the Company has validly reserved for issuance a number of
shares of Common Stock that will be sufficient to permit the exercise in
full of the 1999 Warrants and the 1999 Special Warrants. Assuming payment
therefor has been made, upon issuance and exercise of the 1999 Warrants or
the 1999 Special Warrants, the 1999 Warrant Shares or the 1999 Special
Warrant Shares, as the case may be, will be validly issued and outstanding,
fully paid and nonassessable. Assuming that the Common Stock continues to
satisfy the requirements set forth in paragraph (b) of Rule 4450 of the
Nasdaq Marketplace Rules, the Conversion Shares, the 1999 Warrant Shares
and the 1999 Special Warrant Shares will be eligible for listing on the
Nasdaq Stock Market.
(r) INTELLECTUAL PROPERTY. (I) The Intellectual Property that is owned
by the Company and its Subsidiaries constitutes all of the Intellectual
Property that is material to the Company and its Subsidiaries, taken as a
whole, except for Intellectual Property subject to written or oral
licenses, agreements or arrangements pursuant to which the use of
Intellectual Property by the Company or any of its Subsidiaries is
permitted by any Person (the "COMPANY INTELLECTUAL PROPERTY"). The Company
Intellectual Property that is owned by the Company or any of its
Subsidiaries is owned free from any Liens (other than Permitted Liens).
Except as set forth in Schedule 2.01(r), all material Intellectual Property
Licenses are in full force and effect in accordance with their terms, and
are free and clear of any Liens (other than Permitted Liens). Except as set
forth in Schedule 2.01(r), immediately after the Closing, the Company and
its Subsidiaries will own or have the right to use all the Company
Intellectual Property, in each case free from Liens (except for Permitted
Liens incurred in the ordinary course of business) and on the same terms
and conditions as in effect prior to the Closing. Except as set forth in
Sched ule 2.01(r), the conduct of the respective businesses of the Company
and its Subsidiaries does not infringe upon or conflict with the rights of
any third
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party in respect of any Intellectual Property, except where such conduct
would not materially affect the ability of the Company and its Subsidiaries
to conduct their respective businesses as presently conducted. Except as
set forth in Schedule 2.01(r), to the knowledge of the Company, none of the
Company Intellectual Property is being infringed by any third party except
where such infringement would not have a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole. Except as set forth in
Schedule 2.01(r), there is no claim or demand of any Person pertaining to,
or any proceeding which is pending or, to the knowledge of the Company,
threatened, that challenges the rights of the Company or any of its
Subsidiaries in respect of any Company Intellectual Property, or that
claims that any default exists under any Intellectual Property License,
except where such claim, demand or proceeding would not materially affect
the ability of the Company or any of its Subsidiaries to conduct their
respective businesses as presently conducted. Except as set forth in
Schedule 2.01(r), none of the Company Intellectual Property is subject to
any outstanding order, ruling, decree, judgment or stipulation by or with
any court, tribunal, arbitrator, or other Governmental Entity, which order,
ruling, decree, judgement or stipulation is materially adverse to the
Company. Except as set forth in Schedule 2.01(r), the Intellectual Property
owned by the Company or any of its Subsidiaries and material to the Company
and its Subsidiaries, taken as whole has been duly registered with, filed
in or issued by, as the case may be, the appropriate filing offices,
domestic or foreign, to the extent necessary or desirable to ensure usual
and customary protection for the Company Intellectual Property in the
relevant jurisdiction under any applicable law, and the same remain in full
force and effect. The Company and its Subsidiaries have taken all necessary
actions to ensure usual and customary protection for the Company
Intellectual Property in the relevant jurisdiction of the Company
Intellectual Property (including maintaining the secrecy of all
confidential Intellectual Property) under any applicable law.
(II) The disclosure as to Year 2000 Compatibility issues in the
Company's Quarterly Report on Form 10-Q for the period ended January 23,
1999, is true and correct in all material respects and does not omit to
state a material fact necessary to make the statements contained therein
not misleading.
(s) BROKERS OR FINDERS. Except as set forth on Schedule 2.01(s), no
agent, broker, investment banker or other firm is or will be entitled to
any broker's or finder's fee or any other commission or similar fee in
connection with any of the transactions contemplated by this Agreement.
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(t) DISCLOSURE. No representation or warranty by the Company contained
in this Agreement or in any certificate to be furnished by or on behalf of
the Company pursuant hereto contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact necessary
to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading with respect to
the business of the Company and its Subsidiaries or the transactions
contemplated by this Agreement.
(u) NO SOLICITATION BY PURCHASER. There has been no solicitation of
the acquisition of Securities from the Company (within the meaning of
Section 8.10(iii) of the 1998 Investment Agreement) by Purchaser or an
Affiliate thereof subsequent to June 10, 1998.
(v) FAIRNESS OPINION. The Board of Directors of the Company has
received an oral fairness opinion from Morgan, Stanley & Co., Incorporated,
which opinion shall have been confirmed in writing, customary in form and
substance, within 7 days of the date hereof.
SECTION II.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants as of the date hereof and as of the Closing Date as
follows:
(a) ORGANIZATION. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) AUTHORITY. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform this Agreement and to
consummate the transactions contemplated hereby. All necessary action
required to have been taken by or on behalf of Purchaser by applicable law,
its limited liability company agreement or otherwise to authorize the
approval, execution, delivery and performance by Purchaser of this
Agreement and the consummation by it of the transactions contemplated
hereby have been duly authorized, and no other proceedings on its part are
or will be necessary to authorize this Agreement or for it to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of Purchaser, enforceable against Purchaser in accordance with
its terms.
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(c) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any Lien upon any of the properties or assets of Purchaser
pursuant to, or require any consent, approval or other action by or any
notice to or filing with any court or administrative or governmental body
pursuant to, the organizational documents or agreements of Purchaser or any
agreement, instrument, order, judgment, decree, statute, law, rule or
regulation by which Purchaser is bound (assuming that the Company shall
have made or obtained all consents, approvals, orders, authorizations,
registrations, declarations or filings referred to in Section 2.01(c)(ii)),
except for filings after the Closing under Sections 13(d) and 16 of the
Exchange Act.
(d) ACQUISITION FOR INVESTMENT. Purchaser is acquiring the Preferred
Shares pursuant to this Agreement, and acquired the 1998 Warrants and the
1998 Special Warrants pursuant to the 1998 Investment Agreement, for its
own account for the purpose of investment and not with a view to or for
sale in connection with any distribution thereof, and Purchaser has no
present intention or plan to effect any distribution of Preferred Shares,
1999 Warrants, 1999 Special Warrants, 1999 Warrant Shares or 1999 Special
Warrant Shares; PROVIDED that the disposition of Purchaser's property shall
at all times be and remain within its control and subject to the provisions
of this Agreement and the Registration Rights Agreement as amended pursuant
hereto. Purchaser has delivered to the Company a complete and correct copy
of a commitment letter from the Fund for $51 million, which is subject to
the consent of the Fund's limited partners to the waiver described in Sec
tion 2.02(g). The Fund constitutes a "venture capital operating company"
within the meaning of Section 2510.3-101(d) of the regulations promulgated
under ERISA and the transactions contemplated by this Agreement shall not
adversely affect such status.
(e) BROKERS OR FINDERS. Except as set forth in Schedule 2.02(e), no
agent, broker, investment banker or other firm is or will be entitled to
any broker's or finder's fee or any other commission or similar fee from
Purchaser in connection with any of the transactions contemplated by this
Agreement.
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(f) LIMITED PARTNER CONSENT. A majority in interest of the limited
partners of the Fund will be solicited to consent to a waiver of the
diversification cap of the Fund in connection with the transactions
contemplated hereby.
ARTICLE III
TRANSFER OF PREFERRED SHARES
SECTION III.1 TRANSFER OF PREFERRED SHARES. (a) Other than as
specifically approved by a majority of the Non-Investor Directors, prior to
June 10, 2000, Purchaser will not, directly or indirectly, dispose of any
Preferred Shares, 1999 Warrants or 1999 Special Warrants (except to any
Affiliate of Purchaser).
(b) Other than as specifically approved by a majority of the
Non-Investor Directors, prior to June 10, 2003, Purchaser will not, directly or
indirectly, sell, transfer or otherwise dispose of any Preferred Shares except
(I) pursuant to a registered underwritten public offering intended to achieve a
broad distribution in accordance with the Registration Rights Agreement as
amended pursuant hereto, (II) in accordance with the volume and manner-of-sale
limitations of Rule 144 promulgated under the Securities Act (regardless of
whether such limitations are applicable), (III) in a transaction exempt from the
registration requirements of the Securities Act to any Person or group (within
the meaning of Section 13(d)(3) of the Exchange Act) of Persons, if, prior to
and after giving effect to such sale, such Person or group of Persons (A) does
not or would not to Purchaser's knowledge after due inquiry, Beneficially Own
(provided that for purposes of this Section 3.01(a) a Person shall be deemed to
Beneficially Own all shares that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time) 5% or
more of the then outstanding shares of Common Stock or (B) is an investment
company registered under the Investment Company Act of 1940, as amended, or (IV)
in connection with a Buyout Transaction. Purported transfers of Preferred Shares
that are not in compliance with this Article III shall be of no force or effect.
(c) The provisions of clauses (a) and (b) of this Article III shall
terminate and be of no further force or effect on the earliest to occur of (I)
the fifth anniversary of the 1998 Closing Date, (II) the date on which the
percentage of the Total Voting Power represented by the aggregate voting power
of all Voting Securities then owned by Purchaser (other than any Voting
Securities acquired in violation of this Agreement) is
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greater than 50%, and (III) the first public disclosure of a Third-Party Bid
(provided, however, that if such Third-Party Bid is thereafter abandoned,
terminated or withdrawn, the provisions of Sections 3.01(a) and (b) hereof shall
be reinstated, although any action taken or agreement or arrangement entered
into by Purchaser after such first public disclosure and prior to such
reinstatement (or the consummation of any such action, agreement or arrangement,
whether before or, unless such action, agreement or arrangement shall be a
tender offer or other public offer with respect to the Company, after such
reinstatement) shall not be deemed to breach the provisions of Sections 3.01(a)
and (b) hereof as a result of such reinstatement).
(d) Prior to the seventh anniversary of the 1998 Closing Date,
Purchaser will not, directly or otherwise dispose of Preferred Shares
convertible into 15% or more of the Common Stock outstanding, after giving
effect to such conversion, to any Person or group (within the meaning of Section
13(d)(3) of the Exchange Act) without first offering the Company the right to
make an offer to purchase the Preferred Shares proposed to be so sold,
transferred or otherwise disposed of. The provisions of the previous sentence
shall terminate and be of no effect on the earlier to occur of (I) the date on
which the percentage of the Total Voting Power represented by the aggregate
voting power of all Voting Securities then owned by Purchaser (other than any
Voting Securities acquired in violation of this Agreement) is greater than 50%,
and (II) the first public disclosure of a Third-Party Bid (provided, however,
that if such Third-Party Bid is thereafter abandoned, terminated or withdrawn,
the provisions of this Section 3.01(d) shall be reinstated, although any action
taken or agreement or arrangement entered into by Purchaser after such first
public disclosure and prior to such reinstatement (or the consummation of any
such action, agreement or arrangement, whether before or, unless such action,
agreement or arrangement shall be a tender offer or other public offer with
respect to the Company, after such reinstatement) shall not be deemed to breach
this Section 3.01(d) as a result of such reinstatement).
ARTICLE IV
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION IV.1 COVENANTS OF THE COMPANY. During the period from the
date of this Agreement and continuing until the Closing, the Company agrees as
to itself and its Subsidiaries that, except as set forth in Schedule 4.01, or to
the extent that Purchaser otherwise consents in writing:
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(a) REASONABLE EFFORTS. The Company will use commercially reasonable
efforts to preserve the relationships with customers, suppliers and others
having business dealings with the Company and its Subsidiaries.
(b) NO ACQUISITIONS. The Company will not, nor will it permit any of
its Subsidiaries to, acquire or agree to acquire (excluding any non-binding
letters of intent) by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization
or division thereof, or otherwise acquire or agree to acquire any assets
(other than inventory) involving aggregate consid eration having a value in
excess of $2.5 million in any case or $15 million in the aggregate (in
either case whether payable in cash, stock or a combination thereof);
PROVIDED that no such consideration shall be payable in Common Stock or
stock of any Subsidiary of the Company.
(c) NO DISPOSITIONS. The Company will not, nor will it permit any of
its Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of, any
of the Assets of the Company or any of its Subsidiaries other than at fair
market value in the ordinary course of business consistent with past
practice and except for other dispositions of Assets (other than inventory)
with an aggregate value not in excess of $1 million in any one case or $5
million in the aggregate.
(d) OTHER TRANSACTIONS. The Company will not, nor will it permit any
of its Subsidiaries to, do any of the following (except as otherwise
expressly provided herein):
(i) amend its Certificate of Incorporation (except to the extent
necessary to adopt the Certificate of Designation), By-laws or other
organi zational documents (except for immaterial amendments to the
Certificate of Incorporation or By-laws of any of the Company's
Subsidiaries, PROVIDED such amendments in no way adversely affect
Purchaser or the rights granted to Purchaser hereunder);
(ii) declare or pay any non-cash dividend or make any non-cash
distribution with respect to the Assets;
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(iii) redeem or otherwise acquire any shares of its capital stock
or issue any capital stock (except upon exercise of options issued
prior to the date hereof under a Company Stock Plan), or any option
(except for options granted to employees to acquire not more than
200,000 shares of Common Stock in the aggregate), or warrant or right
relating thereto;
(iv) incur any liabilities, obligations or indebtedness for
borrowed money or guarantee any such liabilities, obligations or
indebtedness, other than in the ordinary course of business consistent
with past practice (except as incurred in connection with acquisitions
to the extent permitted hereby) and in an aggregate amount that would
not be material to the Company;
(v) permit, allow or suffer any material Assets of the Company or
of any of its Subsidiaries to be subject to any Lien other than
Permitted Liens;
(vi) cancel any material indebtedness (individually or in the
aggregate) or waive any claims or rights of substantial value;
(vii) make any change in any method of accounting or accounting
practice or policy, except (I) as may be required by GAAP, (II) as
disclosed on Schedule 2.01(h)(iv) or (III) pursuant to the approval of
all of the members of the audit committee of the Company's Board of
Directors;
(viii) enter into, terminate, renew or modify any Contract to
which the Company or any of its Subsidiaries is a party or by which
any of their assets are bound and which is material to the Company or
such Subsidiary, except as explicitly contemplated hereby;
(ix) enter into any agreement or take any action in violation of
the terms of this Agreement;
(x) settle any material tax audit, make or change any tax
election or amend any Tax Returns; or
(xi) agree, whether in writing or otherwise, to do any of the
foregoing.
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(e) EMPLOYEE BENEFITS. Except (X) as set forth in Schedule 4.01(e) or
(Y) in the ordinary course of business and as consistent with past practice
(which shall include normal periodic performance reviews and related
benefit increases) or (Z) pursuant to the existing terms of any collective
bargaining agreement, the Company will not, nor will it permit any of its
Subsidiaries to (I) increase in any manner the compensation of any of the
officers or other employees of the Company or any of its Subsidiaries; (II)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required by any existing plan, agreement or arrangement to any
such officer or employee, whether past or present; (III) enter into, or
negotiate, any collective bargaining agreement with respect to employees of
the Company or any of its Subsidiaries except as required by law, in which
case the Company or such Subsidiary shall first notify Purchaser; or (IV)
commit itself to any additional pension, profit-sharing, bonus, incentive,
deferred compensation, stock purchase, stock option, equity purchase (or
other equity based plan), stock appreciation right, group insurance,
severance pay, retirement or other employee benefit plan, policy, program,
understanding, agreement or arrangement, or to any employment agreement or
consulting agreement (arising out of prior employment), regardless of the
applicable funding arrangements, with or for the benefit of any officer or
employee of the Company or any of its Subsidiaries, or amend, renew or
extend any of such plan or any of such agreements in existence on the date
hereof in any manner which would, in the case of clauses (i), (ii), (iii)
and (iv) above, result in liabilities that are material to the Company and
its Subsidiaries, taken as a whole.
(f) CERTIFICATE OF DESIGNATION. Prior to the Closing, the Board of
Directors of the Company will adopt the Certificate of Designation and will
cause the same to be filed with the Secretary of State of the State of
Delaware.
SECTION IV.2 NO SOLICITATION. From the date hereof to the Closing
Date, the Company shall not, nor shall it permit any of its Subsidiaries to, nor
shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney, accountant or other advisor, agent or
representative of, the Company or any of its Subsidi aries to, directly or
indirectly, (I) solicit or encourage any proposals for, or enter into or
continue any discussions or negotiations, or review any proposal or offer, with
respect to the acquisition by any Person (other than Purchaser and its
Affiliates) of more than 5% of the capital stock of or other significant
ownership interest in the Company or any significant portion of the Assets, or
(II) furnish or cause to be furnished
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any non-public information concerning the Company or the assets and properties
of the Company to any person (other than Purchaser and its representatives),
other than in the ordinary course of business or as required by applicable law,
in each case, after prior notice to and consultation with Purchaser. The Company
will promptly notify Purchaser of any inquiry or proposal received by the
Company or its Subsidiaries with respect to the acquisition by any other Person
of any capital stock of or other significant ownership interest in the Company
or any significant portion of the Assets. Notwithstanding the foregoing, if the
Board of Directors of the Company determines in good faith, after consultation
with outside counsel, that failure to take any of the actions otherwise
prohibited by this Section 4.02 would result in a breach of its fiduciary duties
to stockholders under applicable law, the Company may take such otherwise
prohibited actions to the extent necessary to avoid such breach.
SECTION IV.3 ACCESS AND INFORMATION. (a) So long as this Agreement
remains in effect, prior to the Closing, the Company will (and will cause each
of its Subsidiaries and each of their respective accountants, counsel,
consultants, officers, directors, employees, agents and representatives to) give
Purchaser and its representatives, full access during reasonable business hours
to all of their respective properties, assets, books, contracts, commitments,
reports and records relating to the Company and its Subsidiaries, and furnish to
them all such documents, records and information with respect to the properties,
assets and business of the Company and its Subsidiaries and copies of any work
papers relating thereto as Purchaser shall from time to time reasonably request.
The Company will keep Purchaser generally informed as to the affairs of the
business of the Company and its Subsidiaries.
SECTION IV.4 FURTHER ACTIONS. (a) The Company shall, and shall cause
each of its Subsidiaries to, use reasonable best efforts to take or cause to be
taken all actions, and to do or cause to be done all other things, necessary,
proper or advisable in order for the Company to fulfill and perform its
obligations in respect of this Agreement, or otherwise to consummate and make
effective the transactions contemplated hereby.
(b) The Company shall (and shall cause each of its Subsidiaries to),
as promptly as practicable, (I) make, or cause to be made, all filings and
submissions required under any law applicable to the Company or any of its
Subsidiaries, and give such reasonable undertakings as may be required in
connection therewith, and (II) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
the Company or any of its Subsidiaries, in each case in connection with this
Agreement, the issuance to Purchaser of the Preferred Shares, the
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amendment of the 1998 Warrants and the 1998 Special Warrants pursuant hereto,
and the consummation of the other transactions contemplated hereby.
(c) The Company shall, and shall cause each of its Subsidiaries to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may be reasonably requested by Purchaser
in connection with the filings and other actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article V to be satisfied, promptly upon becoming aware of the
same.
SECTION IV.5 FURTHER ASSURANCES. Following the Closing Date, the
Company shall, and shall cause each of its Subsidiaries to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and render effective the consummation
of the transactions contemplated hereby, or otherwise to carry out the intent
and purposes of this Agreement.
SECTION IV.6 PREFERRED SHARE VOTING RIGHTS. Following the Closing
Date, the Company shall not take any of the actions described in Section 2(b) of
the Certificate of Designation if a vote of the holders of the Common Stock is
required or sought in connection therewith, unless the holders of the Preferred
Shares shall have been allowed to vote on such action as a single class with the
Common Stock, as described in Section 2(b) of the Certificate of Designation.
SECTION IV.7 SCHEDULE DELIVERY. With respect to (X) matters required
to be disclosed pursuant to (I) the last sentence of Section 2.01(d), (II) the
last sentence of Section 2.01(h), and (III) clause (H) of Section 2.01(m)(i),
and (Y) matters that have occurred since June 10, 1998 or that were not required
to have been disclosed to Purchaser as of such date under the terms of the 1998
Investment Agreement, the Company shall cause each of the Schedules called for
in this Agreement that have not been provided to Purchaser prior to execution of
this Agreement to be delivered to Purchaser and its counsel prior to 5:00 p.m.,
New York time, on the date that is 14 days after the date hereof (the "SCHEDULE
DELIVERY CUT-OFF TIME"), and may, prior to the Schedule Delivery Cut-off Time,
with respect to the matters specified in clauses (x) and
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(y) of this Section 4.07, supplement Schedules that have previously been
supplied. Any such Schedule so delivered or supplemented and satisfactory to
Purchaser in its good-faith reasonable judgment shall be deemed to have been
delivered as of the date hereof.
ARTICLE V
CONDITIONS PRECEDENT
SECTION V.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations
of the Company and Purchaser to consummate the transactions contemplated to
occur at the Closing shall be subject to the satisfaction prior to the Closing
of each of the following conditions, each of which may be waived only if it is
legally permissible to do so:
(a) APPROVALS. All material authorizations, consents, orders or
approvals of, or regulations, declarations or filings with, or expirations
of applicable waiting periods imposed by, any Governmental Entity necessary
for the consummation of the transactions contemplated hereby, shall have
been obtained or filed or shall have occurred.
(b) NO LITIGATION, INJUNCTIONS, OR RESTRAINTS. No statute, rule,
regulation, executive order, decree, temporary restraining order,
preliminary or permanent injunction or other order enacted, entered,
promulgated, enforced or issued by any Governmental Entity or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by this Agreement shall be in effect.
(c) CREDIT FACILITY OBLIGATIONS. The Company shall have concluded an
amendment, satisfactory to Purchaser and the Company in the good-faith
judgment of each, with the requisite lenders under the Credit Agreement.
SECTION V.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate the transactions contemplated to occur
at the Closing shall be subject to the satisfaction or waiver thereof prior to
the Closing of each of the following conditions:
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(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchaser that are qualified as to materiality shall be true and
correct, and those that are not so qualified shall be true and correct in
all material respects, as of the date of this Agreement and as of the time
of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, on and as of such
earlier date) and the Company shall have received a certificate signed by
an authorized officer of Purchaser to such effect.
(b) OPINION OF COMPANY'S COUNSEL. The Company shall have received an
opinion dated as of the Closing of Wilmer, Cutler & Pickering, in form and
substance reasonably acceptable to the Company, to the effect that (I) the
issuance of the Preferred Shares and the amendment of the 1998 Warrants and
the 1998 Special Warrants for the Cash Consideration will qualify as a
"reorganization" within the meaning of section 368(a) of the Code and (II)
such transactions should not cause the Distributions (as such term is
defined in the 1998 Investment Agreement) to be treated as distributions to
which section 355(e) of the Code applies.
SECTION V.3 CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The
obligations of Purchaser to consummate the transactions contemplated to occur at
the Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company set forth in this Agreement that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of the date of this
Agreement and as of the time of the Closing as though made at and as of
such time, except to the extent such representations and warranties
expressly relate to an earlier date (in which case such representations and
warranties that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, on and as of such earlier date), and Purchaser shall
have received a certificate signed by the chief financial officer and the
chief administrative officer of the Company to such effect.
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(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under
this Agreement, and Purchaser shall have received a certificate signed by
the chief financial officer and the chief administrative officer of the
Company to such effect.
(c) OPINION OF PURCHASER'S COUNSEL. Purchaser shall have received an
opinion dated as of the Closing of Debevoise & Plimpton, in form and
substance reasonably acceptable to Purchaser, to the effect that (I) the
the issuance of the Preferred Shares and the amendment of the 1998 Warrants
and the 1998 Special Warrants for the Cash Consideration will qualify as a
"reorganization" within the meaning of section 368(a) of the Code and (II)
such transactions should not cause the Distributions (as such term is
defined in the 1998 Investment Agreement) to be treated as distributions to
which section 355(e) of the Code applies.
(d) PURCHASER'S EXPENSES. Purchaser's Expenses shall have been paid to
Purchaser.
(e) OTHER PARTIES. (A) No Person or "GROUP" (as defined in the
Exchange Act) other than Purchaser shall have acquired beneficial ownership
of more than 15% of the outstanding shares of Voting Securities, and (B) no
Person (other than Purchaser or one or more of its Affiliates) shall have
entered into an agreement in principle or definitive agreement with the
Company with respect to a tender or exchange offer for any shares of Common
Stock or a merger, consolidation or other business combination with or
involving the Company.
(f) CORPORATE PROCEEDINGS. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident thereto, shall be satisfactory in form
and substance to Purchaser and its counsel, and Purchaser and its counsel
shall have received all such documents and instruments, or copies thereof,
certified or requested, as may be reasonably requested. The Certificate of
Designation shall have been duly filed with and accepted for filing by the
Secretary of State of Delaware.
(g) MATERIAL ADVERSE EFFECT. No event, change or development shall
exist or have occurred since January 23, 1999 which has had or is
reasonably likely to
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have a Material Adverse Effect on the Company and its Subsidiaries,
taken as a whole, other than matters disclosed on Schedule 2.01(h)(iv).
(h) OPINION OF THE COMPANY'S COUNSEL. Purchaser shall have received an
opinion of Wilmer, Cutler & Pickering, counsel to the Company, dated as of
the Closing Date, in form and substance reasonably satisfactory to
Purchaser.
(i) LIMITED PARTNER CONSENT. A majority in interest of the limited
partners of the Fund shall have consented to a waiver of the
diversification cap of the Fund in connection with the transactions
contemplated hereby.
(j) SCHEDULES. All new Schedules and all changes, supplements and
additions to the Schedules made after the date hereof pursuant to Section
4.07 shall be satisfactory to Purchaser in its good faith reasonable
judgment.
(k) FAIRNESS OPINION. The fairness opinion of Morgan, Stanley & Co.,
Incorporated referred to in Section 2.01(v) shall not have been withdrawn
or modified.
ARTICLE VI
TERMINATION
SECTION VI.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company:
(i) if the Closing shall not have occurred prior to May 30, 1999,
PROVIDED, that the right to terminate this Agreement pursuant to this
clause (i) shall not be available to any party whose failure to
fulfill any obligation under this Agreement results in the failure of
the Closing to occur; or
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(ii) if there shall be any statute, law, regulation or rule that
makes consummating the transactions contemplated hereby illegal or if
any court or other Governmental Entity of competent jurisdiction shall
have issued a judgment, order, decree or ruling, or shall have taken
such other action restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated hereby and such
judgment, order, decree or ruling shall have become final and
non-appealable;
(c) by Purchaser:
(i) if the Company shall have failed to perform in any material
respect any of its obligations hereunder or shall have breached in any
respect any representation or warranty contained herein qualified by
materiality or shall have breached in any material respect any
representation or warranty not so qualified, and the Company has
failed to perform such obligation or cure such breach, within three
days of its receipt of written notice thereof from Purchaser, and such
failure to perform shall not have been waived in accordance with the
terms of this Agreement; or
(ii) if any of the conditions set forth in Section 5.01 or 5.03
shall become impossible to fulfill (other than as a result of any
breach by Purchaser of the terms of this Agreement) and shall not have
been waived in accordance with the terms of this Agreement;
(d) by the Company:
(i) if Purchaser shall have failed to perform in any material
respect any of its obligations hereunder or shall have breached in any
respect any representation or warranty contained herein qualified by
materiality or shall have breached in any material respect any
representation or warranty not so qualified, and Purchaser has failed
to perform such obligation or cure such breach, within 10 days of its
receipt of written notice thereof from the Company, and such failure
to perform shall not have been waived in accordance with the terms of
this Agreement;
(ii) if any of the conditions set forth in Section 5.01 or 5.02
shall become impossible to fulfill (other than as a result of any
breach by the
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Company of the terms of this Agreement) and shall not have been
waived in accordance with the terms of this Agreement.
SECTION VI.2 EFFECT OF TERMINATION. In the event of termination of
this Agreement by either the Company or Purchaser as provided in Section 6.01,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Purchaser or the Company, other than the
provisions of this Sections 6.02, 9.05, 9.09, 9.11, 9.14 and Article VII and
except to the extent that such termination results from the wilful and material
breach by a party of any of its representations, warranties, covenants or
agreements set forth in this Agreement.
ARTICLE VII
INDEMNIFICATION
SECTION VII.1 INDEMNIFICATION OF PURCHASER. The Company covenants and
agrees to defend, indemnify and hold harmless each of Purchaser, its Affiliates
(other than the Company and its Subsidiaries), and their respective officers,
directors, partners, employees, agents, advisers and representatives including,
without limitation, the Fund, CD&R Investment Associates, Inc., a Delaware
corporation, and CD&R Associates V Limited Partnership, a Cayman Islands
exempted limited partnership, and CD&R (collec tively, the "PURCHASER
INDEMNITEES") from and against, and pay or reimburse the Purchaser Indemnitees
for, any and all claims, demands, liabilities, obligations, losses, costs,
expenses, fines or damages (whether absolute, accrued, conditional or otherwise
and whether or not resulting from third party claims), including interest and
penalties with respect thereto and out-of-pocket expenses and reasonable
attorneys' and accountants' fees and expenses incurred in the investigation or
defense of any of the same or in asserting, preserving or enforcing any of their
respective rights hereunder (collectively, "LOSSES"), resulting from or based on
(or allegedly resulting from or based on):
(i) any actions (including by any shareholders of the Company in
connection with any derivative actions) resulting from or based on (or
allegedly resulting from or based on) any of the transactions contemplated
hereby, PROVIDED that the indemnity provided in this clause (i) shall not
include (A) actions brought by any limited partner of the Fund against
Purchaser or any of its Affiliates relating to the transactions
contemplated by this Agreement, (B) Losses resulting from or based on the
acts or omissions of a Purchaser Indemnitee following the
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Closing, (C) claims resulting from or based on (1) a breach by Purchaser of
its obligations under this Agreement, (2) any pre-existing contract,
agreement, obligation, commitment, understanding or other arrangement
between the claimant and any Purchaser Indemnitee, or (3) any intentional
tort by a Purchaser Indemnitee; and
(ii) subject to the limitations set forth in Section 7.03, any breach
by the Company of any representation, warranty, covenant or obligation of
the Company hereunder.
The Losses described in clauses (i) and (ii) of this Section 7.01(a)
are herein referred to as "PURCHASER INDEMNIFIABLE LOSSES". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
SECTION VII.2 INDEMNIFICATION PROCEDURES. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "INDEMNIFYING
PERSON"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by a Purchaser Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Purchaser Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (I) consti tute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (II)
relieve it from any liability or obligation that it may otherwise have to such
Purchaser Indemnitee. In case any such action or claim shall be brought or
asserted against any Purchaser Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Purchaser Indemnitee, PROVIDED, HOWEVER, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Purchaser Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
PROVIDED FURTHER that a Purchaser Indemnitee shall not enter
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into any settlement of any such claim without the prior consent of the Company,
such consent not to be unreasonably withheld or delayed.
SECTION VII.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on the first anniversary of the Closing Date, except for
the representations and warranties contained in Sections 2.01(n), 2.01(o) and
2.01(p), which shall expire for all purposes upon expiration of the applicable
statute of limitations.
SECTION VII.4 OTHER INDEMNITIES. The rights of each Purchaser
Indemnitee to be indemnified under any other agreement, document, certificate or
instrument or applicable law, including without limitation the 1998 Investment
Agreement, the Registration Rights Agreement as amended pursuant hereto, the
Indemnification Agreement, the Consulting Agreement, and the Loan Out Agreement,
dated as of February 24, 1999, between the Company and CD&R are independent of
and in addition to any rights of such Purchaser Indemnitee to be indemnified
under this Agreement.
ARTICLE VIII
INTERPRETATION; DEFINITIONS
SECTION VIII.1 DEFINITIONS. For purposes of this Agreement, the
following terms shall have the following meanings:
"1998 CLOSING DATE" is defined in the first recital to this Agreement.
"1998 INVESTMENT AGREEMENT" is defined in the first recital to this
Agreement.
"1998 SPECIAL WARRANTS" is defined in the first recital to this
Agreement.
"1998 TRANSACTION AGREEMENTS" means (I) the 1998 Investment Agreement,
(II) the Registration Rights Agreement, (III) the 1998 Warrant, (IV) the
1998 Special Warrant, (V) the Tax Allocation Agreement, (VI) the
Indemnification Agreement, (VII) the Agreement and Plan of Distribution,
dated as of June 9, 1998, between the Company, Workflow Management, Inc.,
School Specialty,
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Inc., Aztec Technology Partners, Inc. and Navigant International, Inc.,
(VIII) the Amended Services Agreement, dated as of June 8, 1998, between
the Company and Jonathan J. Ledecky, (IX) the Consulting Agreement, and (X)
the Employee Benefits Services and Liabilities Agreement, dated as of June
9, 1998, between the Company, Workflow Management, Inc., School Specialty,
Inc., Aztec Technology Partners, Inc. and Navigant International, Inc.
"1998 WARRANTS" is defined in the first recital to this Agreement.
"1999 SPECIAL WARRANTS" is defined in the third recital to this
Agreement.
"1999 WARRANTS" is defined in the third recital to this Agreement.
"1999 SPECIAL WARRANT SHARES" means the shares of Common Stock
issuable upon exercise of the 1999 Special Warrants.
"1999 WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of the 1999 Warrants.
"2001 NOTES" is defined in Section 2.01(d).
"2003 NOTES" is defined in Section 2.01(d).
"AFFILIATE" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"AGREEMENT" is defined in the recitals to this agreement.
"ASSETS" is defined in Section 2.01(k).
"BALANCE SHEET" is defined in Section 2.01(g)(ii).
"BENEFICIALLY OWN" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule
13d-3 under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing.
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"BUSINESS DAY" means any day on which banking institutions are open in
the City of New York.
"BUYOUT TRANSACTION" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that
offers each holder of Voting Securities (other than, if applicable, the
Person proposing such transaction) the opportunity to dispose of Voting
Securities Beneficially Owned by each such holder for the same
consideration or otherwise contemplates the acquisition of Voting
Securities Beneficially Owned by each such holder for the same
consideration.
"CASH CONSIDERATION" is defined in Section 1.01.
"CD&R" means Clayton, Dubilier & Rice, Inc., a Delaware corporation.
"CERTIFICATE OF DESIGNATION" is defined in the recitals to this
Agreement.
"CLOSING" is defined in Section 1.02.
"CLOSING DATE" is defined in Section 1.02.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" is defined in the first recital to this Agreement.
"COMPANY" is defined in the introductory paragraph to this Agreement.
"COMPANY BY-LAWS" is defined in Section 2.01(a).
"COMPANY CHARTER" is defined in Section 2.01(a).
"COMPANY FINANCIAL STATEMENTS" is defined in Section 2.01(g)(i).
"COMPANY INTELLECTUAL PROPERTY" is defined in Section 2.01(r).
"COMPANY SEC DOCUMENTS" is defined in Section 2.01(f).
"COMPANY STOCK PLANS" is defined in Section 2.01(d).
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"COMPUTER SYSTEM" means, with respect to any Person, any and all
computer software programs, semiconductor chips, microprocessors, embedded
microcontrollers and other hardware containing programming instructions of
any kind, whether owned or licensed or otherwise held by such Person for
use.
"CONSULTING AGREEMENT" means the Consulting Agreement, dated as of
June 10, 1998, by and between the Company and CD&R.
"CONTRACT" is defined in Section 2.01(c)(i).
"CONVERSION SHARES" is defined in Section 2.01(q).
"CREDIT AGREEMENT" is defined in Section 2.01(e).
"EMPLOYEE" means any employee or former employee of any member of the
Company or any of its Subsidiaries or any beneficiary or dependent of any
such employee or former employee.
"EMPLOYEE BENEFIT PLANS" means all defined contribution, defined
benefit, welfare benefit, bonus, incentive compensation, stock option,
stock purchase, stock appreciation right, stock bonus, incentive, deferred
compensation, insurance, medical, dental, vision, life, death benefit,
fringe benefit or other employee benefit plans, programs, policies or
arrangements, including without limitation, any employment, consulting,
offer, secondment, severance or other termination agreement, whether or not
an employee benefit plan within the meaning of section 3(3) of ERISA,
maintained by the Company or any of its Subsidiaries.
"ENVIRONMENTAL LAW" is defined in Section 2.01(p).
"ENVIRONMENTAL PERMITS" is defined in Section 2.01(p).
"EQUITY SECURITY" means (I) any Common Stock or other Voting
Securities, (II) any securities of the Company convertible into or
exchangeable for Common Stock or other Voting Securities or (III) any
options, rights or warrants (or any similar securities) issued by the
Company to acquire Common Stock or other Voting Securities.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FILED COMPANY SEC DOCUMENTS" is defined in Section 2.01(i).
"FINAL DETERMINATION" means the final resolution of liability for any
Tax for any taxable period, including any related interest or penalties, by
or as a result of: (I) a final and unappealable decision, judgment, decree
or other order of a court of competent jurisdiction; (II) a closing
agreement or accepted offer in compromise under Section 7121 or 7122 of the
Code, or comparable agreement under the laws of other jurisdictions, which
resolves the entire tax liability for any tax period; (III) any allowance
of a refund or credit in respect of an overpayment of Tax, but only after
the expiration of all periods during which such refund may be recovered
(including by way of offset) by the applicable taxing jurisdiction; or (IV)
any other final disposition, including by reason of the expiration of the
applicable statute of limitations.
"FUND" means Clayton, Dubilier & Rice Fund V Limited Partnership, a
Cayman Islands exempted limited partnership.
"GAAP" means United States generally accepted accounting principles.
"GOVERNMENTAL ENTITY" is defined in Section 2.01(c)(ii).
"HAZARDOUS SUBSTANCE" is defined in Section 2.01(p).
"INDEMNIFICATION AGREEMENT" means the Indemnification Agreement dated
as of June 10, 1998 by and among the Company, Purchaser, the Fund and CD&R.
"INDEMNIFYING PERSON" is defined in Section 7.02.
"INTELLECTUAL PROPERTY" means trademarks, trade names, trade dress,
service marks, copyrights, domain names, and similar rights (including
registrations and applications to register or renew the registration of any
of the foregoing), patents and patent applications, trade secrets, ideas,
inventions, improvements, practices, processes, formulas, designs,
know-how, confidential business or technical
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information, computer software, firmware, data and documentation, licenses
of or agreements relating to any of the foregoing, rights of privacy and
publicity, moral rights, and any other similar intellectual property rights
and tangible embodiments of any of the foregoing (in any medium including
electronic media).
"KNOWLEDGE OF THE COMPANY" or any like expression means to the
knowledge of the persons listed on Schedule 8.02 after due inquiry.
"LIEN" is defined in Section 2.01(c)(i).
"LOSSES" is defined in Section 9.01(a).
"MARKET CAPITALIZATION" means, for any entity, the market
capitalization of such entity determined on the basis of the average
closing price for the common stock of such entity for the five-day period
ending on the tenth day after the date of the Distributions.
"MATERIAL ADVERSE EFFECT" on or with respect to an entity (or group of
entities taken as a whole) means any state of facts, event, change or
effect that has had, or would reasonably be expected to have, a material
adverse effect on the business, properties, results of operations or
financial condition of such entity (or, if with respect thereto, of such
group of entities taken as a whole), or on the ability of such entity (or
group of entities) to consummate the transactions contemplated hereby or to
perform its obligations hereunder.
"MATERIAL CONTRACTS" is defined in Section 2.01(m).
"MATERIAL SUBSIDIARY" is defined in Section 2.01(a).
"NON-INVESTOR DIRECTOR" means any director of the Company not
designated or nominated by the Purchaser.
"PERMIT" is defined in Section 2.01(c)(i).
"PERMITTED LIENS" shall mean those Liens (A) securing debt that is
reflected on the Balance Sheet or the notes thereto (B) referred to in
Schedule 2.01(k)(ii), (C) for Taxes not yet due or payable or being
contested in good faith and for which adequate reserves have been
established in accordance
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with GAAP, (D) that constitute mechanics', carriers', workmens' or like
liens, liens arising under original purchase price conditional sales
contracts and equipment leases with third parties entered into in the
ordinary course, (E) Liens incurred or deposits made in the ordinary course
of business consistent with past practice in connection with workers'
compensation, unemployment insurance and social security, retirement and
other legislation and (F) easements, covenants, declarations, rights of
way, encumbrances, or similar restrictions in connection with real property
owned by the Company or its Subsidiaries that do not materially impair the
use of such real property by the Company and its Subsidiaries, and in the
case of Liens described in clauses (B), (C), (D), (E) or (F) that,
individually and in the aggregate, would not have a Material Adverse Effect
on the Company and its Subsidiaries, taken as a whole.
"PERSON" means any individual, partnership, joint venture,
corporation, limited liability company, trust, unincorporated organization,
government or department or agency of a government.
"PLANS" is defined in Section 2.01(o)(i).
"PREFERRED SHARES" is defined in the third recital to this agreement.
"PURCHASER" is defined in the recitals to this Agreement.
"PURCHASER INDEMNIFIABLE LOSSES" is defined in Section 7.01(a).
"PURCHASER INDEMNITEES" is defined in Section 7.01(a).
"PURCHASER'S EXPENSES" is defined in Section 9.09(b).
"REGISTRATION RIGHTS AGREEMENT" is defined in the second recital to
this Agreement.
"SCHEDULE DELIVERY CUT-OFF TIME" is defined in Section 4.07.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
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"SECURITY" means at any time Equity Securities and any shares of any
class of capital stock of the Company.
"SUBSIDIARY" means, as to any Person, any corporation at least a
majority of the shares of stock of which having general voting power under
ordinary circumstances to elect a majority of the Board of Directors of
such corporation (irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency) is, at the time as of which the
determination is being made, owned by such Person, or one or more of its
Subsidiaries or by such Person and one or more of its Subsidiaries.
"TAX ALLOCATION AGREEMENT" means the Tax Allocation Agreement, dated
as of June 9, 1998, among the Company, Workflow Management, Inc., School
Specialty, Inc., Aztec Technology Partners, Inc. and Navigant
International, Inc.
"TAX RETURNS" is defined in Section 2.01(n)(i).
"TAXES" is defined in Section 2.01(n)(i).
"THIRD-PARTY BID" means an unsolicited bona fide tender offer or other
public offer by a Person other than Purchaser, an Affiliate thereof or the
Company or any of its Subsidiaries (a "THIRD PARTY") to purchase a number
of shares of Common Stock which, together with the shares of Common Stock
Beneficially Owned by such Third Party, would result in the Third Party
being the Beneficial Owner of 25% or more of the shares of Common Stock
outstanding.
"TOTAL VOTING POWER" means at any time the total combined voting power
in the general election of directors of all the Voting Securities then
outstanding.
"UNAUDITED COMPANY FINANCIAL STATEMENTS" is defined in Section
2.01(g)(ii).
"VOTING SECURITIES" means at any time shares of any class of capital
stock of the Company which are then entitled to vote generally in the
election of directors.
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"YEAR 2000 COMPATIBLE" (and variations thereof) means, with respect to
any Computer System, that such Computer System (I) records, stores,
processes and provides true and accurate dates and calculations for dates
and spans of dates, (II) is and will be able to operate on a basis
comparable to its current operation during and after calendar year 2000
A.D., including, but not limited to, leap years, and (III) shall not end
abnormally or provide invalid or incorrect results as a result of date data
which represents or references (or fails to represent or reference)
different centuries or more than one century.
ARTICLE IX
MISCELLANEOUS
SECTION IX.1 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such which may be hereafter declared invalid, void or
unenforceable.
SECTION IX.2 SPECIFIC ENFORCEMENT. Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement or the Certificate of
Designation were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of the provisions of this
Agreement or the Certificate of Designation and to enforce specifically the
terms and provisions hereof and thereof in any court of the United States or any
state thereof having jurisdiction, this being in addition to any other remedy to
which they may be entitled at law or equity.
SECTION IX.3 ENTIRE AGREEMENT. This Agreement (including the documents
set forth in the Exhibits and Schedules hereto), together with the 1998
Investment Agreement, the Registration Rights Agreement as amended pursuant
hereto, and the Indemnification Agreement, contains the entire understanding of
the parties with respect to the transactions contemplated hereby.
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SECTION IX.4 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been signed
by each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
SECTION IX.5 NOTICES. All notices, consents, requests, instructions,
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered personally, by telecopy (except for legal process) or sent by
registered mail, postage prepaid, if to:
The Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention of: Mark D. Director
Telecopy No.: (202) 339-6727
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention of: George P. Stamas
Telecopy No.: (202) 663-6363
Purchaser:
c/o Clayton, Dubilier & Rice Fund V
Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware 19803
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with a copy to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Attention of: Brian D. Finn
Telecopy No.: (212) 407-5200
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention of: Franci J. Blassberg
Telecopy No.: (212) 909-6836
or to such other address or telex number as any party may, from time to time,
designate in a written notice given in a like manner.
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SECTION IX.6 AMENDMENTS; WAIVERS, ETC. This Agreement may be amended
as to Purchaser and their successors and assigns (determined as provided in
Section 9.08), and the Company may take any action herein prohibited, or omit to
perform any act required to be performed by it, if the Company shall obtain the
written consent of Purchaser. This Agreement may not be waived, changed,
modified, or discharged orally, but only by an agreement in writing signed by
the party or parties against whom enforcement of any waiver, change,
modification or discharge is sought or by parties with the right to consent to
such waiver, change, modification or discharge on behalf of such party. Any such
waiver shall constitute a waiver only with respect to the specific matter
described in such writing and shall in no way impair the rights of the party
granting such waiver in any other respect or at any other time. Neither the
waiver by any of the parties hereto of a breach of or a default under any of the
provisions of this Agreement, nor the failure by any of the parties, on one or
more occasions, to enforce any of the provisions of this Agreement or to
exercise any right or privilege hereunder, shall be construed as a waiver of any
other breach or default of a similar nature, or as a waiver of any of such
provisions, rights or privileges hereunder. The rights and remedies of any party
based upon, arising out of or otherwise in respect of any inaccuracy or breach
of any representation, warranty, covenant or agreement or failure to fulfill any
condition shall in no way be limited by the fact that the act, omission,
occurrence or other state of facts upon which any claim of any such inaccuracy
or breach is based may also be the subject matter of any other representation,
warranty, covenant or agreement as to which there is no inaccuracy or breach.
The representations and warranties of the Company shall not be affected or
deemed waived by reason of any knowledge of or investigation made by or on
behalf of Purchaser (including but not limited to knowledge of or investigation
by any of its advisors, consultants, representatives or affiliates).
SECTION IX.7 COOPERATION. Purchaser and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement.
SECTION IX.8 SUCCESSORS AND ASSIGNS. All covenants and agreements
contained herein shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns; PROVIDED, HOWEVER, that neither party
may assign any of its rights under this Agreement without the written consent of
the other party.
SECTION IX.9 EXPENSES AND REMEDIES. Whether or not the Closing takes
place, all costs and expenses incurred in connection with this Agreement, the
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transactions contemplated hereby and any amendments to or waivers of this
Agreement, the 1998 Investment Agreement or the Registration Rights Agreement,
including the reasonable out-of-pocket expenses incurred by Purchaser in
connection therewith ("PURCHASER'S EXPENSES"), shall be borne by the Company.
SECTION IX.10 TRANSFER OF PREFERRED SHARES, 1999 WARRANTS AND 1999
SPECIAL WARRANTS. Purchaser understands and agrees that the Preferred Shares,
the Conversion Shares, the 1999 Warrants, the 1999 Warrant Shares, the 1999
Special Warrants and the 1999 Special Warrant Shares have not been registered
under the Securities Act or the securities laws of any state and that they may
be sold or otherwise disposed of only in one or more transactions registered
under the Securities Act and, where applicable, such laws or as to which an
exemption from the registration requirements of the Securities Act and, where
applicable, such laws is available. Purchaser acknowledges that except as
provided in the Registration Rights Agreement, Purchaser has no right to require
the Company to register Preferred Shares, the 1999 Warrants, the 1999 Warrant
Shares, the 1999 Special Warrants or the 1999 Special Warrant Shares. Purchaser
understands and agrees that each certificate representing Preferred Shares, 1999
Warrants, 1999 Warrant Shares, 1999 Special Warrants or 1999 Special Warrant
Shares (other than, with respect to the first legend, Preferred Shares, 1999
Warrants, 1999 Warrant Shares, 1999 Special Warrants or 1999 Special Warrant
Shares that are no longer subject to the provisions of Article III and other
than, with respect to the second legend, Preferred Shares, 1999 Warrants, 1999
Warrant Shares, 1999 Special Warrants or 1999 Special Warrant Shares which have
been transferred in a transaction registered under the Securities Act or exempt
from the registration requirements of the Securities Act pursuant to Rule 144
thereunder or any similar rule or regulation) shall bear the following legends:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS
OF SUCH ACT OR SUCH LAWS."
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and Purchaser agrees to transfer Preferred Shares, 1999 Warrants, 1999 Warrant
Shares, 1999 Special Warrants and 1999 Special Warrant Shares only in accordance
with the provisions of such legends.
SECTION IX.11 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, except to the extent that Delaware law mandatorily governs.
SECTION IX.12 PUBLICITY. The Company and Purchaser will consult and
cooperate with each other before issuing, and provide each other the opportunity
to review and comment upon, any press releases or otherwise making public
statements with respect to the transactions contemplated by this Agreement.
SECTION IX.13 NO THIRD PARTY BENEFICIARIES. (a) Nothing contained in
this Agreement is intended to confer upon any person or entity other than the
parties hereto and their respective successors and permitted assigns, any
benefit, right or remedies under or by reason of this Agreement; PROVIDED,
HOWEVER, that the parties hereto hereby acknowledge and agree that the Purchaser
Indemnitees (other than Purchaser) are third party beneficiaries of Article VII
of this Agreement.
SECTION IX.14 CONSENT TO JURISDICTION. Each of the Company and
Purchaser irrevocably submits to the personal exclusive jurisdiction of the
United States District Court for the Southern District of New York for the
purposes of any suit, action or other proceeding arising out of this Agreement
or any transaction contemplated hereby (and, to the extent permitted under
applicable rules of procedure, agrees not to commence any action, suit or
proceeding relating hereto except in such court). Each of the Company and
Purchaser further agrees that service of any process, summons, notice or
document hand delivered or sent by registered mail to such party's respective
address set forth in Section 9.05 will be effective service of process for any
action, suit or proceeding in New York with respect to any matters to which it
has submitted to jurisdiction as set forth in the immediately preceding
sentence. Each of the Company and Purchaser irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby in the
United States District Court for the Southern District of New York, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in such court that
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any such action, suit or proceeding brought in such court has been brought in
an inconvenient forum.
SECTION IX.15 REPLACEMENT OF SHARE CERTIFICATES. Upon receipt of an
affidavit of loss with respect to any certificate representing Shares or
Preferred Shares or, in the case of any mutilation of such certificate, upon
surrender of such certificate, the Company at its expense shall execute and
deliver, in lieu thereof, a new certificate representing such Shares or
Preferred Shares.
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IN WITNESS WHEREOF, Purchaser and the Company have caused this
Agreement to be duly executed as of the day and year first above written.
U.S. OFFICE PRODUCTS COMPANY
By: /s/ Mark D. Director
---------------------------------
Name: Mark S. Director
Title: Secretary
CDR-PC ACQUISITION, L.L.C.
By: /s/ Brian D. Finn
---------------------------------
Name: Brian D. Finn
Title: Executive Vice President
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Exhibit IV
AMENDMENTS TO THE 1998 INVESTMENT AGREEMENT
(i) Paragraph (a) of the penultimate recital to the 1998 Investment
Agreement shall be restated in its entirety as follows as follows:
(a) Purchaser wishes to purchase from the Company, and the
Company wishes to sell to Purchaser, shares of Common Stock and
warrants having the terms and conditions set forth in Exhibit 1
(as such warrants are amended from time to time, whether pursuant
to the Investment Agreement, dated as of March 30, 1999, between
the Company and Purchaser (the "1999 Investment Agreement") or
otherwise, the "Special Warrants") entitling the holder thereof
to purchase shares of Common Stock together representing 24.9% of
the shares of Common Stock as of the Closing Date (as herein
defined) that would be outstanding after giving effect to the
issuance of such shares (and assuming the conversion into Common
Stock of all of the Company's issued and outstanding 5 1/2%
Convertible Subordinated Notes Due 2001 issued pursuant to an
Indenture, dated as of February 7, 1996, between the Company and
State Street Bank and Trust Company (the "2001 Notes") that are
outstanding on the Closing Date, and after giving effect to the
issuance of any Contingent Stock (as defined herein)), and
warrants entitling the holder thereof to purchase one share of
Common Stock for each share and Special Warrant so purchased on
the terms and subject to the conditions set forth in Exhibit 2
(as such warrants are amended from time to time, whether pursuant
to the 1999 Investment Agreement or otherwise, the "Warrants"),
and
(ii) Paragraph (b) of Section 4.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(b) Purchaser shall be entitled to nominate three directors for
election, PROVIDED:
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(i) if the total number of shares of Common Stock represented by
the Shares, the Special Warrants and the Warrants ("Purchaser's Total
Securities") declines by more than 33-1/3% but less than 66-2/3% from
Purchaser's Total Securities at Closing by reason of sales or other
dispositions of Common Stock, Warrants or Special Warrants by
Purchaser, Purchaser shall have the right to nominate two directors;
(ii) if Purchaser's Total Securities declines by 66-2/3% or more
from Purchaser's Total Securities at Closing, but Purchaser's
Percentage Interest remains at least 5% of the outstanding Voting
Securities, by reason of sales or other dispositions of Common Stock,
Warrants or Special Warrants by Purchaser, Purchaser shall have the
right to nominate one director;
(iii) for the purpose of calculating Purchaser's Total Securities
as of any time after the closing under the 1999 Investment Agreement
(but not for the purpose of calculating Purchaser's Total Securities
at Closing), each Preferred Share owned by Purchaser shall be treated
as if it were 100 Shares.
(iv) in the event that the size of the Board of Directors shall
be increased, Purchaser shall have the right to at least proportionate
representation on the Board following such increase based on the
composition of the Board as between Investor Directors and
Non-Investor Directors immediately prior to such increase; PROVIDED
that in no event shall the Board consist of more than 12 directors;
and
(v) if the chief executive officer of the Company is not then a
member of the Board of Directors or a nominee for membership thereon,
the Purchaser shall be entitled to approve an additional nominee to
the Board of Directors.
(iii) Paragraph (a) of Section 6.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(a) Except as permitted by Section 6.01(b) or 6.01(c), neither
Purchaser nor its Affiliates will directly or indirectly acquire any
securities
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(including by exercise of the Warrants or Special Warrants) or take
any other action that would cause (i) the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting
Securities then held by Purchaser to equal or exceed 26.7% or (ii) the
aggregate voting power of all Equity Securities then held by Purchaser
(on an as converted basis) to equal or exceed 50%.
(IV) Paragraph (c) of Section 6.01 of the 1998 Investment Agreement
shall be restated in its entirety as follows:
(c) This Section 6.01 shall terminate and be of no further force
or effect on the earliest to occur of (I) the fifth anniversary of the
Closing, (II) the date on which the percentage of the Total Voting
Power represented by the aggregate voting power of all Voting
Securities then owned by Purchaser (other than any Voting Securities
acquired in violation of this Agreement) is greater than 50%, and
(III) the first public disclosure of a Third-Party Bid (provided,
however, that if such Third-Party Bid is thereafter abandoned,
terminated or withdrawn, the provisions of this Section 6.01 shall be
reinstated, although any action taken or agreement or arrangement
entered into by Purchaser after such first public disclosure and prior
to such reinstatement (or the consummation of any such action,
agreement or arrangement, whether before or, unless such action,
agreement or arrangement shall be a tender offer or other public offer
with respect to the Company, after such reinstatement) shall not be
deemed to breach this Section 6.01 as a result of such reinstatement).
(V) The first paragraph of Section 6.02 of the 1998 Investment
Agreement shall be restated in its entirety as follows:
SECTION 6.02 ADDITIONAL LIMITATIONS. (a) Except as permitted by
Section 6.02(b), during the five-year period beginning on the date of this
Agreement, Purchaser shall not, and shall not permit its Affiliates to:
(VI) Section 6.02 of the 1998 Investment Agreement shall be amended by
adding a section (b) as follows:
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(b) The limitations set forth in Section 6.02 (a) hereof shall not
apply (X) in connection with a Buyout Transaction that is not solicited or
proposed by Purchaser or its Affiliates, (Y) following the first public
disclosure of a Third-Party Bid (provided, however, that if such
Third-Party Bid is thereafter abandoned, terminated or withdrawn, the
provisions of Section 6.02 (a) hereof shall be reinstated, although any
action taken or agreement or arrangement entered into by Purchaser after
such first public disclosure and prior to such reinstatement (or the
consummation of any such action, agreement or arrangement, whether before
or, unless such action, agreement or arrangement shall be a tender offer or
other public offer with respect to the Company, after such reinstatement)
shall not be deemed to breach the provisions of Section 6.02 (a) hereof as
a result of such reinstatement), or (Z) as specifically approved by a
majority of the Non- Investor Directors
(vii) Paragraphs (c) and (d) of Section 7.01 of the 1998 Investment
Agreement shall be restated in their entirety as follows:
(c) The provisions of clauses (a) and (b) of this Article VII shall
terminate and be of no further force or effect on the earliest to occur of
(I) the fifth anniversary of the Closing, (II) the date on which the
percentage of the Total Voting Power represented by the aggregate voting
power of all Voting Securities then owned by Purchaser (other than any
Voting Securities acquired in violation of this Agreement) is greater than
50%, and (III) the first public disclosure of a Third-Party Bid (provided,
however, that if such Third-Party Bid is thereafter abandoned, terminated
or withdrawn, the provisions of clauses (a) and (b) of this Article VII
shall be reinstated, although any action taken or agreement or arrangement
entered into by Purchaser after such first public disclosure and prior to
such reinstatement (or the consummation of any such action, agreement or
arrangement, whether before or, unless such action, agreement or
arrangement shall be a tender offer or other public offer with respect to
the Company, after such reinstatement) shall not be deemed to breach the
provisions of clauses (a) and (b) of this Article VII as a result of such
reinstatement).
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(d) Prior to the seventh anniversary of the Closing, the Purchaser
will not, directly or otherwise dispose of Shares representing 15% or more
of the then outstanding Common Stock, to any Person or group (within the
meaning of Section 13(d)(3) of the Exchange Act) without first offering the
Company the right to make an offer to purchase the Shares proposed to be so
sold, transferred or otherwise disposed of. The provisions of the previous
sentence shall terminate and be of no effect on the earlier to occur of (I)
the date on which the percentage of the Total Voting Power represented by
the aggregate voting power of all Voting Securities then owned by Purchaser
(other than any Voting Securities acquired in violation of this Agreement)
is greater than 50%, and (II) the first public disclosure of a Third Party
Bid (provided, however, that if such Third-Party Bid is thereafter
abandoned, terminated or withdrawn, the provisions of this Section 7.01 (d)
shall be reinstated, although any action taken or agreement or arrangement
entered into by Purchaser after such first public disclosure and prior to
such reinstatement (or the consummation of any such action, agreement or
arrangement, whether before or, unless such action, agreement or
arrangement shall be a tender offer or other public offer with respect to
the Company, after such reinstatement) shall not be deemed to breach this
Section 7.01 (d) as a result of such reinstatement).
(VIII) Section 8.10 of the 1998 Investment Agreement shall be restated in
its entirety as follows:
Section 8.10 TAX STANDSTILL. Except as permitted by Section 6.01(b) or
6.01(c) and except for acquisitions of Securities from the Company, during
the period ending two years after the date of the Distributions, (I)
Purchaser shall not acquire any Securities or take any other action that
would cause Purchaser's Percentage Interest to equal or exceed 50%, (II)
none of Purchaser, the Fund or CD&R shall act in concert with any other
Person to acquire any Securities if aggregating such acquisition with the
Purchaser's holdings would cause the Purchaser's Percentage Interest to
equal or exceed 50%, and (III) none of Purchaser, the Fund or CD&R shall
solicit the acquisition of any Securities, PROVIDED that the provision by
the Fund to its limited partners of customary reports and information, and
customary communication with such limited partners
55
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on behalf of the Fund, with respect to the Fund's investment in the Company
that, in either case, do not recommend any such acquisition, shall not be
treated as a solicitation by the Purchaser within the meaning of this
clause (iii). The limitations contained in this Section 8.10 shall
terminate upon the first public disclosure of a Third-Party Bid (provided,
however, that if such Third-Party Bid is thereafter abandoned, terminated
or withdrawn, the provisions of this Section 8.10 shall be reinstated,
although any action taken or agreement or arrangement entered into by
Purchaser after such first public disclosure and prior to such
reinstatement (or the consummation of any such action, agreement or
arrangement, whether before or, unless such action, agreement or
arrangement shall be a tender offer or other public offer with respect to
the Company, after such reinstatement) shall not be deemed to breach this
Section 8.10 as a result of such reinstatement).
(IX) Section 12.02 of the 1998 Investment Agreement shall be amended
by inserting, immediately following the definition of "Pre-Distribution
Transactions", a new definition as follows:
"PREFERRED SHARES" means the shares of Series A Non-Voting
Participating Convertible Preferred Stock of the Company, par value
$.001 per share, purchased by Purchaser pursuant to an Investment
Agreement, dated as of March 30, 1999, between the Company and
Purchaser.
(X) Section 12.02 of the 1998 Investment Agreement shall be amended by
restating the definition of "Pro Rata Share", as follows:
"PRO RATA SHARE" means the fraction of an entire issuance of New
Securities, the numerator of which shall be the sum of (A) the number
of shares of Common Stock owned or receivable upon exercise of the
Warrants and the Special Warrants by Purchaser and its Affiliates
(other than the Company and its Subsidiaries) immediately prior to
such issuance of such New Securities and (B) the number of shares of
Common Stock into which the Preferred Shares owned by Purchaser and
its Affiliates are convertible, and the denominator of which shall be
the sum of (X) the aggregate number of shares of Common Stock
outstanding immediately
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prior to such issuance of such New Securities and receivable upon
exercise of the Warrants and the Special Warrants and (Y) the number
of shares of Common Stock into which such Preferred Shares are
convertible.
(XI) Section 12.02 of the 1998 Investment Agreement shall be amended by
inserting, immediately following the definition of "Termination Fee", a new
definition as follows:
"THIRD-PARTY BID" means an unsolicited bona fide tender offer or other
public offer by a Person other than Purchaser, an Affiliate thereof or the
Company or any of its Subsidiaries (a "THIRD PARTY") to purchase a number
of shares of Common Stock which, together with the shares of Common Stock
Beneficially Owned by such Third Party, would result in the Third Party
being the Beneficial Owner of 25% or more of the shares of Common Stock
outstanding.
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Exhibit V
AMENDMENTS TO THE REGISTRATION RIGHTS AGREEMENT
(I) Section 1(a) of the Registration Rights Agreement shall be amended by
adding a new paragraph, immediately following the first paragraph, as follows:
The Company is also a party to an Investment Agreement, dated as of
March 30, 1999, with the Purchaser (the "1999 INVESTMENT AGREEMENT"),
pursuant to which the Company agreed, in exchange for consideration of
$51 million in cash (I) to issue to Purchaser up to 73,350 newly
issued shares of Series A Non-Voting Participating Convertible
Preferred Stock, par value $.001 per share (the "PREFERRED SHARES"),
of the Company having the terms set forth in Exhibit I of the 1999
Investment Agreement, (II) to amend and restate the Warrants as set
forth in Exhibit II of the 1999 Investment Agreement, and (III) to
amend and restate the Special Warrants as set forth in Exhibit III of
the 1999 Investment Agreement.
(II) Section 1(b) of the Registration Rights Agreement shall be restated in
its entirety as follows:
(b) This Agreement shall become effective with respect to
any Registrable Securities upon the issuance or sale of Registrable
Securities pursuant to the Investment Agreement or the 1999 Investment
Agreement. This Agreement shall remain in effect upon the assignment
or transfer of Registrable Securities by the Purchaser or a Holder to
an Affiliate, a Distributee or other successors, assigns and
transferees of Purchaser of such Holder pursuant to Section 4.4.
(III) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Registrable Securities" in its entirety as follows:
"REGISTRABLE SECURITIES" means (A) the Shares, (B) the Additional
Shares, (C) the Warrant Shares, (D) the Warrants, (E) the Special
Warrant Shares, (F) the Special Warrants, (G) the Preferred Shares,
(H) the Conversion Shares and (I) any securities issued or issuable
with respect to any Shares, Additional Shares, Warrants, Special
Warrants, Preferred
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Shares or Conversion Shares referred to in the foregoing clauses (a)
through (h), (I) upon any conversion or exchange thereof, (II) by way
of stock dividend or other distribution, stock split or reverse stock
split or (III) in connection with a combination of shares,
recapitalization, merger, consolidation, exchange offer or other
reorganization. As to any particular Registrable Securities, once
issued such securities shall cease to be Registrable Securities when
(A) a Registration Statement with respect to the sale of such
securities shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such
Registration Statement, (B) such securities shall have been
distributed to the public in reliance upon Rule 144, (C) subject to
the provisions of Section 4.1(b)(ii), such securities shall have been
otherwise transferred, new certificates for such securities not
bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of such securities
shall not require registration or qualification of such securities
under the Securities Act or any similar state law then in force or
(D) such securities shall have been acquired by the Company. In
determining the number of Registrable Securities outstanding at any
time or whether the Holders of the requisite number of Registrable
Securities have taken any action hereunder and in calculating the
number of Registrable Securities for all other purposes under this
Agreement, each Warrant and Special Warrant shall be deemed to have
been exercised (to the fullest extent then determinable) and each
Preferred Share shall be deemed to have been converted and such
calculation shall include the number of Warrant Shares and Special
Warrant Shares then deliverable upon the exercise of such Warrant or
Special Warrant and the number of Conversion Shares deliverable upon
conversion of the Preferred Shares (to the fullest extent then
determinable).
(iv) Section 2 of the Registration Rights Agreement shall be amended by
inserting, immediately following the definition of "Contingent Stock", a new
definition as follows:
"CONVERSION SHARES" means the shares of Common Stock issuable upon
conversion of the Preferred Shares.
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(V) Section 2 of the Registration Rights Agreement shall be amended by
inserting, immediately following the definition of "Postponement Period", a new
definition as follows:
"PREFERRED SHARES" is defined in Section 1(a).
(VI) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Special Warrants" as follows:
"SPECIAL WARRANTS" means warrants entitling the holder
thereof to purchase shares of Common Stock on the terms and subject to
the conditions set forth in Exhibit 1 of the Investment Agreement, and
any warrants of the Company received in exchange therefor, pursuant to
the 1999 Investment Agreement or otherwise.
(VII) Section 2 of the Registration Rights Agreement shall be amended by
restating the definition of "Warrants" as follows:
"WARRANTS" means warrants entitling the holder thereof to
purchase one share of Common Stock for each Share and Special Warrant
purchased by the Purchaser pursuant to the Investment Agreement, on
the terms and subject to the conditions set forth in Exhibit 2
thereof, and any warrants of the Company received in exchange
therefor, pursuant to the 1999 Investment Agreement or otherwise.
(VIII) Paragraph (a) of Section 3.1 of the Registration Rights Agreement
shall be restated in its entirety as follows:
(A) REQUESTS. Subject to the provisions of Section 3.6, at any
time or from time to time as of the date hereof, Holders of not less
than 25% of the then outstanding Registrable Securities shall have the
right to make written requests that the Company effect up to six
registrations under the Securities Act of all or part of the
Registrable Securities of the Holders making such request, which
requests shall specify the intended method of disposition thereof by
such Holders, including whether the registration requested is for an
underwritten offering. For a registration to be underwritten, a
majority of the Holders requesting registration (as
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measured by ownership of Registrable Securities) must so request. The
Company shall not be required to effect more than [six] registrations
under this Section 3.1.
(IX) Clause C of Section 3.1(f)(iii) of the Registration Rights Agreement
shall be restated in its entirety as follows:
(C) third, to the extent that the number of shares registered
pursuant to clauses (A) and (B) is less than the largest number that
can be sold in an orderly manner in such offering within a price range
acceptable to the selling Holders, the securities requested to be
included by any other holders (if permitted by the Holders pursuant to
Section 3.1(f)(ii)).
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Exhibit 21.1
MATERIAL SUBSIDIARY LIST
Listed below are the subsidiaries of the Company. Second and third tier
subsidiaries are listed below the respective company.
1203803 Ontario Limited
A. Take a Break Services, Inc.
1. Great Canadian (15%)
1316712 Ontario Limited
A. Arbuckle Foods, Inc.
B. 1203829 Ontario Limited
Action Wholesale Service, Inc.
Affordable Interior Systems, Inc.
Andrews Office Supply & Equipment Co.
A. Expert Office Services, Inc.
Blue Star Group Limited
A. Blue Star Business Solutions Limited
B. Blue Star Computers Limited
1. Orbit Software Limited
C. Blue Star Office Automation Limited
D. U-Bix Business Machines Limited
1. BSG Finance Limited
2. Monitor Business Machines Limited (20%)
E. Cogent Communications Limited
F. Blue Star Properties (No. 2) Limited
1. Blue Star Properties (Grey Street) Limited
2. Whitcoulls Block Development Limited
3. Blue Star Properties (Crawford Street) Limited
4. Blue Star Properties Limited
G. Blue Star Systems Limited
1. Wang New Zealand Limited
H. New Zealand Office Products Limited
1. Blue Star Office Products (Hawkes Bay) Limited
I. Croxley Stationery Limited
1. Armidale Industries Limited (65%)
J. WGL Retail Holdings Limited
1. Calendar Club NZ Limited (50%)
2. Blue Star Consumer Retailing Limited
a. Blue Star B & M Franchises Limited
(i) Books & More NS Limited (50%)
b. Bennetts Government Bookshop Limited
c. University Bookshop (Canterbury) Limited (50%)
d. University Bookshop (Otago) Limited (50%)
e. University Bookshop (Auckland) Limited (50%)
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3. Angus & Robertson Bookworld Pty Ltd.
a. Bookworld (Australia) Pty Limited
b. Reader's Cafe Pty Limited (80%)
c. Angus & Robertson Bookworld Calendar Club Pty Ltd. (50%)
K. Blue Star Print Group Limited
1. Blue Star Print Franchises Limited (SHELF COMPANY)
L. Blue Star Shelf (No. 1) Limited
M. Blue Star Shelf (No. 2) Limited
N. GPO Properties (Masterton) Limited
Blue Star Group Pty Limited
A. Blue Star Corporate Pty Limited
B. Blue Star Business Solutions Australia Pty Limited
C. Dixon Office Warehouse Pty Limited
D. Blue Star Print Group Australia Pty Limited
1. The Craftsman Press Pty Limited
a. Craftsman Publishing Pty Ltd.
2. Blue Star Print Franchises Pty Limited (SHELF COMPANY)
E. Paperwealth Limited (HOLDING COMPANY)
1. Commonwealth Paper Company Pty Limited
2. Empire Office Supplies Pty Limited
F. Milliglade Pty Limited (SHELF COMPANY)
G. Australian Toner Cartridge Co. Pty Limited
H. Toramont Pty Ltd. (SHELF COMPANY)
I. Bookland Pty Limited
J. Filing Efficiency Pty Ltd.
1. Australian Associated Packaging Pty Ltd.
Cafe Express, Inc.
Central Texas Office Products, Inc.
Dulworth Office Furniture Company
Kentwood Office Furniture, Inc.
Mail Boxes Etc.
A. Mail Boxes Etc. USA, Inc.
1. Global Mailbox Express, LLC (51%)
McWhorter's, Inc.
Modern Food Systems, Inc.
Modern Vending, Inc.
Price Modern, Inc.
A. US Office Products, Mid-Atlantic District, Inc.
Rainen Business Interiors, Inc.
ReWork Acquisition Corp.
Sagot Office Interiors, Inc.
Sletten Vending Service, inc.
Sturgis Acquisition Corp.
Superior Office Products, Inc.
A. Benefax Corporation
Sweitzer's Offset Services, Inc.
2
<PAGE>
The Office Furniture Store, Inc.
The Systems House, Inc.
US Office Furniture, Inc.
US Office Furniture Rentals, Inc.
US Office Products, Carolinas District, Inc.
US Office Products, Central Pennsylvania District, Inc.
US Office Products, Chicago District, LLC
US Office Products, Colorado District, LLC
A. Pear Commercial Interiors, Inc.
US Office Products, Florida District, LLC
US Office Products, Georgia District, LLC
A. Courtland-Cain, Inc.
US Office Products, Great Lakes District, Inc. (DE Corp.)
US Office Products, Great Lakes District, Inc. (MI Corp.)
US Office Products, Louisiana District, Inc.
US Office Products, Mid-South District, Inc. (AR Corp.)
US Office Products, Mid-South District, Inc. (MS Corp.)
US Office Products, Mid-South District, Inc. (TN Corp.)
US Office Products, Midwest District, Inc.
A. Forty-Fifteen Papin Redevelopment Corporation
US Office Products, Milwaukee District, Inc.
US Office Products, Mississippi, Inc.
US Office Products, New Mexico District, Inc.
US Office Products, North Atlantic District, Inc.
US office Products, Northern California District, Inc.
US Office Products, Northwest District, LLC
A. Bindery Systems, Inc.
US Office Products, Penn-Ohio District, Inc.
US Office Products, South Central District, Inc.
US Office Products, Southern California District, Inc.
US Office Products, Upper Mid-West District, Inc.
US Office Products, Wisconsin District, Inc.
USOP Holding Co. of Mexico, Inc.
USOP Merchandising Company
USOPN, Inc.
Vend-Rite Service Corporation
Woburn Vending, Inc.
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (333-01574, 333-12789 and 333-24581); Form S-3
(333-10383); and Post-Effective Amendment No. 1 to Form S-4 on Form S-8
(333-36463) of U.S. Office Products Company of our report dated June 8, 1999,
relating to the financial statements and financial statement schedule, which
appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Washington D.C.
July 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME INCLUDED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-24-1999
<PERIOD-START> APR-26-1998
<PERIOD-END> APR-24-1999
<CASH> 76,102
<SECURITIES> 0
<RECEIVABLES> 316,094
<ALLOWANCES> (11,720)
<INVENTORY> 206,857
<CURRENT-ASSETS> 694,104
<PP&E> 334,153
<DEPRECIATION> (103,001)
<TOTAL-ASSETS> 2,012,159
<CURRENT-LIABILITIES> 335,241
<BONDS> 1,171,429
0
0
<COMMON> 37
<OTHER-SE> 479,505
<TOTAL-LIABILITY-AND-EQUITY> 2,012,159
<SALES> 2,664,589
<TOTAL-REVENUES> 2,664,589
<CGS> 1,933,796
<TOTAL-COSTS> 834,315<F1>
<OTHER-EXPENSES> 11,109
<LOSS-PROVISION> 6,982
<INTEREST-EXPENSE> 106,291
<INCOME-PRETAX> (227,904)
<INCOME-TAX> 30,402
<INCOME-CONTINUING> (197,502)
<DISCONTINUED> (1,294)
<EXTRAORDINARY> (269)
<CHANGES> 0
<NET-INCOME> (199,065)
<EPS-BASIC> (5.49)
<EPS-DILUTED> (5.49)
<FN>
<F1>INCLUDES $97,505 OF STRATEGIC RESTRUCTURING PLAN COSTS, $58,735 OF IMPAIRED
ASSET WRITE-OFFS AND $24,042 OF OPERATING RESTRUCTURING COSTS.
</FN>
</TABLE>
