<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 23, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-----
As of December 3, 1999, there were 36,802,286 shares of common stock
outstanding.
<PAGE>
US OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet...............................................................3
October 23, 1999 (unaudited) and April 24, 1999
Consolidated Statement of Operations.....................................................4
For the three months ended October 23, 1999 (unaudited)
and October 24, 1998 (unaudited) and the six months ended October
23, 1999 (unaudited) and October 24, 1998 (unaudited)
Consolidated Statement of Cash Flows.....................................................5
For the six months ended October 23, 1999 (unaudited) and
October 24, 1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited)...................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................37
Item 4. Submission of Matters to a Vote of Security Holders.....................................38
Item 5. Other Information.......................................................................38
Item 6. Exhibits and Reports on Form 8-K........................................................39
Signatures.........................................................................................40
Exhibit Index......................................................................................41
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 23, April 24,
ASSETS 1999 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 29,296 $ 76,102
Accounts receivable, less allowance for doubtful
accounts of $11,056 and $11,720, respectively........................... 334,386 304,374
Inventories, net.......................................................... 198,509 206,857
Prepaid expenses and other current assets................................. 113,394 106,771
------------- -------------
Total current assets.................................................. 675,585 694,104
Property and equipment, net.................................................. 230,345 231,152
Intangible assets, net....................................................... 848,076 858,197
Other assets................................................................. 235,593 228,706
------------- -------------
Total assets.......................................................... $ 1,989,599 $ 2,012,159
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................................... $ 38,651 $ 19,193
Accounts payable.......................................................... 189,563 168,976
Accrued compensation...................................................... 41,100 46,384
Other accrued liabilities................................................. 100,725 100,688
------------- -------------
Total current liabilities............................................. 370,039 335,241
Long-term debt............................................................... 1,165,349 1,171,429
Other long-term liabilities and minority interests........................... 28,772 25,947
------------- -------------
Total liabilities..................................................... 1,564,160 1,532,617
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, 73,262 shares issued and outstanding........................
Common stock, $.001 par value, 500,000,000 shares
authorized, 36,979,271 and 36,853,505 shares issued,
36,802,286 and 36,702,778 shares outstanding, and
176,985 and 150,727 held in treasury, respectively ..................... 37 37
Additional paid-in capital................................................ 728,074 727,614
Accumulated other comprehensive loss...................................... (119,554) (119,941)
Accumulated deficit....................................................... (183,118) (128,168)
------------- -------------
Total stockholders' equity ........................................... 425,439 479,542
------------- -------------
Total liabilities and stockholders' equity............................ $ 1,989,599 $ 2,012,159
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 642,511 $ 677,205 $ 1,268,014 $ 1,329,154
Cost of revenues 463,381 492,166 914,102 966,451
----------- ----------- ----------- -----------
Gross profit 179,130 185,039 353,912 362,703
Selling, general and administrative expenses 160,787 150,670 319,396 299,466
Amortization expense 6,252 6,137 12,242 12,123
Operating restructuring costs 5,188 3,469 7,097 12,195
Strategic Restructuring Plan costs 97,503
----------- ----------- ----------- -----------
Operating income (loss) 6,903 24,763 15,177 (58,584)
Interest expense 27,873 28,991 55,590 47,879
Interest income (455) (460) (1,525) (827)
Unrealized foreign currency transaction loss 12,198 25,754
Loss on sale of businesses 3,066 2,536 4,020 2,536
Other (income) expense 1,093 (609) 2,589 (1,019)
----------- ----------- ----------- -----------
Loss from continuing operations before benefit
from income taxes and extraordinary items (36,872) (5,695) (71,251) (107,153)
Benefit from income taxes (9,449) (1,713) (16,301) (19,628)
----------- ----------- ----------- -----------
Loss from continuing operations before
extraordinary items (27,423) (3,982) (54,950) (87,525)
Loss from discontinued operations, net
of income taxes (1,294)
----------- ----------- ----------- -----------
Loss before extraordinary items (27,423) (3,982) (54,950) (88,819)
Extraordinary items - loss on early termination
of debt facilities, net of income taxes 269
----------- ----------- ----------- -----------
Net loss $ (27,423) $ (3,982) $ (54,950) $ (89,088)
=========== =========== =========== ===========
Basic and diluted per share data:
Loss from continuing operations before
extraordinary items $ (0.75) $ (0.11) $ (1.49) $ (2.44)
Loss from discontinued operations (0.04)
Extraordinary items (0.01)
----------- ----------- ----------- -----------
Net loss $ (0.75) $ (0.11) $ (1.49) $ (2.49)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
October 23, October 24,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (54,950) $ (89,088)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss from discontinued operations ....................................... 1,294
Depreciation and amortization ........................................... 33,793 29,769
Unrealized foreign currency transaction loss ............................ 25,754
Strategic Restructuring Plan costs ...................................... 70,380
Loss on sale of businesses .............................................. 4,020 2,536
Deferred income taxes ................................................... (9,734) (1,855)
Equity in net loss (income) of affiliate ................................ 1,991 (1,611)
Extraordinary loss ...................................................... 269
Changes in assets and liabilities (net of effects of acquisitions and
divestitures):
Accounts receivable ................................................... (39,973) (28,670)
Inventory ............................................................. (5,126) (16,614)
Prepaid expenses and other current assets ............................. (5,284) (37,084)
Accounts payable ...................................................... 30,492 14,142
Accrued liabilities ................................................... (3,228) 34,592
----------- -----------
Net cash used in operating activities ................................ (22,245) (21,940)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net of disposals ..................... (35,632) (20,996)
Cash paid in acquisitions, net of cash received ........................... (9,329) (22,723)
Investment in affiliates .................................................. (4,000)
Proceeds from sale of businesses .......................................... 13,590
Other ..................................................................... 1,313 (743)
----------- -----------
Net cash used in investing activities ................................ (34,058) (44,462)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................................. 520 1,152,595
Repurchase of common stock in Equity Tender ............................... (1,000,000)
Proceeds from (payments of) short-term debt, net .......................... 11,039 (339,016)
Proceeds from issuance of common stock, net ............................... 460 322,720
Payments of long-term debt ................................................ (2,140) (213,666)
Net repayments by (advances to) discontinued operations ................... 123,551
----------- -----------
Net cash provided by financing activities ............................ 9,879 46,184
----------- -----------
Effect of exchange rates on cash and cash equivalents ........................ (382) 200
----------- -----------
Cash used in discontinued operations ......................................... (12,518)
----------- -----------
Net decrease in cash and cash equivalents .................................... (46,806) (32,536)
Cash and cash equivalents at beginning of period ............................. 76,102 52,021
----------- -----------
Cash and cash equivalents at end of period ................................... $ 29,296 $ 19,485
=========== ===========
</TABLE>
Page 5
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
October 23, October 24,
1999 1998
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 52,817 $ 37,871
Income taxes paid $ 2,952 $ 2,601
</TABLE>
The Company issued cash in connection with certain business combinations
accounted for under the purchase method for the six months ended October 23,
1999 and October 24, 1998, respectively. The estimated fair values of the assets
and liabilities at the dates of the acquisitions are presented as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
October 23, October 24,
1999 1998
------------ -------------
<S> <C> <C>
Accounts receivable $ $ 2,144
Inventory 2,442
Prepaid expenses and other current assets 3,886
Property and equipment 1,578 2,532
Intangible assets 9,785 18,476
Other assets 416
Short-term debt (192) (654)
Accounts payable (538)
Accrued liabilities (943) (1,694)
Long-term debt (899) (580)
Other long-term liabilities and minority interests (3,707)
------------ -------------
Net assets acquired $ 9,329 $ 22,723
============ =============
</TABLE>
Non-cash transactions:
- - During the six months ended October 24, 1998, the Company issued 2,025,185
shares of common stock in exchange for $130,989 of the 5 1/2% convertible
subordinated notes due 2001.
- - During the six months ended October 24, 1998, the Company issued 7,911
shares of common stock upon conversion of $1,000 of the 5 1/2% convertible
subordinated notes due 2003.
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of U.S. Office Products
Company (the "Company" or "US Office Products"), and the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates. As a result of the
Company's spin-off of its Technology Solutions, Print Management, Educational
Supplies, and Corporate Travel Services businesses (collectively, the "Spin-Off
Companies"), the accompanying consolidated financial statements reflect the
results of the Spin-Off Companies as discontinued operations through June 9,
1998 (the effective date of the Spin-Off). See Note 2, "Discontinued
Operations." The Company's continuing operations consist of its North American
operations (which include office supplies, office furniture, office coffee and
vending services, and a series of non-core businesses), Mail Boxes Etc. ("MBE"),
the Company's international operations in New Zealand and Australia (referred to
herein as the "Blue Star Group"), and the Company's 49% interest in Dudley
Stationery Limited ("Dudley"), a U.K. contract stationer. The North American
operations are primarily in the United States; they include two coffee and
beverage businesses located in Canada.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan"). The Strategic Restructuring Plan included three
principal elements: (i) the repurchase by the Company, through a self-tender
offer, of a portion of its outstanding shares (including shares underlying
employee stock options) (the "Equity Tender"); (ii) the Company's distribution
to its stockholders of the shares of the Spin-Off Companies; and (iii) the
purchase by an affiliate of an investment fund managed by Clayton, Dubilier &
Rice, Inc., a private investment fund, of 24.9% of the Company's shares, plus
warrants to purchase additional shares.
In conjunction with the Strategic Restructuring Plan, the Company also
completed several financing transactions (the "Financing Transactions") in June
1998. The Financing Transactions consisted of the following: (i) the Company
repurchased substantially all of its 5 1/2% convertible subordinated notes due
2003; (ii) through an exchange offer, the Company exchanged substantially all of
its 5 1/2% convertible subordinated notes due 2001; (iii) the Company entered
into a new $1,225,000 senior secured bank credit facility and terminated its
former credit facility; and (iv) the Company issued and sold $400,000 of 9 3/4%
senior subordinated notes due 2008 (the "2008 Notes") in a private placement.
During fiscal 1999, the Company reached an agreement with its bank lenders to
revise the terms of the credit facility (as amended, the "Credit Facility"). The
revisions included modifications to the financial covenants and reductions in
the amounts available under the revolving credit facility from $250,000 to
$200,000 and the multi-draw term loan facility from $200,000 to $50,000.
For a complete description of the Strategic Restructuring Plan and the
Financing Transactions, see Note 3 of the Notes to the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended April 24, 1999.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended April 24, 1999, included in the Company's Annual Report on Form 10-K.
NOTE 2 - DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for the six months ended October 24, 1998
in the Company's consolidated financial statements. The Spin-Off Companies began
operating as independent companies on June 10,1998.
Page 7
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
The loss from discontinued operations included in the consolidated statement
of operations represents the sum of the results of the Spin-Off Companies for
the 45-day period they were included in the Company's fiscal 1999 results and is
summarized as follows:
<TABLE>
<CAPTION>
Corporate Total
Print Travel Educational Technology Discontinued
Management Services Supplies Solutions Operations
---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Six months ended October 24, 1998:
Revenues .......................... $ 41,132 $ 19,346 $ 40,785 $ 30,951 $ 132,214
Operating income (loss) ........... (1,601) 14 1,836 403 652
Income (loss) before provision for
(benefit from) income taxes ..... (2,043) (108) 1,069 381 (701)
Provision for (benefit from) income
taxes ........................... (732) 158 703 464 593
Income (loss) from discontinued
operations, net of income taxes. (1,311) (266) 366 (83) (1,294)
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at US Office Products' weighted average interest rates, and do not
include any allocations of corporate overhead from US Office Products during the
periods presented.
NOTE 3 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended October 23, 1999
were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 24, 1999 $ 479,542
Issuances of common stock in conjunction with:
Employee stock purchase plan 460
Comprehensive loss:
Other comprehensive income 387
Net loss (54,950)
Stockholders' equity balance at October 23, 1999 $ 425,439
============
</TABLE>
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (27,423) $ (3,982) $ (54,950) $ (89,088)
Other comprehensive income (loss):
Cumulative translation adjustment 111 5,632 387 (31,145)
--------- --------- --------- ---------
Comprehensive income (loss) $ (27,312) $ 1,650 $ (54,563) $(120,233)
========= ========= ========= =========
</TABLE>
On June 10, 1998, the Company effected a one-for-four reverse split of its
common stock whereby each four shares of common stock were exchanged for one
share of common stock. All share and per share data appearing in these
consolidated financial statements and notes hereto have been retroactively
adjusted for this split.
Page 8
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 4 - 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>
Loss Shares Per Share
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 23, 1999:
Basic and diluted loss per share $ (27,423) 36,800 $ (0.75)
=========
THREE MONTHS ENDED OCTOBER 24, 1998:
Basic and diluted loss per share $ (3,982) 36,569 $ (0.11)
==========
SIX MONTHS ENDED OCTOBER 23, 1999:
Basic and diluted loss per share $ (54,950) 36,768 $ (1.49)
==========
SIX MONTHS ENDED OCTOBER 24, 1998:
Basic and diluted loss per share $ (87,525) 35,821 $ (2.44)
==========
</TABLE>
As a result of the loss from continuing operations before extraordinary items
for the three and six month periods ended October 23, 1999 and October 24, 1998,
the basic and diluted loss per share amounts for such periods were calculated
using the same number of shares outstanding, since all of the Company's employee
stock options and the two series of convertible debt securities outstanding
during the periods were anti-dilutive. In addition, the convertible preferred
stock outstanding during the three and six month periods ended October 23, 1999
was anti-dilutive.
NOTE 5 - BUSINESS COMBINATIONS
The Company acquired one business, which was accounted for under the purchase
method, for a purchase price of $9,329 and completed two business divestitures
during the three month period ended October 23, 1999. In addition, the Company
made no acquisitions and completed three business divestitures during the three
month period ended July 24, 1999. In fiscal 1999, the Company completed a total
of 22 acquisitions, all related to continuing operations, which were accounted
for under the purchase method and had an aggregate purchase price of $34,508.
The Company also completed seven business divestitures or closures during fiscal
1999.
The following presents the unaudited pro forma results of operations of the
Company for the three and six months ended October 23, 1999, and October 24,
1998. These results include the Company's consolidated financial statements and
the results of the Purchased Companies and exclude the results of all business
divestitures as if all such purchase acquisitions and business divestitures had
been made at the beginning of fiscal 1999. The results presented below include
certain pro forma adjustments to reflect the amortization of intangible assets,
removal of Strategic Restructuring Plan costs and the inclusion of an
appropriate income tax provision or benefit on all earnings and losses:
Page 9
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................................. $ 643,999 $ 649,123 $ 1,260,694 $ 1,278,653
Income/(loss) from continuing operations
before extraordinary
items............. (26,392) (1,368) (53,821) (7,706)
Basic and diluted loss per share from
continuing operations.................. (0.72) (0.04) (1.46) (0.22)
</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 occurred at the
beginning of fiscal 1999 or the results that may occur in the future.
NOTE 6 - SEGMENT REPORTING
BUSINESS SEGMENTS
The Company has five reportable segments, which include:
- NORTH AMERICAN OFFICE SUPPLIES - a direct-to-business contract
stationer that offers items such as desktop accessories, writing
instruments, paper products, computer consumables, business machines
and catalog furniture;
- NORTH AMERICAN OFFICE FURNITURE - a group of operating companies that
offer middle-market and contract furniture products and related
services;
- NORTH AMERICAN OTHER - the balance of the Company's North American
operations, which includes a group of operating companies that offer
office coffee and vending services, a group of non-core operating
businesses and the corporate costs associated with the North American
operations;
- BLUE STAR GROUP - a group of operating companies that include business
supplies, business solutions (technology related products and
services), print and consumer retailing operations that operate in New
Zealand and Australia;
- MBE - a franchisor of retail business, communication and postal service
centers which offers a range of business products and services for
personal and business consumers.
Other consists of costs related to the Company's corporate headquarters and
the Company's equity interest in Dudley. Eliminations consist of the elimination
of the Company's investments in subsidiaries.
During the second quarter of fiscal 2000, the Company's management began
measuring the performance of operating companies that offer office coffee
services along with the operating companies that offer vending services.
Prior to the second quarter, the operating companies offering office coffee
services were considered part of the North American office supplies segment.
As a result of this change, the results of the operating companies offering
office coffee services are included in North American other for all periods
presented.
Page 10
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
Management measures the performance of the business segments based on
several factors, including revenues, gross profit, operating income (loss) and
EBITDA, as defined below. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note 2
of the Notes to the Company's audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended April 24,
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 23, 1999
-----------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-------------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ----- -------- ----- --- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 266,021 $ 103,662 $ 62,488 $ 432,171 $ 189,977 $ 20,363 $ 642,511
Gross profit 70,667 22,203 17,110 109,980 58,084 11,066 179,130
Depreciation
and amortization 4,386 968 3,787 9,141 6,292 1,970 $ 125 17,528
Operating
income (loss) 11,736 2,997 (7,507) 7,226 3,217 1,869 (5,409) 6,903
EBITDA (a) 18,679 5,355 (3,622) 20,412 10,590 3,900 (5,283) 29,619
Other significant
items:
Identifiable
assets 457,292 176,255 177,112 810,659 729,028 316,582 1,092,344 $(959,014) 1,989,599
Net capital
expenditures (636) 315 11,571 11,250 9,114 474 993 21,831
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 24, 1998
--------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-------------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ----- -------- --------- --- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 270,988 $ 114,922 $ 80,571 $ 466,481 $ 192,380 $ 18,344 $ 677,205
Gross profit 71,759 24,486 20,549 116,794 58,264 9,981 185,039
Depreciation
and amortization $ 3,978 847 2,494 7,319 5,772 1,928 133 15,152
Operating
income (loss) 14,288 4,013 2,501 20,802 5,451 3,579 (5,069) 24,763
EBITDA (a) 18,448 4,947 5,220 28,615 13,514 5,507 (4,253) 43,383
Other significant
items (b):
Identifiable
Assets 843,141 784,471 316,605 1,111,736 $(958,901) 2,097,052
Net capital
expenditures 6,192 4,214 199 (2,537) 8,068
</TABLE>
Page 11
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 23, 1999
---------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-------------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ----- -------- ----- --- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $ 515,259 $ 198,380 $124,661 $838,300 $391,488 $38,226 $1,268,014
Gross profit....... 138,362 42,707 32,614 213,683 119,721 20,508 353,912
Depreciation
and amortization... 7,910 2,606 6,338 16,854 12,778 3,926 $ 235 33,793
Operating
income (loss)..... 23,789 4,049 (12,144) 15,694 9,092 3,110 (12,719) 15,177
EBITDA (a)......... 34,869 8,709 (5,706) 37,872 23,426 7,150 (12,381) 56,067
Other significant
items:
Identifiable
assets......... 457,292 176,255 177,112 810,659 729,028 316,582 1,092,344 $(959,014) 1,989,599
Net capital
expenditures.... 58 640 18,237 18,935 14,605 683 1,409 35,632
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 24, 1998
--------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-------------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ----- -------- ----- --- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $525,146 $226,564 $154,983 $906,693 $388,671 $33,790 $1,329,154
Gross profit....... 139,462 48,765 37,657 225,884 118,367 18,452 362,703
Depreciation
and amortization... 7,650 1,675 4,558 13,883 11,855 3,801 $ 230 29,769
Operating
income (loss)..... 26,117 3,392 3,643 33,152 9,470 5,476 (106,682) (58,584)
EBITDA (a)......... 34,190 10,649 8,595 53,434 26,025 10,245 (8,820) 80,884
Other significant
items (b):
Identifiable
assets......... 843,141 784,471 316,605 1,111,736 $(958,901) 2,097,052
Net capital
expenditures.... 11,564 10,624 758 (1,950) 20,996
</TABLE>
(a) EBITDA represents earnings from continuing operations before interest
expense, benefit from income taxes, depreciation expense, amortization
expense, operating restructuring costs, Strategic Restructuring Plan
costs, unrealized foreign currency transaction loss, loss on sale 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
(loss) as a measure of performance or to cash flow as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
(b) The identifiable assets as of October 24, 1998 and the net capital
expenditures for the three and six months ended October 24, 1998 have
not been presented for the segments of the Company's North American
operations because it was not practicable to obtain such information
under the Company's new product line oriented organizational structure.
Page 12
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations
in its different geographic segments:
<TABLE>
<CAPTION>
NEW
ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
------- --------- -----
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 23, 1999:
Revenues ................................................. $ 452,534 $ 189,977 $ 642,511
Operating income ......................................... 3,686 3,217 6,903
Identifiable assets of continuing operations at period-end 1,260,571 729,028 1,989,599
SIX MONTHS ENDED OCTOBER 23, 1999:
Revenues ................................................. $ 876,526 $ 391,488 $ 1,268,014
Operating income ......................................... 6,085 9,092 15,177
Identifiable assets of continuing operations at period-end 1,260,571 729,028 1,989,599
THREE MONTHS ENDED OCTOBER 24, 1998:
Revenues ................................................. $ 484,825 $ 192,380 $ 77,205
Operating income ......................................... 19,312 5,451 24,763
Identifiable assets of continuing operations at period-end 1,312,581 784,471 2,097,052
SIX MONTHS ENDED OCTOBER 24, 1998:
Revenues ................................................. $ 940,483 $ 388,671 $ 1,329,154
Operating income (loss) .................................. (68,054) 9,470 (58,584)
Identifiable assets of continuing operations at period-end 1,312,581 784,471 2,097,052
</TABLE>
NOTE 7 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information for
the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the Credit Facility and the 2008 Notes. The guarantor
subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
separate financial statements would not provide additional meaningful
information to investors.
Page 13
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
BALANCE SHEETS
OCTOBER 23, 1999
----------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .............. $ 276 $ 14,768 $ 14,252 $ $ 29,296
Accounts receivable, less allowance for
doubtful accounts .................... 247,781 86,605 334,386
Inventories, net ....................... 87,455 111,167 (113)(b) 198,509
Prepaid expenses and other current
assets ............................... 36,571 24,648 51,922 253 (b) 113,394
----------- ----------- ----------- --------- ----------
Total current assets ............... 36,847 374,652 263,946 140 675,585
Property and equipment, net ............... 2,034 120,014 108,707 (410)(b) 230,345
Intangible assets, net .................... 550,157 297,919 848,076
Investment in subsidiaries ................ 959,014 (959,014)(a)
Other assets .............................. 129,430 38,101 68,062 235,593
----------- ----------- ----------- --------- ----------
Total assets ....................... $ 1,127,325 $ 1,082,924 $ 738,634 $ (959,284) $ 1,989,599
----------- ---------- ----------- --------- ----------
----------- ---------- ----------- --------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ........................ $ 36,200 $ 1,109 $ 1,342 $ $ 38,651
Short-term intercompany balances ....... 290,860 (292,405) 1,545
Accounts payable ....................... 2,696 119,252 67,615 189,563
Accrued compensation ................... 4,462 18,980 17,658 41,100
Other accrued liabilities .............. 26,435 1,994 72,296 100,725
----------- ---------- ----------- --------- ----------
Total current liabilities .......... 360,653 (151,070) 160,456 370,039
Long-term debt ............................ 1,156,819 3,870 4,660 1,165,349
Other long-term liabilities and minority
interests ............................... 22,104 6,358 310 28,772
Long-term intercompany balances ........... (804,912) 386,950 417,962
----------- ----------- ----------- --------- ----------
Total liabilities .................. 734,664 246,108 583,388 1,564,160
----------- ----------- ----------- --------- ----------
Stockholders' equity:
Preferred stock
Common stock ........................... 37 37
Additional paid-in capital ............. 696,193 727,868 263,027 (959,014)(a) 728,074
Accumulated other comprehensive loss ... (76,524) (43,030) (119,554)
Retained earnings (accumulated deficit) (227,045) 108,948 (64,751) (270)(b) (183,118)
----------- ----------- ----------- --------- ----------
Total stockholders' equity ......... 392,661 836,816 155,246 (959,284) 425,439
Total liabilities and stockholders' ----------- ----------- ----------- --------- ----------
equity ........................... $ 1,127,325 $ 1,082,924 $ 738,634 $ (959,284) $ 1,989,599
----------- ----------- ----------- --------- ----------
----------- ----------- ----------- --------- ----------
</TABLE>
Page 14
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 24, 1999
----------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
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>
Page 15
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 23, 1999
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 457,884 $ 193,398 $ (8,771) (c) $ 642,511
Cost of revenues............................... (1,490) 339,437 134,150 (8,716) (c) 463,381
------- ------- ------- ------- -------
Gross profit............................ 1,490 118,447 59,248 (55) 179,130
Selling, general and administrative
expenses..................................... 12,977 95,058 52,752 160,787
Amortization expense........................... 278 4,046 1,928 6,252
Operating restructuring costs.................. 1,945 2,161 1,082 5,188
----- ----- ----- ----- -------
Operating income (loss)................. (13,710) 17,182 3,486 (55) 6,903
Interest expense............................... 32,679 (14,799) 9,993 27,873
Interest income................................ (106) (254) (95) (455)
Unrealized foreign currency transaction loss... 12,198 12,198
Loss (gain) on sale of businesses.............. 1,394 1,674 (2) 3,066
Other (income) expense......................... (41,822) 41,524 1,294 97 (c) 1,093
------- ------ ----- -- -----
Loss before provision for (benefit from)
income taxes ............................... (5,855) (10,963) (19,902) (152) (36,872)
Provision for (benefit from) income taxes...... 499 (3,814) (6,112) (22) (c) (9,449)
--- ------ ------ --- ------
Net loss....................................... $ (6,354) $ (7,149) $ (13,790) $ (130) $ (27,423)
======== ======== ========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 24, 1998
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 491,013 $ 195,225 $ (9,033) (c) $ 677,205
Cost of revenues............................... (1,924) 367,045 136,064 (9,019) (c) 492,166
------------- -------------- ------------- ------------- -------------
Gross profit............................ 1,924 123,968 59,161 (14) 185,039
Selling, general and administrative
expenses..................................... 7,917 93,622 49,131 150,670
Amortization expense........................... 206 3,819 2,112 6,137
Operating restructuring costs.................. 1,179 2,290 3,469
------------- -------------- ------------- ------------- -------------
Operating income (loss)................. (6,199) 25,348 5,628 (14) 24,763
Interest expense............................... 30,959 (11,290) 9,322 28,991
Interest income................................ (40) (364) (56) (460)
Loss on sale of businesses..................... 2,536 2,536
Other (income) expense........................ 4 (2,384) 1,771 (609)
------------- --------------- ------------- ------------- -------------
Income (loss)
before provision for (benefit from) income
taxes........................................ (37,122) 36,850 (5,409) (14) (5,695)
Provision for (benefit from) income taxes...... (16,775) 16,362 (1,294) (6) (c) (1,713)
------------- -------------- ------------- ------------- -------------
Net income (loss).............................. $ (20,347) $ 20,488 $ (4,115) $ (8) $ (3,982)
========= ======== ======== ==== ========
</TABLE>
Page 16
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 23, 1999
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 886,695 $ 398,248 $ (16,929) (c) $ 1,268,014
Cost of revenues............................... (1,490) 656,247 276,206 (16,861) (c) 914,102
------ ------- ------- ------- -------
Gross profit............................ 1,490 230,448 122,042 (68) 353,912
Selling, general and administrative
expenses.................................... 25,179 187,393 106,834 (10) (c) 319,396
Amortization expense........................... 278 7,970 3,994 12,242
Operating restructuring costs.................. 2,047 3,494 1,556 7,097
----- ----- ----- --- -----
Operating income (loss)................. (26,014) 31,591 9,658 (58) 15,177
Interest expense............................... 64,640 (28,834) 19,784 55,590
Interest income................................ (386) (894) (245) (1,525)
Unrealized foreign currency transaction loss... 25,754 25,754
Loss (gain) on sale of businesses.............. (4,413) 6,982 1,451 4,020
Other (income) expense......................... (40,480) 40,544 2,428 97 (c) 2,589
------- ------ ----- -- -----
Income (loss) before provision for (benefit from)
income taxes and extraordinary items........ (45,375) 13,793 (39,514) (155) (71,251)
Provision for (benefit from) income taxes...... (15,675) 9,263 (9,865) (24) (c) (16,301)
------- ----- ------ --- -------
Net income (loss) $ (29,700) $ 4,530 $ (29,649) $ (131) $ (54,950)
========= ======= ========= ====== =========
</TABLE>
Page 17
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 24, 1998
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ $ 951,470 $ 394,559 $ (16,875) (c) $ 1,329,154
Cost of revenues............................... (2,697) 711,693 274,290 (16,835) (c) 966,451
------------- ------------- ------------ ------------ -------------
Gross profit............................ 2,697 239,777 120,269 (40) 362,703
Selling, general and administrative
expenses..................................... 15,983 182,151 101,369 (37) (c) 299,466
Amortization expense........................... 206 7,585 4,332 12,123
Operating restructuring costs.................. 7,495 4,700 12,195
Strategic Restructuring Plan costs............. 96,948 555 97,503
------------- ------------- ------------ ------------ -------------
Operating income (loss)................. (110,440) 41,991 9,868 (3) (58,584)
Interest expense............................... 51,864 (21,581) 17,596 47,879
Interest income................................ (92) (528) (207) (827)
Loss on sale of businesses..................... 2,536 2,536
Other (income) expense......................... 4 309 (1,332) (1,019)
------------- ------------- ------------ ------------ -------------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes and extraordinary items................ (162,216) 63,791 (8,725) (3) (107,153)
Provision for (benefit from) income taxes...... (49,290) 30,527 (864) (1) (c) (19,628)
------------- ------------- ------------ ------------ -------------
Income (loss) from continuing operations
before extraordinary items................... (112,926) 33,264 (7,861) (2) (87,525)
Loss from discontinued operations,
net of income taxes.......................... (1,294) (1,294)
------------- ------------- ------------ ------------ -------------
Income (loss) before extraordinary items....... (112,926) 33,264 (9,155) (2) (88,819)
Extraordinary items - loss on early
termination of debt facilities, net of
income taxes................................. 269 269
------------- ------------- ------------ ----------- -------------
Net income (loss).............................. $ (113,195) $ 33,264 $ (9,155) $ (2) $ (89,088)
============= ============= ========= ========== =============
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 23, 1999
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities........... $ (22,434) $ (13,677) $ 13,866 $ $ (22,245)
Cash flows from investing activities........... 3,565 (19,829) (17,794) (34,058)
Cash flows from financing activities........... (28,949) 38,993 (165) 9,879
Effect of exchange rates on cash and cash
equivalents.................................. (382) (382)
----------- ---------- ---------- ------------ ----------
Net decrease in cash and cash
equivalents................................... (47,818) 5,487 (4,475) (46,806)
Cash and cash equivalents at beginning
of period.................................... 48,094 9,281 18,727 76,102
------ ----- ------ ------------ ------
Cash and cash equivalents at end of period..... $ 276 $ 14,768 $ 14,252 $ $ 29,296
========== ========== ========= ============ =========
</TABLE>
Page 18
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 23, 1999
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 24, 1998
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities........... $ (67,460) $ 37,197 $ 8,379 $ (56) (d) $ (21,940)
Cash flows from investing activities........... (14,525) (12,499) (17,494) 56 (d) (44,462)
Cash flows from financing activities.......... 67,276 (33,230) 12,138 46,184
Effect of exchange rates on cash and cash
equivalents.................................. 200 200
Cash used in discontinued operations........... (12,518) (12,518)
------ ------- ------ ------------ ------
Net decrease in cash and cash equivalents...... (14,709) (8,532) (9,295) (32,536)
Cash and cash equivalents at beginning
of period.................................... 19,684 15,743 16,594 52,021
------ ------ ------ ------------ ------
Cash and cash equivalents at end of period..... $ 4,975 $ 7,211 $ 7,299 $ $ 19,485
============= ============== =========== ============ ==========
</TABLE>
The "US Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
operations include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of
cash flows include the following:
(d) Elimination of intercompany profits.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of SOP
98-1 had no impact on the results of operations or financial position of the
Company.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to October 23, 1999, the Company completed the sale of two
businesses for aggregate consideration of approximately $35,000 in cash. The
Company anticipates an aggregate gain of approximately $15,000 on these
divestitures.
Page 19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS
EXPRESSED IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE FOLLOWING:
- - THE COMPANY'S ABILITY TO IMPLEMENT ITS NEW BUSINESS STRATEGY, INCLUDING:
- ITS ABILITY TO CONSOLIDATE FACILITIES AND INTEGRATE SYSTEMS ON A
TIMELY AND COST-EFFECTIVE BASIS
- THE EFFECTIVENESS OF ACCELERATED CHANGE PROGRAMS TO INCREASE
REVENUES, MARGINS, AND CASH FLOW, TO REDUCE COSTS, TO IMPROVE THE
PERFORMANCE OF UNDERPERFORMING BUSINESS UNITS, AND TO SELL TO LARGER
CUSTOMERS
- THE POTENTIALLY DISRUPTIVE IMPACT OF IT SYSTEMS CONVERSIONS AND OTHER
ACCELERATED CHANGE PROGRAMS ON SALES AND CUSTOMER SERVICE ACTIVITIES
- THE DEVELOPMENT OF E-COMMERCE STRATEGIES
- - THE COMPANY'S HIGH LEVEL OF DEBT
- - THE IMPACT OF INCREASES IN INTEREST RATES
- - CHALLENGES OF COMBINING ACQUIRED BUSINESSES
- - THE IMPACT OF CHANGES IN THE EXCHANGE RATES FOR THE NEW ZEALAND AND AUSTRALIAN
DOLLARS
- - THE IMPACT OF COMPETITION FROM NATIONAL, REGIONAL AND LOCAL COMPETITORS,
COMPETITIVE PRESSURES FROM CUSTOMERS, AND THE SUCCESS OF THE COMPANY'S LARGE
ACCOUNT INITIATIVES
- - THE IMPACT OF COMPETITION ON THE INTERNET
- - THE COMPANY'S ABILITY TO SELL NON-CORE OPERATIONS AT REASONABLE PRICES
- - CHALLENGES OF ONGOING LITIGATION
- - UNCERTAINTY ATTENDANT TO MANAGING FOREIGN OPERATIONS
- - ABILITY TO EXPLOIT A SIGNIFICANT TECHNOLOGY UPGRADE BY MBE
- - POTENTIAL LIABILITY FOR COSTS ARISING FROM 1998 SPIN-OFFS
- - RECENT CHANGES IN MANAGEMENT
PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED APRIL 24, 1999 FOR A DISCUSSION OF THESE AND OTHER IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
Page 20
<PAGE>
DISCUSSED BY THESE FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT UNDERTAKE
ANY OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE
EVENTS OR CIRCUMSTANCES.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements, including the related notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's
audited consolidated financial statements for the fiscal year ended April 24,
1999, including the related notes thereto, included in the Company's Annual
Report on Form 10-K, which was filed with the Securities and Exchange Commission
on July 22, 1999.
Since the completion of the Strategic Restructuring Plan, (see Note 1 of
the Notes to the Company's consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q), the Company has focused on
operational improvements. The Company significantly reduced its acquisition
activity early in fiscal 1999 and later suspended all acquisitions. During
the current fiscal year, the Company has begun to pursue additional selected,
strategic acquisition opportunities, and it completed one acquisition during
the second fiscal quarter. As a result of the focus on operational
improvements, the Company reorganized the structure of its North American
businesses effective at the beginning of fiscal 2000. In prior years, these
businesses were organized into a series of geographic regions and districts,
all operated within a single management structure as part of the North
American Office Products Group. Under the new structure, the Company has
separated these businesses into three lines of business, North American
office supplies (desktop accessories, writing instruments, paper products,
computer consumables, business machines, catalog furniture and coffee
services), North American office furniture (middle-market and contract
furniture), and North American vending services, with each group having a
distinct management team. Toward the end of the second fiscal quarter, the
Company moved management responsibility for the majority of its office coffee
operations from its supplies unit to its vending unit. The Company's North
American office coffee and vending businesses are now being operated under
the USRefresh-TM- name. The Company also separately manages a series of
non-core businesses (typically being considered for disposition). The
Company's other businesses include Mail Boxes Etc. ("MBE"), the world's
largest franchisor of retail business, communications, and postal service
centers, and the Blue Star Group, which includes a group of operating
companies that include business supplies, business solutions (technology
products and services), print, and consumer retailing businesses. The Company
also owns a 49% equity interest in Dudley Stationery Limited ("Dudley"), a
U.K. contract stationer.
The increased interest expense resulting from the increased debt levels
associated with the Strategic Restructuring Plan has significantly reduced the
Company's reported earnings in fiscal 1999 and the first six months of fiscal
2000. Rather than net income and net income per share, management believes that
a more meaningful indication of the Company's performance is cash flow from
operations and earnings from continuing operations before interest expense,
benefit from income taxes, depreciation expense, amortization expense, operating
restructuring costs, Strategic Restructuring Plan costs, unrealized foreign
currency transaction loss, loss on sale of businesses, other (income) expense
and extraordinary items ("EBITDA"). EBITDA is provided because it is a measure
commonly used by analysts and investors to determine a company's ability to
incur and service its debt. EBITDA is not a measurement of performance under
GAAP and should not be considered an alternative to net income (loss) as a
measure of performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
OPERATING REVENUES AND EXPENSES
The Company derives revenues primarily from the sale of a wide variety of
office supplies and other office products, office 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 centers.
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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 centers.
Selling, general and administrative expenses represent product marketing
and selling costs, customer service, product and furniture design costs,
warehouse costs, and other administrative expenses.
FACTORS AFFECTING COMPARABILITY
Certain factors should be considered in comparing the Company's financial
condition and results of operations in fiscal 2000 to those in fiscal 1999.
ACQUISITIONS AND DIVESTITURES
The Company completed 22 business combinations during fiscal 1999, all of
which were accounted for under the purchase method. In addition, the Company
completed seven business divestitures or closures during fiscal 1999. In the
first six months of fiscal 2000, the Company completed one acquisition and five
business divestitures. The Company expects to complete additional business
divestitures during fiscal 2000 and expects to pursue selected acquisition
opportunities that complement its existing businesses.
FOREIGN CURRENCY EXCHANGE RATES
Approximately one-third of the Company's revenues are generated by its
operations in New Zealand and Australia. Fluctuations in the exchange rates for
the New Zealand and Australian dollars affect the Company's results.
ACCELERATED CHANGE ACTIVITIES
During the second half of fiscal 1999, the Company organized a series of
Accelerated Change Teams ("ACTs") to realize many of its cost reduction and
revenue enhancement strategies on an accelerated basis. ACTs are teams of
employees (in some cases assisted by outside consultants) dedicated to driving
fundamental business process changes throughout the Company's business units.
The ACTs provide functional experts focused by initiative, enabling business
unit managers to focus on sales, customer service, and overall productivity
issues. Core ACT initiatives focus on the Company's supply chain, including the
consolidation of facilities and support functions and the implementation of
enhanced pricing strategies and inventory management tools. The Company also
formed an ACT focused solely on reducing working capital to improve overall
asset utilization. The ACTs began to implement many of their programs toward the
end of the fourth quarter of fiscal 1999, and they have made progress during the
first two quarters of fiscal 2000. The Company expects to begin to see the
benefits of these initiatives during the second half of fiscal 2000, although
there can be no assurance that these strategies will be successful or will have
a positive effect within the anticipated timeframe.
As predicted by the Company's public disclosures made at the end of fiscal
1999, the expenses associated with the Company's accelerated change programs
have had a negative effect on its results during the first two quarters of
fiscal 2000. These expenses consist primarily of additional selling, general,
and administrative expenses related to outside resources to refine the Company's
financial and operating change management strategies. See "- Consolidated
Results of Operations." The Company also has significantly increased spending on
information technology and e-commerce activities. 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.
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Accelerated implementation of the changes also may result in additional charges
including severance costs, facility closure costs, and write-downs or write-offs
of goodwill and other assets.
As part of its accelerated change process, the Company has implemented a
"fix, sell, or close" strategy. This strategy includes two basic components:
(1) Non-core businesses that the Company intends to sell are identified,
placed into an active disposition process, and managed separately from the
Company's core businesses until the disposition is completed; and (2) the
Company assigns dedicated groups of employees (sometimes assisted by outside
consultants) to improve the performance of underperforming core businesses,
often involving the intensive application of various ACT initiatives. Where
the Company decides that an underperforming unit cannot be brought to an
acceptable level of performance within a reasonable time and with an
efficient level of investment, that unit may be sold or closed. In the
Company's core North American office supplies business, the Company believes
that this strategy is having a positive effect on revenues, gross margin
and/or costs, although the period of disruption to sales and operational
activities at locations undergoing accelerated change activities is
significant. Business units accounting for approximately 85% of the total
office supplies revenues in North America had completed significant
information systems and facility consolidation activities (and some
management changes) by the end of the second fiscal quarter. Approximately
half of this group of business units completed these activities during the
second fiscal quarter. In general, locations that have been through these
changes for more than 90 days are reporting improved performance, on average.
Locations that have only recently completed these changes are reporting
widely disparate levels of performance. Based on increasing experience with
the impact of its ACT initiatives, the Company believes that it takes its a
business unit an average of at least 90 days to recover from the disruption
to sales and operational activities that occurs during the period of the most
intensive ACT initiatives. The Company's strategy is to get its business
units through the most disruptive aspects of the accelerated change process
quickly (at a cost of near-term negative effects on overall results), to
accelerate the opportunity for substantial performance improvement. There can
be no assurance that results to date with ACT initiatives are indicative of
future results, that subsequent ACT programs or other business or competitive
events will not affect the future performance of the Company's business
units, or that near-term benefits of ACT initiatives will be sustainable.
Because the Company is seeking to effect change at an accelerated pace, it
may recognize certain non-recurring charges more rapidly than would be likely in
the absence of the accelerated change initiatives. For example, because of the
rapid changes the Company is seeking to effect, it may write-down or write-off
assets that it previously had expected to use in continuing operations. In some
cases, charges may relate to businesses that the Company had expected to
continue to operate or to operate on a temporary basis, pending disposition, but
decides instead to close. The Company also expects to make investments that are
expected to drive change on an accelerated basis, and this is likely to cause
expenses to increase in the near term.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 23, 1999 COMPARED TO THREE MONTHS ENDED
OCTOBER 24, 1998
Revenues decreased 5.1%, from $677.2 million for the three months ended
October 24, 1998, to $642.5 million for the three months ended October 23, 1999.
The decrease in revenues was due primarily to the anticipated residual effect of
the loss of a number of large office supply accounts in North America during
fiscal 1999, sales force and customer service turnover in certain locations, a
decline in furniture revenue primarily from transitions in our product offering,
and the disposal or closure of twelve businesses subsequent to the first quarter
of fiscal 1999. The decrease was partially offset by the inclusion of revenues
from 12 companies acquired in business combinations accounted for under the
purchase method after the beginning of the second quarter of fiscal 1999 (the
"2Q Purchased Companies"). On a pro forma basis, adjusted for the fluctuation in
the New Zealand and Australian dollars, revenues decreased 1.6%.
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Since the beginning of the 1999 calendar year, the Company has devoted
substantial additional personnel and resources to the development of focused
sales and service initiatives for larger regional and national customers. The
Company believes that these initiatives have had positive results. Since January
1999, the Company has annualized revenue gains equal to almost twice the
annualized revenue lost in the large account segment (which the Company defines
as accounts purchasing at least $180,000 per year from the Company). In view of
the highly competitive nature of this customer segment, there can be no
assurance that the Company will continue to be able to gain market share in the
large account segment or that such business can be maintained on a profitable
basis.
Gross profit decreased 3.2%, from $185.0 million for the three months ended
October 24, 1998, to $179.1 million for the three months ended October 23, 1999.
The decrease in gross profit is directly related to the decrease in revenues. As
a percentage of revenues, gross profit increased from 27.3% for the three months
ended October 24, 1998, to 27.9% for the three months ended October 23, 1999.
The increase in gross profit as a percentage of revenues is primarily the result
of the disposal or closure of certain lower margin businesses since the
beginning of the second quarter of fiscal 1999.
Selling, general and administrative expenses increased 6.7%, from $150.7
million for the three months ended October 24, 1998, to $160.8 million for the
three months ended October 23, 1999. Selling, general and administrative
expenses as a percentage of revenues increased from 22.2% for the three months
ended October 24, 1998, to 25.0% for the three months ended October 23, 1999.
The increase in selling, general and administrative expenses was due to several
factors, including (i) outside consulting fees of approximately $3.8 million
associated with the Company's ACTs (See "- Introduction" for a discussion of
ACTs); (ii) information technology initiatives of approximately $2.1 million at
MBE related to the roll-out of a national point-of-sale system, a customer data
warehouse and a satellite communication system; (iii) approximately $1.1 million
related to the Company's e-commerce initiatives in North America; and (iv) other
costs related to the internal information technology group and strengthening of
the Company's management team. The outside consulting fees of $3.8 million and
information technology initiatives at MBE of $2.1 million qualify as
non-recurring charges under the terms of the Company's bank credit agreement.
The Company recorded operating restructuring costs of $3.5 and $5.2 million
during the three months ended October 24, 1998, and October 23, 1999,
respectively, related to the approval and commencement of restructuring plans at
a limited number of operating locations. These plans relate primarily to the
consolidation of facilities and job functions, which include the costs of
exiting such facilities and severance to employees who have been notified that
their jobs will be eliminated. The Company is continuing to develop and review
additional plans and expects to record additional operating
restructuring-related costs in the future.
Interest expense, net of interest income, decreased 3.9%, from $28.5
million for the three months ended October 24, 1998, to $27.4 million for the
three months ended October 23, 1999. This decrease is due primarily to the lower
average level of outstanding borrowings during this year's second fiscal quarter
as compared to last year's second quarter.
The Company recorded an unrealized foreign currency transaction loss of
$12.2 million during the three months ended October 23, 1999. This loss
represents the impact of the devaluation of the New Zealand dollar on
approximately $443 million of USD denominated intercompany loans and the
related accrued interest to the Blue Star Group. The New Zealand dollar
declined from approximately USD $.531 at July 24, 1999 to approximately USD
$.515 at October 23, 1999. The recognition of the loss in the statement of
operations is the result of a change in accounting policy related to such
loans effective the beginning of fiscal 2000. During fiscal 1999, the Company
considered its intercompany loans to the Blue Star Group to be permanent in
nature and, therefore, the unrealized currency transaction gains and losses
related to the intercompany loans were recorded as a component of
stockholders' equity on the balance sheet. Effective April 25, 1999, the
Company changed its perspective on the Blue Star Group operations and no
longer considers the intercompany loans to be permanent in nature.
Accordingly, the Company has recorded the unrealized foreign currency
transaction loss related to its intercompany loans with the Blue Star Group
as a component of the loss from continuing operations in the statement of
operations for fiscal 2000.
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The Company recorded $3.1 million of losses on the sale of two
businesses in North America in the three months ended October 23, 1999. In
the three months ended October 24, 1998, the Company recognized a $2.5
million loss on the sale of a business in New Zealand.
Other (income) expense decreased from income of $0.6 million for the
three months ended October 24, 1998, to expense of $1.1 million for the three
months ended October 23, 1999. Other (income) expense includes the Company's
49% equity interest in the net income (loss) of Dudley and miscellaneous
other income and expense items. The decrease of $1.7 million is due primarily
to the Company's share of Dudley's reported net loss of approximately $0.8
million for the three months ended October 23, 1999, compared to the
Company's share of Dudley's reported net income of approximately $0.8 million
for the three months ended October 24, 1998. The loss reported by Dudley
during the three months ended October 23, 1999, is attributable to the
start-up activities associated with the new national distribution facility in
London, which has experienced reduced customer service levels resulting in
lost revenues and increased operating costs during the start-up period.
Dudley's revenues have declined significantly during this start-up period.
With service levels having now recovered to its traditionally high level,
Dudley has launched an aggressive new sales growth program. There can be no
assurance that the new sales efforts will be successful.
Benefit from income taxes increased from $1.7 million for the three months
ended October 24, 1998, to $9.4 million for the three months ended October 23,
1999, reflecting effective income tax benefit rates of 30.1% and 25.6%,
respectively. The increase in the income tax benefit is primarily the result of
the increase in the loss from continuing operations before benefit from income
taxes and extraordinary items of $5.7 million for the three months ended October
24, 1998, to $36.9 million for the three months ended October 23, 1999. The
benefit from income taxes for the three months ended October 23, 1999, reflects
the recording of a tax benefit at the federal statutory rate of 35%, plus
appropriate adjustments for state, local and foreign taxes. In addition, the
effective income tax benefit rate was reduced to reflect the incurrence of
non-deductible expenses, which consisted primarily of goodwill amortization
expense.
The benefit from income taxes for the three months ended October 24, 1998
reflects the net impact of (i) an income tax provision of 90.0% on the results
from continuing operations, excluding the operating restructuring costs and loss
on the sale of the business in New Zealand; and (ii) an income tax benefit on
the operating restructuring costs ($3.5 million) and the loss on the sale of a
businesses in New Zealand ($2.5 million), as the Company believes that such
costs will be deductible for income tax purposes. The 90.0% effective tax rate
discussed above 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 the incurrence of non-deductible
goodwill amortization expense.
SIX MONTHS ENDED OCTOBER 23, 1999 COMPARED TO SIX MONTHS ENDED
OCTOBER 24, 1998
Revenues decreased 4.6% from $1,329.2 million for the six months ended
October 24, 1998 to $1,268.0 million for the six months ended October 23,
1999. The decrease in revenues was primarily due to the residual effect of
the loss of a number of large office supply accounts in North America during
fiscal 1999, sales force and customer service turnover in certain locations,
a decline in furniture revenue primarily from transitions in our product
offerings, and the disposal or closure of twelve businesses subsequent to the
beginning of the first quarter of fiscal 1999. The decrease was partially
offset by the inclusion of revenues from 23 companies acquired in business
combinations accounted for under the purchase method after the beginning of
the first quarter of fiscal 1999 (the "Purchased Companies"). On a pro forma
basis, adjusted for the fluctuation in the New Zealand and Australian
dollars, revenues decreased 2.0%.
Gross profit decreased 2.4% from $362.7 million for the six months ended
October 24, 1998 to $353.9 million for the three months ended October 23, 1999.
The decrease in gross profit is directly related to the decrease in revenues. As
a percentage of revenues, gross profit increased from 27.3% for the six months
ended October 24,
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1998 to 27.9% for the six months ended October 23, 1999. The increase in gross
profit as a percentage of revenues is primarily the result of the disposal or
closure of certain lower margin businesses since the beginning of the first
quarter of fiscal 1999.
Selling, general and administrative expenses increased 6.7% from $299.5
million for the six months ended October 24, 1998 to $319.4 million for the six
months ended October 23, 1999. Selling, general and administrative expenses as a
percentage of revenues increased from 22.5% for the six months ended October 24,
1998 to 25.2% for the six months ended October 23, 1999. The increase in
selling, general and administrative expenses was due to several factors,
including (i) outside consulting fees of approximately $6.8 million associated
with the Company's ACTs (See "-Introduction" for a discussion of ACTs); (ii)
information technology initiatives of approximately $4.2 million at MBE related
to the roll-out of a national point of sale system, a customer data warehouse
and a satellite communication system; (iii) approximately $2.1 million related
to the Company's e-commerce initiatives in North America; and (iv) other costs
related to the internal information technology group and strengthening of the
Company's management team. The outside consulting fees of $6.8 million and
information technology initiatives at MBE of $4.2 million qualify as
non-recurring charges under the terms of the Company's bank credit agreement.
The Company recorded operating restructuring costs of $12.2 million and
$7.1 million during the six months ended October 24, 1998, and October 23, 1999,
respectively related to the approval and commencement of restructuring plans at
a limited number of operating locations.
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of approximately
$97.5 million during the six months ended October 24, 1998, $70.4 million of
which were non-cash. In addition, approximately $11.7 million in such costs were
incurred by the Spin-Off Companies and were included in the results of
discontinued operations. The Strategic Restructuring Plan costs related to
continuing operations consisted of: (i) compensation expense of approximately
$50.8 million ($49.9 million of which was non-cash) related to the difference
between the exercise prices of employee stock options underlying shares that
were accepted in the Company's equity tender offer and the purchase price of
such shares in the equity tender offer; (ii) professional fees (including
accounting, legal, investment banking and printing fees) of approximately $26.2
million; and (iii) a non-cash expense of approximately $20.5 million resulting
from the issuance of incremental shares of common stock related to the
temporary, effective reduction in the conversion price of the Company's 5 1/2%
convertible subordinated notes due 2001 (the "2001 Notes"), which the Company
made as part of an exchange offer for the 2001 Notes.
Interest expense, net of interest income, increased 14.9% from $47.1
million for the six months ended October 24, 1998, to $54.1 million for the six
months ended October 23, 1999. This increase is due primarily to the timing of
the completion of the Strategic Restructuring Plan and the related financing
transactions (see Note 1 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q), which
resulted in a significant increase in both the amount of debt outstanding and
the average interest rate related to such debt. Because these transactions
occurred in June 1998, interest expense related to the increased debt and higher
interest rates was reflected for only approximately three-fourths of the six
month period ended October 24, 1998 and was reflected for the entire six-month
period ended October 23,1999.
The Company recorded an unrealized foreign currency transaction loss of
$25.8 million during the six months ended October 23, 1999. This loss
represents the impact of the devaluation of the New Zealand dollar on
approximately $400 million of USD denominated intercompany loans to the Blue
Star Group. The New Zealand dollar declined from approximately USD $.551 at
April 24, 1999 to approximately USD $.515 at October 23, 1999.
The Company recorded $4.0 million of losses on the sale of four
businesses in North America and the disposal of various real estate in New
Zealand during the six months ended October 23, 1999. In the six months ended
October 24, 1998, the Company recognized a $2.5 million loss on the sale of
one business in New Zealand.
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Other (income) expense decreased from income of $1.0 million for the six
months ended October 24, 1998, to expense of $2.6 million for the six months
ended October 23, 1999. The decrease of $3.6 million is due primarily to the
Company's share of Dudley's reported net loss of approximately $1.8 million for
the six months ended October 23, 1999, compared to the Company's share of
Dudley's reported net income of approximately $1.6 million for the six months
ended October 24, 1998.
Benefit from income taxes decreased from $19.6 million for the six months
ended October 24, 1998, to $16.3 million, reflecting effective income tax
benefit rates of 18.3% and 22.9%, respectively. The decrease in the income tax
benefit is primarily the result of the decrease in the loss from continuing
operations before benefit from income taxes and extraordinary items from $107.2
million for the six months ended October 24, 1998, to $71.3 million for the six
months ended October 23, 1999. The benefit from income taxes for the six months
ended October 23, 1999, reflects the recording of a tax benefit at the federal
statutory rate of 35.0%, plus appropriate adjustments for state, local and
foreign taxes. In addition, the effective income tax benefit rate was reduced to
reflect the incurrence of non-deductible expenses, which consisted primarily of
goodwill amortization expense.
The benefit from income taxes for the six months ended October 24, 1998,
reflects the net impact of (i) an income tax provision of 65.0% on the results
from continuing operations, excluding the aggregate $106.2 million of Strategic
Restructuring Plan costs and operating restructuring costs; and (ii) an income
tax benefit on approximately half of the aggregate $106.2 million of Strategic
Restructuring Plan costs ($97.5 million) and operating restructuring costs ($8.7
million), as the Company believes that approximately half of such costs will be
deductible for income tax purposes. The 65.0% effective tax rate discussed above
reflects the recording of an income tax provision at the federal statutory rate
of 35.0%, plus appropriate adjustments for state, local and foreign taxes. The
effective income tax rate was also increased to reflect the incurrence of
non-deductible expenses, which consisted primarily of goodwill amortization
expense.
Loss from discontinued operations totaled $1.3 million for the six months
ended October 24, 1998. See Note 2 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The extraordinary loss, net of income taxes, of $269,000 during the six
months ended October 24, 1998, represents the aggregate of several extraordinary
items, all of which involve indebtedness that the Company either repaid or
converted into equity in connection with the Strategic Restructuring Plan and
the related financing transactions. The primary components of this extraordinary
loss are: (i) the pre-tax non-cash write-offs of $5.2 million, $4.7 million and
$2.9 million of debt issue costs incurred in conjunction with the issuance of
the Company's 5 1/2% convertible subordinated notes due 2003 (the "2003 Notes"),
the former credit facility and the issuance of the 2001 Notes, respectively; and
(ii) a pre-tax gain of $12.2 million related to the early extinguishment of
$222.2 million of 2003 Notes at a purchase price of 94.5% of the principal
amount.
BUSINESS SEGMENT RESULTS OF OPERATIONS
The following compares revenues and EBITDA (as defined in "Introduction")
for each of the Company's reportable business segments. For a definition of each
of the reportable business segments, see Note 6 of the Notes to the Company's
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
THREE MONTHS ENDED OCTOBER 23, 1999 COMPARED TO THREE MONTHS ENDED
OCTOBER 24, 1998
NORTH AMERICAN OFFICE SUPPLIES - Revenues for the three months ended
October 23, 1999 decreased 1.8% on a historical basis and 2.8% on a pro forma
basis versus the three months ended October 24, 1998. The decreases in
revenues are due primarily to the impact of the anticipated residual effect
of the loss of a number of large office supply accounts during fiscal 1999,
as well as sales force and customer service turnover in certain locations.
EBITDA for the three months ended October 23, 1999 increased 1.3% on a
historical basis versus the three months ended October 24, 1998.
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NORTH AMERICAN OFFICE FURNITURE - Revenues for the three months ended
October 23, 1999 decreased 9.8% on a historical basis and 6.4% on a pro forma
basis versus the three months ended October 24, 1998. The decreases in
revenues are due primarily to disruptions to sales efforts related to the
transition of certain furniture locations to new product lines or new
organizational or managerial structures. The sale of a furniture business in
the three months ended October 23, 1999 also contributed to the decline in
revenues on a historical basis. EBITDA for the three months ended October 23,
1999 increased 8.2% on a historical basis versus the three months ended
October 24, 1998. The significant increase in EBITDA was driven primarily by
the decline in selling, general and administrative costs for the three months
ended October 23, 1999 versus the three months ended October 24, 1998. In
addition, the improved performance of certain underperforming locations over
the same period last year contributed to the increase in EBITDA.
OTHER NORTH AMERICAN OPERATIONS - Revenues for the three months ended
October 23, 1999 decreased 22.4% on a historical basis versus the three
months ended October 24, 1998. The decrease in historical revenues is
primarily the result of the sale of a non-core business with aggregate annual
revenues of approximately $22.5 million during the quarter. On a pro forma
basis, revenues for the three months ended October 23, 1999 increased 2.6%
due primarily to an increase in office coffee services revenues. EBITDA for
the three months ended October 23, 1999 decreased $8.8 million on a
historical basis versus the three months ended October 24, 1998. The decline
in EBITDA is due primarily to the sale of a non-core business and costs
associated with (i) the addition of internal and external resources to assist
the Company's ACTs implement initiatives, which have not been allocated to
the office supplies and furniture groups, and (ii) the development and
implementation of an e-commerce strategy for the Company.
MBE - Revenues for the three months ended October 23, 1999 increased 11.0%
on both a historical and pro forma basis versus the three months ended October
24, 1998. The increase in revenues is primarily due to growth in royalties and
the sale of products and equipment to franchisees, as MBE continues to grow the
number of MBE franchised centers open around the world. EBITDA for the three
months ended October 23, 1999 decreased approximately $1.6 million, or 29.2%,
versus the three months ended October 24, 1998. This decline is the result of
the costs associated with the roll-out of MBE's information technology
initiatives, which totaled $2.1 million during the three months ended October
23, 1999, partially offset by the impact of increased revenues. MBE's
information technology initiatives include the roll-out of a national point of
sale system and a satellite communication system to its domestic franchisees and
the development of a customer data warehouse.
BLUE STAR GROUP - Revenues for the three months ended October 23, 1999
decreased 1.2% on a historical basis and increased 0.5% on a pro forma currency
adjusted basis versus the three months ended October 24, 1998. EBITDA for the
three months ended October 23, 1999 decreased 21.6% on a historical basis and
declined 25.4% on a pro forma currency adjusted basis versus the three months
ended October 24, 1998, due primarily to the Company's underperforming
Australian and New Zealand office supply operations and the New Zealand
retail operations.
CORPORATE - EBITDA for the three months ended October 23, 1999 decreased
approximately $1.0 million versus the three months ended October 24, 1998. The
decrease is primarily the result of an overall higher level of general and
administrative costs, as the Company has expanded and strengthened its corporate
management team.
SIX MONTHS ENDED OCTOBER 23, 1999 COMPARED TO SIX MONTHS ENDED
OCTOBER 24, 1998
NORTH AMERICAN OFFICE SUPPLIES - Revenues for the six months ended
October 23, 1999 decreased 1.9% on a historical basis and 3.0% on a pro forma
basis versus the six months ended October 24, 1998. The decreases in revenues
are due primarily to the impact of the anticipated residual effect of the
loss of a number of large office supply accounts during fiscal 1999, as well
as sales force and customer service turnover in certain locations. EBITDA for
the six months ended October 23, 1999 increased 2.0% on a historical basis
versus the six months ended October 24, 1998.
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NORTH AMERICAN OFFICE FURNITURE - Revenues for the six months ended
October 23, 1999 decreased 12.4% on a historical basis and 11.7% on a pro
forma basis versus the six months ended October 24, 1998. The decreases in
revenues are due primarily to the uneven timing of contract furniture
projects and disruptions to sales efforts related to the transition of
certain furniture locations to new product lines or new organizational or
managerial structures. The sale of a furniture business in the three months
ended October 23, 1999 also contributed to the decline in revenues on a
historical basis. EBITDA for the six months ended October 23, 1999 decreased
$1.9 million, or 18.2%, on a historical basis, versus the six months ended
October 24, 1998. The significant decrease in EBITDA was driven primarily by
the decline in revenues, offset by a decrease in selling, general and
administrative costs and improved performance of previously underperforming
locations.
OTHER NORTH AMERICAN OPERATIONS - Revenues for the six months ended
October 23, 1999 decreased 19.6% on a historical basis and 0.3% on a pro
forma basis versus the six months ended October 24, 1998. The decrease in
historical revenues is primarily the result of the sale of three non-core
businesses with aggregate annual revenues of approximately $52.5 million
during the six months ended October 23, 1999. EBITDA for the six months ended
October 23, 1999 decreased $14.3 million versus the six months ended October
24, 1998. The decline in EBITDA is due primarily to the sale of the three
non-core businesses and the costs associated with (i) the addition of
internal and external resources to assist the Company's ACTs implement
initiatives, which have not been allocated to the office supplies and
furniture groups, and (ii) the development and implementation of an
e-commerce strategy for the Company.
MBE - Revenues for the six months ended October 23, 1999 increased 13.1% on
both a historical and pro forma basis versus the six months ended October 24,
1998. The increase in revenues is primarily due to growth in royalties and the
sale of products and equipment to franchisees, as MBE continues to grow the
number of MBE franchised centers open around the world. EBITDA for the six
months ended October 23, 1999 decreased approximately $3.1 million, or 30.2%,
versus the six months ended October 24, 1998. This decline is the result of the
costs associated with the roll-out of MBE's information technology initiatives,
which totaled $4.2 million during the six months ended October 23, 1999,
partially offset by the impact of increased revenues.
BLUE STAR GROUP - Revenues for the six months ended October 23, 1999
increased 0.7% on a historical basis and increased 3.1% on a pro forma currency
adjusted basis versus the six months ended October 24, 1998. The increase in pro
forma currency adjusted revenues is due primarily to sales growth in the print
and consumer retailing divisions. EBITDA for the six months ended October 23,
1999 decreased 10.0% on a historical basis and declined 14.6% on a pro forma
currency adjusted basis versus the six months ended October 24, 1998, due
primarily to the Company's underperforming Australian and New Zealand office
supply operations and the New Zealand retail operations.
CORPORATE - EBITDA for the six months ended October 23, 1999 decreased
approximately $3.6 million versus the six months ended October 24, 1998. The
decrease is primarily the result of an overall higher level of general and
administrative costs, as the Company has expanded and strengthened its corporate
management team.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At October 23, 1999, the Company had cash of $29.3 million. Cash
decreased $46.8 million from $76.1 million at April 24, 1999 due primarily to
the payment of $52.8 million in interest, $35.6 million of net capital
expenditures, $9.3 million to acquire a business and the repayment of $11.0
million of debt, offset by $20.2 million in borrowings, $17.4 million in
income tax refunds, and $13.6 million in proceeds from sales of businesses and
real estate.
At October 23, 1999, the Company had working capital of $305.5 million.
Working capital decreased $53.4 million from $358.9 million at April 24,
1999. The decrease in working capital was primarily the result of short-term
borrowings, accounts payable management, and the receipt of an income tax
refund in the second quarter of fiscal 2000.
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LONG-TERM DEBT
The Company's credit facility (the "Credit Facility") provides for an
aggregate principal amount of $1,025.0 million, consisting of (i) a seven-year
multi-draw term loan facility totaling $50.0 million, (ii) a seven-year
revolving credit facility totaling $200.0 million, (iii) a seven-year term loan
facility totaling $100.0 million, and (iv) an eight-year term loan facility
totaling $675.0 million. See Note 1 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
In connection with the completion of the Strategic Restructuring Plan and the
related financing transactions, the Company borrowed the full amount of the two
single-draw term loan facilities. Interest rates on borrowings bear interest, at
the Company's option, at the lending bank's base rate plus an applicable margin
of up to 1.50%, or a eurodollar rate plus an applicable margin of up to 2.50%.
The Company's obligations under the Credit Facility are guaranteed by its
present domestic subsidiaries; future material domestic subsidiaries will also
be required to guarantee these obligations. The Credit Facility is
collateralized by substantially all of the assets of the Company and its
domestic subsidiaries; future material domestic subsidiaries also will be
required to pledge their assets as collateral. The Company is required to enter
into arrangements to ensure that the effective interest rate paid by the Company
on at least 50% of the aggregate amount outstanding under the Credit Facility
and the Company's 9 3/4% senior subordinated notes due 2008 (the "2008 Notes")
was at a fixed rate of interest. As a result, the Company has entered into
interest rate swap arrangements to limit the LIBOR-based interest rate exposure
on $500.0 million of the outstanding balance under the Credit Facility to rates
ranging from 5.7% to 6.0%. The interest rate swap agreements expire over a
period ranging from 2001 to 2003. As a result of these swap agreements (and
including the fixed-rate 2008 Notes), the Company has fixed the interest rates
on $915.2 million (76.0%) of the total debt outstanding at October 23, 1999. At
the Company's current debt levels, a hypothetical 10% increase in the weighted
average interest rate would result in approximately $1.3 million, net of taxes,
of additional interest expense on an annual basis. Subsequent to October 23,
1999, the 30-day LIBOR-based interest rate has increased 106 basis points.
At October 23, 1999, the Company had total debt outstanding of $1,204.0
million and had additional borrowing availability of $179.8 million under the
revolving credit facility and of $50.0 million under the multi-draw term loan
facility. The Company's capitalization, defined as the sum of long-term debt and
stockholders' equity, at October 23, 1999, was approximately $1.6 billion.
The Credit Facility includes, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends, or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios, and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility).
The 2008 Notes are unsecured but are guaranteed by the Company's present
domestic subsidiaries; future material domestic subsidiaries will be required to
guarantee the 2008 Notes. The indenture governing the 2008 Notes places
restrictions on the Company's ability to incur indebtedness, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of its assets to, or merge or consolidate with, another
entity. The eight-year term loan facility contains negative covenants and
default provisions substantially similar to those contained in the indenture
governing the 2008 Notes.
In November 1999, the Company's Board of Directors authorized the
repurchase of up to $50.0 million principal amount of the 2008 Notes from
time to time in privately-negotiated transactions. The Company may from time
to time make such repurchases in its discretion, but there can be no
assurances as to whether, when or to what extent such repurchases will be
made. The Credit Facility allows the the Company to use up to approximately
$50.0 million in aggregate to fund one or more of the following: the
repurchase of a portion of the 2008 Notes or capital expenditures in excess
of annual covenant limits.
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STOCKHOLDERS' EQUITY
In May 1999, MBE invested $4.0 million to acquire a 17% interest in
iShip.com, a provider of web-based shipping solutions. In October 1999,
Stamps.com announced an agreement to purchase iShip.com for 8.0 million
shares of Stamps.com stock. The transaction is expected to close during the
first calendar quarter of 2000. The equity value of MBE's investment in
iShip.com, based on the number of Stamps.com shares it would receive in the
merger transaction, is approximately $90.0 million as of December 6, 1999.
MBE also has the right to earn performance-based warrants for additional
shares of Stamps.com stock. Since the Company does not consider its
investment in iShip.com to be a trading security, the gain on the transaction
will be recorded as other comprehensive income, a component of stockholders'
equity. If the Company does liquidate its investment, any resulting gain
would be recognized in the consolidated statement of operations.
FOREIGN CURRENCY
The New Zealand and Australian dollars weakened against the USD during
the three and six month periods ended October 23, 1999. This resulted in an
unrealized foreign currency transaction loss of $12.2 million and $25.8
million for the three and six month periods ended October 23, 1999,
respectively. See "-Consolidated Results of Operations." If exchange rates
continue to decline, the Company will continue to record unrealized foreign
currency transaction losses resulting from the further devaluation of the
Company's intercompany loans with the Blue Star Group. Subsequent to October
23, 1999, the New Zealand dollar continued to weaken against the USD. As of
December 1, 1999, the New Zealand dollar equaled USD $.507 (down from USD
$.515 at October 23, 1999).
As a result of the Company's indebtedness, a portion of the cash flows from
the Company's international operations will be required to service debt and
interest payments. The Company expects that it may incur additional costs with
respect to accessing cash flows from international operations including such
items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs.
CASH FLOWS
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Company's Credit Facility will be sufficient to
meet its liquidity requirements for its operations, capital expenditures and
additional debt service obligations for the remainder of the fiscal year. The
Company does not currently anticipate that any future restructuring costs
related to the Company's planned cost reduction measures, coupled with the
expected effects of such cost reduction measures, would have a material adverse
effect on the Company's liquidity or cash flows. See "- Introduction." The
Company had net capital expenditures of $35.6 million during the six months
ended October 23, 1999, and anticipates additional capital expenditures of
approximately $24-$34 million in fiscal 2000. The anticipated capital
expenditures will primarily support the Company's information systems
development, e-commerce initiatives, and the consolidation of certain
administrative functions.
During the six months ended October 23, 1999, net cash used in operating
activities was $22.2 million. This use of cash included the payment of $52.8
million in interest expenses that became payable during the quarter. Net cash
used in investing activities was $34.1 million, including $35.6 million used for
net additions to property and equipment and $9.3 million used to acquire a
business. Net borrowings decreased $8.9 million.
During the six months ended October 24, 1998, net cash used in operating
activities was $21.9 million. This use of cash included the payment of
approximately $21.7 million of costs related to the Strategic Restructuring
Plan, the payment of approximately $5.5 million of operating restructuring costs
and increases in accounts receivable (due to significant seasonal furniture
sales) and inventory (due to building of inventory for the Christmas retail
season). Net cash used in investing activities was $44.5 million, including
$22.7 million used for acquisitions and $21.0 million used for additions to
property and equipment. Net borrowings increased approximately $481.3 million
during the six months ended October 24, 1998, primarily to fund the Strategic
Restructuring Plan and Financing
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Transactions, and also to fund the purchase prices of acquisitions and additions
to property and equipment during the period. In addition, the Company received
approximately $254.7 million from Investor related to the Equity Investment, net
of expenses, and $123.6 million from discontinued operations in repayment of
intercompany loan balances outstanding at the date of the Distributions.
Discontinued operations used $12.5 million of cash during the six months ended
October 24, 1998.
YEAR 2000 COMPLIANCE
The Company is carrying out a process to assess Year 2000 compliance of its
systems and the systems of major vendors and third-party service providers, and
to remediate any non-compliance of its systems.
Prior to the Year 2000 readiness project, the Company initiated a common
system project for hardware and software systems. As a result of this project,
the Company has replaced several systems. The Company has not materially
accelerated the replacement of hardware or software systems as a result of Year
2000 performance and/or compliance issues.
As described below, each of the Company's North American, MBE, Blue Star
Group and Dudley operations is performing its own Year 2000 readiness review.
NORTH AMERICAN OPERATIONS
The Year 2000 compliance process in the Company's North American operations
(excluding MBE) involves three phases, as described below.
PHASE ONE--INVENTORY AND PLANNING
The Company completed this phase in May 1998. In this phase, the Company
inventoried all hardware and software that potentially is susceptible to Year
2000 problems, prepared plans for assessing compliance and for completing
remediation, and prepared vendor and supplier compliance surveys.
PHASE TWO--ASSESSMENT
In this phase, the Company assessed which of its systems are Year 2000
compliant, obtained compliance statements from hardware and software vendors,
supply manufacturers and service trading partners, and planning for remediation
of non-compliant systems. The Company completed this phase in December 1998.
The Company's assessment plan included assessment of Year 2000 compliance
of non-information technology (non-IT) components, including the Company's
bindery machinery, coffee roasting facilities, office furniture manufacturing
facilities, security systems, credit card processing devices and freight
elevators. The Company believes there are no significant uses of
micro-processing oriented equipment within its manufacturing systems and
completed assessment of these systems in December 1998.
PHASE THREE--REMEDIATION AND TESTING
In this phase, the Company is deploying plans for elimination, upgrade,
replacement or modification of non-compliant systems, and testing compliance.
Verification and testing will continue through December 1999.
The Company's Trinity system, which is the core information management and
processing system for its North American office supplies operations, is Year
2000 compliant. The Company is installing this system throughout its office
supplies operations, and it expects to complete its Trinity installation plans
for office supplies businesses by
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the end of 1999. Some North American locations (including those in the
furniture, vending, and office coffee businesses) will continue to use operating
systems other than Trinity after the end of 1999. Therefore, the Company has
assessed the compliance of other systems used by its North American operating
subsidiaries. The Company has determined that some of the systems used by its
North American subsidiaries were not Year 2000 compliant, but the Company
believes these systems have been made compliant without material expense.
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 are Year 2000 compliant. The
Company has identified some vendors as fitting a "concerned" profile due to
late compliance dates or because responses indicate some possibility of poor
planning. The Company is communicating with each of these vendors to
remediate these concerns. Failure of these vendors to reach Year 2000
compliance or remediate prior to the century change is not expected to have a
material adverse effect on the Company's performance. With regard to
products, the Company cannot warrant Year 2000 compliance for products sold
and distributed by the Company and its subsidiaries. Product is procured from
vendors and manufacturers' for sale and distribution to our customers. The
Company does not believe it would face material liability from non-compliance
with respect to these products.
If the Company fails to achieve Year 2000 compliance in all its systems,
the Company could lose the ability to process certain of its customer's orders
until compliance is achieved or a means to work around the failure is
implemented. The Company's systems are not now uniform across all operations and
the Company does not expect uniformity by the end of 1999. Therefore, any
failure would not be system wide. The Company believes that in a worst case
scenario, at most 20% of its orders would be affected. A failure to fill orders
would not, however, necessarily result in a complete loss of the order. An order
could be filled through alternative methods within a relatively short period.
Nevertheless, any disruption in order fulfillment could result in some loss of
revenue. If this disruption is the result of noncompliance that is greater than
anticipated, the loss of revenue could be material. The Company is in the
process of finalizing contingency plans and anticipates completion by
mid-December 1999. The Company's contingency plans include the use of
alternative product suppliers, reliance on alternative warehouse and delivery
locations and methods within the company (in the case of a local or regional
Year 2000 problem), and the use of back-up or alternative communication
methods.
For North America, the Company's assessment and remediation of Year 2000
compliance issues has a budget of less than $1.0 million, and expenses have been
less than expected. The Company does not currently expect that future expenses
for assessment or remediation will be material.
MBE, BLUE STAR GROUP AND DUDLEY
The Company has received reports from MBE that address the Year 2000
readiness of software and hardware provided by MBE and used by MBE franchisees,
as well as that used by MBE's corporate operations. MBE is in the process of
assessing and testing mission critical systems, and performing additional
activities as summarized below. These efforts fall within three categories.
First, MBE continues to review Year 2000 compliance as it relates to the
software that MBE writes and provides to its franchisees. Second, MBE continues
to review Year 2000 compliance as it relates to its internal hardware and
software that it uses for the daily operations of its corporate business. Third,
MBE continues to review Year 2000 compliance statements of major vendors of MBE
and its franchisees, including statements of vendors that supply hardware to MBE
that MBE re-sells to its franchisees.
MBE creates proprietary software ("MBE Software") for its franchisees that
are used for a variety of functions to operate an MBE center. Based on MBE's
testing, the majority of this software is currently Year 2000 compliant. For the
remaining MBE Software, MBE plans either (i) to reprogram or otherwise upgrade
such software, or (ii) to no longer support, and no longer require franchisees
to purchase and use, such software. MBE expects any reprogramming to be
completed by mid-December 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
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ensuring that software not provided by MBE is Year 2000 compliant both standing
alone and in combination with MBE Software. MBE does not believe that the
failure of franchisees to obtain Year 2000 compliance would have a material
adverse effect on MBE because franchisees have manual alternatives available.
MBE's franchisees purchase or lease some hardware from MBE, which is provided to
MBE by various manufacturers. MBE has reviewed statements from the vendors of
hardware currently being sold or leased to franchisees by MBE, and such
statements indicate that such hardware is Year 2000 compliant.
With respect to software and hardware used by MBE's corporate operations,
MBE has reported to the Company that some software products used by MBE for
certain accounting and database functions, as well as some desktop computers,
are not currently Year 2000 compliant. MBE and the providers of this software
and hardware are in the process of reprogramming such software and upgrading
such hardware and expect to complete this process by early December 1999. MBE
expects to be able to bring its software and hardware that are not currently
Year 2000 compliant into compliance within budgeted limits and without material
expense. MBE does not believe any failure to reprogram or upgrade the software
and hardware used by MBE in its corporate operations would have a material
adverse effect on MBE.
Much of MBE's hardware and software depends upon the proper interaction
of various hardware, software and services furnished by third parties. While
MBE is performing Year 2000 readiness tests on its systems and attempting to
obtain statements from its primary vendors, the vast array of combinations of
MBE and third-party components (including those provided by franchisees),
functions and entry and exit points make it impractical to test every aspect
of the systems. MBE is currently evaluating statements from its mission
critical vendors to develop contingency plans in the event one or more of
such vendors experiences a failure due to Year 2000 non-readiness. MBE
currently expects to complete such contingency plans during December 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 December
31, 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, there do
not appear to be any significant Year 2000 issues at Dudley.
The Company's review of Year 2000 compliance issues at MBE, Blue Star and
Dudley to date has been based on reports received from those operations. While
Company personnel speak regularly with employees at MBE, Blue Star, and Dudley
about the status and progress of Year 2000 compliance efforts, Company personnel
responsible for Year 2000 compliance activities within the Company's North
American operations have not conducted their own on-site testing or verification
at these other locations. While the Company's level of assurance regarding the
compliance of systems at MBE, Blue Star, and Dudley might be higher if it were
to conduct such additional on-site reviews to confirm the status of compliance
activities, the Company believes, based upon the compliance programs being
carried out, the content and thoroughness of regular reports transmitted to the
Company, and the involvement of both senior executives and knowledgeable systems
professionals in the compliance activities at all of these operations, that the
compliance process is being handled in a reasonable and responsible manner. MBE,
Blue Star, and Dudley have not segregated their expenses for Year 2000
compliance from other information technology costs, but the Company does not
expect these expenses to exceed $4.0 million. MBE, Blue Star and the Company's
interest in Dudley represent approximately one-third of the Company's
consolidated revenues. If the operations of any of
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these groups are not materially compliant within a safe time frame, the
Company's results of operations could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
As the Company's mix of businesses evolves through future business combinations,
these seasonal fluctuations may continue to change. Therefore, results for any
quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent fiscal quarter or for a full fiscal year.
Quarterly results also may be affected by the timing and magnitude of
business combinations and divestitures, the timing and magnitude of costs
related to such business combinations and divestitures, variations in the prices
paid by the Company for the products it sells, the mix of products sold, and
general economic conditions. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on
its results of operations during fiscal 1999 or the first two quarters of fiscal
2000.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of SOP
98-1 had no impact on the results of operations or financial position of the
Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures arise from changes in interest
rates and fluctuations in the exchange rates related primarily to the New
Zealand, Australian and Canadian dollars. The Company utilizes interest rate
swaps and foreign currency forward contracts to reduce its exposure to adverse
fluctuations in interest rates and exchange rates. The Company does not hold or
issue derivative instruments for trading purposes.
INTEREST RATE RISK
See the disclosure included in the Company's 1999 Annual Report on Form
10-K. The Company does not believe that the interest rate risk it faces is
materially different than at the date of the 1999 Annual Report on Form 10-K.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts business activities in New Zealand and Australia
(related to the Blue Star Group) and Canada (two coffee businesses) and has a
49% equity interest in a business in the United Kingdom. As a result, the
Company is exposed to foreign currency exchange rate risk primarily due to its
transactions and net assets denominated in New Zealand (NZD), Australian (AUD),
and Canadian (CDN) dollars and the Pound Sterling. The Blue Star Group uses
foreign currency forward contracts to hedge the impact of adverse fluctuations
in the exchange rate on the purchases of goods from overseas markets, as well as
on the interest paid related to intercompany debt obligations denominated in
U.S. dollars. The Company has not entered into any derivative instruments with
respect to the CDN dollar or the Pound Sterling.
The U.S. dollar is the functional currency for the Company's consolidated
results of operations and financial position. For the Company's subsidiaries in
New Zealand, Australia and Canada, the functional currency is the NZD, AUD and
CDN dollar, respectively. The functional currency of the Company's equity
investment in the United Kingdom is the Pound Sterling. The cumulative
transaction effects for the subsidiaries using functional currencies other than
the U.S. dollar are included in accumulated other comprehensive loss in
consolidated stockholders' equity, with the exception of the Company's U.S.
dollar denominated $443 million of intercompany loans and the related accrued
interest with the Blue Star Group. The impact of the fluctuation in the NZD and
AUD dollars on these intercompany loans is reflected in the recognition of an
unrealized foreign currency transaction gain or loss. The effect of a USD $.01
change in the NZD exchange rate would result in the recording of an unrealized
foreign currency transaction gain or loss of approximately $8.5 million. In
addition, as of October 23, 1999, the stockholders' equity of the Blue Star
Group totaled $145.7 million.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Individuals purporting to represent various classes composed of
stockholders who purchased shares of US Office Products common stock between
June 5, 1997 and November 2, 1998 filed six actions in the United States
District Court for the Southern District of New York and four actions in the
United States District Court of the District of Columbia in late 1998 and early
1999. Each of the actions named the Company and Jonathan J. Ledecky, the
Company's former Chairman and Chief Executive Officer, and, in some cases, Sands
Brothers & Co. Ltd. as defendants. The actions claim 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. A consolidated amended complaint was filed on July 29,
1999, naming the Company and Mr. Ledecky as defendants. The Company intends to
vigorously contest this action.
Sellers of three businesses that the Company acquired in the fall of 1997
and that were spun off in connection with the Company's Strategic Restructuring
Plan also have filed complaints in state court in Michigan, the United States
District Court for the District of Delaware, and the United States District
Court for the District of Connecticut. These lawsuits were filed on January 19,
1999, February 10, 1999 and March 3, 1999, respectively, and name, among others,
the Company as a defendant. All three of these cases have been transferred and
consolidated for pretrial purposes with the purported class-action pending in
the United States District Court for the District of Columbia. Sellers of two
other businesses acquired in October 1997 and December 1997 that were not spun
off by the Company have also filed complaints in state court in Kentucky and
state court in Indiana in which the Company is named as defendant. Those
complaints were filed on or about September 2, 1999, and September 30, 1999. The
Company removed both lawsuits to federal district court, and the Company has
sought to have both cases transferred and consolidated with the cases pending in
the United States District Court for the District of Columbia. 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 some of these claims may be subject to indemnification, at
least in part, under the terms of the distribution agreement that was executed
in connection with the Strategic Restructuring Plan between the Company and the
companies that were spun off in the Strategic Restructuring Plan. The Company
intends to vigorously contest these actions.
In October 1999, the United States District Court for the District of
Columbia ordered that the parties in all of the cases before it engage in
mediation, and "administratively closed" the cases that had been consolidated
until completion of the mediation process. Mediation sessions are to take place
in December 1999 and January 2000 and possibly thereafter. If the cases are not
settled by mediation, the cases will be reopened with the court.
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.
Page 37
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Company's stockholders was held on August 31,
1999. All nominees for Director were elected pursuant to the following votes:
<TABLE>
<CAPTION>
Authority Broker
Nominee For Withheld Non-Votes
- ------- --- -------- ---------
<S> <C> <C> <C>
Charles P. Pieper 32,856,402 545,582 0
Kevin J. Conway 32,846,012 555,972 0
Frank P. Doyle 32,846,098 555,886 0
Brian D. Finn 32,868,402 533,582 0
L. Dennis Kozlowski 32,868,402 533,582 0
Milton H. Kuyers 32,868,402 533,582 0
Allon H. Lefever 32,868,402 533,582 0
Edward J. Mathias 32,858,102 543,582 0
</TABLE>
The stockholders approved the 1999 Employee Stock Purchase Plan, pursuant
to the following votes:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
32,281,722 1,070,782 49,479 0
</TABLE>
The stockholders ratified the Board of Directors' selection of
PricewaterhouseCoopers LLP as the Company's independent accountants to audit the
Company's consolidated financial statements for the fiscal year ending April 29,
2000, pursuant to the following votes:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C>
32,522,280 828,910 20,974 0
</TABLE>
ITEM 5. OTHER INFORMATION
In September 1999, Warren D. Feldberg was appointed to the offices of
President and Chief Executive Officer of the Company. Mr. Feldberg was also
elected to serve on the Board of Directors after the Directors approved an
expansion of the Board to nine members.
Nasdaq has informed the Company that because its common stock traded
below $5.00 per share for more than 30 consecutive trading days, the Company
was not maintaining the minimum bid price requirement for continued quotation
on the Nasdaq National Market System. Nasdaq also has stated that if, prior
to December 8, 1999, the Company was not in compliance with this requirement
for 10 consecutive trading days, the Company's stock would be delisted at the
opening of business on December 10, 1999. The Company will not be in
compliance with the minimum bid requirement prior to December 8, 1999. In an
effort to maintain its listing, the Company has requested a hearing before
the Nasdaq Listing U.S. Qualifications Panel (the "Panel"). Under Nasdaq's
procedures, the Company's common stock will continue to trade on Nasdaq
pending the outcome of that hearing. Management is exploring its options
while the hearing is pending and, while the Board of Directors has authorized
management to prepare for a reverse split, management is also actively
considering moving to another market or exchange. The Company has not made a
final decision on what action it will take, and there can be no assurance as
to whether any such action will be successful. If the Company's
common stock were ultimately to be delisted, the delisting would likely
adversely affect he stock's market price and liquidity of trading.
Page 38
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Employment Agreement Between US Office Products Company and
Warren D. Feldberg.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
Page 39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
December 7, 1999 By: /s/ WARREN D. FELDBERG
--------------------- ----------------------
Date Warren D. Feldberg
President and Chief Executive Officer
December 7, 1999 By: /s/ JOSEPH T. DOYLE
--------------------- -------------------
Date Joseph T. Doyle
Chief Financial Officer
Page 40
<PAGE>
EXHIBIT INDEX
NO. EXHIBIT
10.1 Employment Agreement Between US Office Products Company and
Warren D. Feldberg
27 Financial Data Schedule
Page 41
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 7th day of September, 1999,
is by and between US Office Products Company (the "Company"), a Delaware
corporation, and Warren D. Feldberg, an individual residing at 75 Buttrick's
Hill Road, Concord, Massachusetts 01742 ("Employee").
RECITALS
The Company desires to employ Employee and to have the benefit of his
skills and services, and Employee desires to accept employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein, and the performance of each, the
parties hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM.
(a) The Company hereby employs Employee to perform the duties
described herein, and Employee hereby accepts employment with the Company,
for a term beginning on September 7, 1999 (the "Commencement Date") and
continuing for a period of three years from the Commencement Date (the
"Term"). This Agreement may be terminated prior to the end of the Term in the
manner provided for in Section 6 below.
(b) This Agreement shall be renewed for additional, successive
one-year terms unless either of the parties delivers written notice of
non-renewal to the other not less than six months prior to the end of the
then-current Term. If such notice of non-renewal is given first by the
Company, Employee shall be entitled to treat this Agreement as having been
terminated by reason of non-renewal, as of the end of the then-current Term,
in accordance with the provisions of Section 6(g) below. For purposes of this
Agreement, "Term" shall mean the original three-year term of this Agreement,
as well as all renewal periods, if any.
2. POSITION AND DUTIES. The Company hereby employs Employees as its
President and Chief Executive Officer. As such, Employee shall be the most
senior executive officer of the Company (except to the extent the Chairman is
considered an officer) and have such responsibilities, duties and authority
as are consistent with that position and are delegated to him from time to
time by the Company's Chairman and its Board of Directors (the "Board").
Employee will report directly to the Board. Employee also will be elected as
a director of the Company effective on the Commencement Date and will be
nominated to serve as a director of the Company at all elections of directors
during the Term at which his term of director is scheduled to expire.
Employee hereby accepts this employment upon the terms and conditions herein
contained and agrees to devote all of his professional time, attention, and
efforts to promote and further the business of the Company. Employee shall
faithfully adhere to, execute, and fulfill all policies established and
communicated by the Company. Employee shall be permitted to serve as a
non-employee director of other companies, to the extent that such service
does not materially interfere with his obligations to the Company under this
Agreement and does
<PAGE>
not violate the restrictions contained in Section 7 below. The number and
type of outside directorships shall be discussed in advance with, and
approved by, the Board; PROVIDED, that Employee's existing outside
directorships are deemed approved.
3. COMPENSATION. For all services rendered by Employee, the Company
shall compensate Employee as follows:
(a) BASE SALARY. Effective on the Commencement Date, the base
salary payable to Employee shall be $1,000,000 (One Million Dollars) per
year, payable on a regular basis in accordance with the Company's standard
payroll procedures, but not less than monthly.
(b) INCENTIVE BONUS. Employee will be eligible to receive a
performance-based incentive bonus in each fiscal year during the Term of up
to $1,000,000 (One Million Dollars), based upon the achievement of
quantitative and qualitative targets and criteria specified by the Board or a
compensation committee thereof and adopted in accordance with, and
administered under, the Company's Section 162(m) Plan, as may be modified or
amended from time to time. These criteria will be subject to annual revision,
to take account of the Company's growth, the results of the budgeting process
for each fiscal year, and other relevant factors. The incentive bonus, if
earned, will be payable in cash. To the extent the Term begins after the
first day of a fiscal year or ends prior to the last day of a fiscal year,
the maximum incentive bonus available to Employee for such partial fiscal
year shall be pro-rated. The Board, or a compensation committee thereof, will
retain complete and final discretion over the terms of this incentive bonus
program, as well as the terms of any and all bonus awards under the program.
During the fiscal year ending in April 2000, Employee shall receive an
incentive bonus of no less than $500,000.
(c) SPECIAL TWO-YEAR BONUS PROGRAM. If the Board, or a
compensation committee thereof, adopts a special two-year bonus program for
key employees that is being considered for fiscal 2000 and fiscal 2001 (or a
similar or alternative program), Employee shall be eligible to participate in
that program at the highest award level included in the program (which shall
provide Employee with an opportunity to receive up to 200% of his annual base
salary and annual target incentive compensation, payable following the
conclusion of the two-year period, upon the achievement of specified targets
and goals). Incentive compensation awards under that program (which may be
paid in cash or in non-cash forms, at the Company's option) shall be governed
by the terms of the program. If the Company does not adopt this special
program or an economically comparable substitute or alternative, the Company
shall implement an alternative incentive compensation arrangement that will
provide Employee with a substantially similar opportunity to earn a
comparable incentive, over such two-year period, upon the achievement of
goals and targets similar to those contemplated by the two-year program
currently under consideration. Employee's participation in the special bonus
program contemplated by this Section 3(c) shall be administered under the
Company's Section 162(m) Plan, as may be modified or amended from time to
time.
(d) PERQUISITES AND BENEFITS. During the Term, Employee shall be
entitled to receive all perquisites and benefits as are generally provided by
the Company to its senior executive employees, subject to such changes,
additions, or deletions as the Company may make generally from time to time,
as well as such other perquisites or benefits as may be specified from time
to time by the Company to its general employees, subject to such changes,
additions, or deletions as the Company may make generally from time to time.
In addition, during the Term Employee shall be entitled to receive the
following perquisites:
2
<PAGE>
(i) The Company shall pay the cost of annual membership for an
Employee at The Historic Georgetowne Club for such period of
time during the Term as the Company's offices remain located
reasonably near the club (so that it can be used
conveniently).
(ii) The Company shall reimburse Employee for personal tax and
financial planning and tax preparation services, in an
amount of no more than $10,000 annually.
(iii) Employee shall be entitled to four weeks of paid vacation
each year during the Term, which shall accrue ratably
throughout the year. In the event of a termination of
employment, payment for accrued but unused vacation shall
be subject to the Company's policies on such matters as
in effect at the time. The Company currently does not
permit accrued but unused vacation to be carried over
from one year to the next.
(e) STOCK OPTION AWARDS. The Company shall recommend to the
subcommittee of the compensation committee of the Board (the "Option
Committee") that administers the Company's 1994 Amended and Restated
Long-Term Incentive Compensation Plan (the "Option Plan") that Employee be
awarded stock options to purchase the following number of shares of the
Company's common stock: (i) at the Commencement Date, 500,000 shares; and
(ii) on each of the first and second anniversaries of the Commencement Date,
100,000 shares. These stock options will be non-qualified options granted
under the Option Plan, will have an exercise price equal to the last reported
sale price of the Company's common stock on the date of grant, will expire in
ten years from the date of grant, and will vest in equal installments over
four years (25% per year) from the date of grant. They will be subject to the
terms of the Option Plan and the terms of an Option Agreement between the
Company and Employee. The current form of Option Agreement being used by the
Company, which may be changed at any time at the direction of the Option
Committee, has been provided to Employee. Employee shall generally be
eligible for awards under the Option Plan.
4. EXPENSE REIMBURSEMENT.
(a) The Company shall reimburse Employee for (or, at the Company's
option, pay) all business travel and other out-of-pocket expenses reasonably
incurred by Employee in the performance of his services hereunder during the
Term.
(b) For a period of up to twelve months from the Commencement Date,
the Company shall reimburse Employee for the reasonable costs of travel
between the Company's offices in Washington, D.C. and his home in
Massachusetts, as well as the cost of an apartment for Employee in
Washington, D.C., if Employee chooses not to relocate his residence to the
Washington, D.C. area during this period.
(c) All reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request for
reimbursement, and in a format and manner consistent with the Company's
expense reporting policy, as well as applicable federal and state tax record
keeping requirements.
3
<PAGE>
5. PLACE OF PERFORMANCE. The principal place of the Employee's
employment shall be at the Company's headquarters office, which is located in
Washington, D.C. Employee understands that he may be requested by the Company
to relocate to another geographic location in order to more efficiently carry
out his duties and responsibilities under this Agreement. Employee shall not
be obligated to relocate, but if he agrees to relocate, the Company will
provide Employee with relocation allowance, in an amount determined by the
Company, to assist Employee in covering the costs of moving himself, his
immediate family, and their personal property and effects. The total amount
and type of costs to be covered shall be determined by the Company, in light
of prevailing Company policy at the time. The reimbursement provisions of
this Section 5 shall include a relocation of Employee and his family from
Massachusetts to the Washington, D.C. area. Once Employee relocates to the
Washington, D.C. area, the reimbursement provisions of this Section 5 shall
not apply to any subsequent relocation of his residence that Employee chooses
to make as long as the Company's headquarters office remains within a 30-mile
radius of Washington, D.C.
6. TERMINATION; RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the following ways, prior to the expiration of the
Term:
(a) DEATH. The death of Employee shall immediately terminate the
Term, and severance compensation in an amount equal to Employee's Total
Short-Term Compensation (as defined in Section 6(i) below) for the most
recently completed fiscal year shall be owed to Employee's estate and shall
be paid 25% within 20 days of the date of death and the remaining 75% over a
period of one year from the date of Employee's death. Payments after the
initial 25% payment shall be made in accordance with the Company's regular
payroll cycle.
(b) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Employee shall have been unable to perform the
material duties of his position on a full-time basis for a period of four
consecutive months, or for a total of four months in any six-month period,
then 30 days after written notice to the Employee (which notice may be given
before or after the end of the aforementioned periods, but which shall not be
effective earlier than the last day of the applicable period), the Company
may terminate the Term and Employee's employment if Employee is unable to
resume his full-time duties at the conclusion of such notice period. Subject
to Section 6(j) below, if Employee's employment is terminated as a result of
Employee's disability, the Company shall pay Employee an amount equal to 25%
of Employee's Total Short-Term Compensation for the most recently completed
fiscal year within 20 days of the effective date of termination of the Term
and an amount equal to 75% of Employee's Total Short-Term Compensation for
the most recently completed fiscal year over a period of one year from the
effective date of termination of the Term. Payments after the initial 25%
payment shall be made in accordance with the Company's regular payroll cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE." The Company may
terminate the Term and Employee's employment promptly after written notice to
Employee "for cause," which shall be: (i) Employee's material breach of this
Agreement, which breach is not cured within 15 business days of receipt by
Employee of written notice from the Company specifying the breach and stating
that it constitutes grounds for "for cause" termination; (ii) Employee's
gross negligence in the performance of his duties hereunder, intentional
nonperformance or intentional mis-performance of such duties, or refusal to
abide by or comply with the directives of the Board, or the Company's
policies and procedures, which actions continue from a period of at least 15
business days after receipt by Employee of written notice of the need to cure
or cease and stating
4
<PAGE>
that such actions constitute grounds for "for cause" termination; (iii)
Employee's willful dishonesty, fraud, or misconduct with respect to the
business or affairs of the Company that materially and adversely affects the
operations or reputation of the Company; (iv) Employee's conviction of a
felony or other crime involving moral turpitude; or (v) Employee's abuse of
alcohol or drugs (legal or illegal) that, in the Company's judgment,
materially impairs Employee's ability to perform his duties hereunder. In the
event of a termination "for cause," as enumerated above, Employee shall have
no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of
employment, the Company may, without cause, terminate the Term and Employee's
employment, effective 30 days after written notice is provided to the
Employee. Subject to Section 6(j) below, should the Term and Employee's
employment be terminated by the Company without cause, Employee shall receive
from the Company as severance an amount equal to the greater (i) 200% of
Employee's Total Short-Term Compensation for the most recently completed
fiscal year; or (ii) 100% of Employee's Total Short-Term Compensation amount
for the most recently completed fiscal year for each full year then remaining
in the Term and a pro-rated portion of such annual amount for any partial
year then remaining in the Term. In each case, 25% of the total amount due to
Employee shall be paid within 20 days of the effective date of termination of
the Term, and the remaining 75% of such total amount shall be paid (x) in the
case of clause (i), over a period of 24 months from the effective date of
termination of the Term; and (y) in the case of clause (ii), over the
then-remaining portion of the Term. Payments after the initial 25% payment
shall be made in accordance with the Company's regular payroll cycle, and no
renewals of the Term shall be included, unless they were agreed to by the
Company and Employee prior to the date on which the Company notified Employee
of its intention to terminate the Term pursuant to this Section 6(d). If
Employee resigns or otherwise terminates his employment for any reason or for
no reason (other than for "Good Reason" pursuant to Section 6(e) below),
Employee shall receive no severance compensation.
(e) TERMINATION FOR "GOOD REASON." Employee may terminate the Term
and his employment hereunder for "Good Reason." As used in this Section 6(e),
the term "Good Reason" shall mean the continuance of any of the following
after 15 business days' prior written notice by Employee to the Company,
specifying the basis for Employee's having Good Reason to terminate the Term
and his employment:
(i) a material adverse change in Employee' status, title,
position, responsibilities, or reporting;
(ii) the assignment to Employee of any duties materially and
adversely inconsistent with the Employee's position as
specified in Section 2 above, including status, offices,
titles, responsibilities, or persons to whom the Employee
reports, or any other action by the Company which results in
a material and adverse change in such position, status,
offices, titles, or responsibilities;
(iii) Employee's removal from, or failure to be re-appointed or
re-elected to, the Board, except where Employee is resigning
from his employment voluntarily pursuant to Section 6(d)
above or where the Company is terminating his employment "for
cause" pursuant to Section 6(c) above;
5
<PAGE>
(iv) any other material breach of this Agreement by the Company,
including specifically the failure by the Company to comply
with the compensation and benefits provisions of Section 3 of
this Agreement or failure by the Company to grant the options
contemplated by Section 3(e) above; or
(v) the Company requiring Employee to be based out of a location
other than within 30 miles of Washington, D.C.
In the event of any termination by Employee for Good Reason, Employee shall
be entitled to the same severance as if the Company had terminated the Term
and his employment without cause, as specified in Section 6(d) above.
(f) CHANGE IN CONTROL. The provisions of Section 16A below shall
apply if a "Change in Control" occurs during the Term.
(g) NON-RENEWAL. If the Company first notified Employee of its
decision not to renew the Term, as contemplated by Section 1(b) above, then
following the completion of the then-current Term, the Company shall continue
to pay Employee an amount equal to 150% of Employee's Total Short-Term
Compensation for the most recently completed fiscal year. This amount shall
be paid as follows: 25% of the total amount due to Employee shall be paid
within 20 days of the effective date of termination of the Term, and the
remaining 75% of such total amount shall be paid over a period of 18 months
from the effective date of termination of the Term. Payments after the
initial 25% payment shall be made in accordance with the Company's regular
payroll cycle. In addition, on and after the date on which the Company
communicates its decision not to renew the Term, (i) Employee shall be
entitled to continue to receive all compensation and benefits due to him
under this Agreement through the end of the Term, and (ii) after a reasonable
period to effect a responsible transition of Employee's duties and
responsibilities (which shall not last more than 45 days), Employee shall not
be required to report to work on a regular basis or to devote his full
professional time and attention to the Company. If Employee elects not to
renew the Term, Employee shall receive no severance compensation, but the
terms of clause (i) of this Section 6(g) shall be applicable.
(h) PAYMENT THROUGH TERMINATION. Upon termination of the Term and
Employee's employment for any reason provided above, Employee shall be
entitled to receive all compensation earned and all benefits and
reimbursements (including payments for accrued vacation, in each case in
accordance with applicable policies of the Company) due through the effective
date of termination. Additional compensation subsequent to termination, if
any, will be due and payable to Employee only to the extent and in the manner
expressly provided in this Section 6 (and, in the case of a "Change of
Control," Section 16A below). If the Company terminates the Term and
Employee's employment pursuant to Sections 6(b) or 6(d) above (excluding a
termination as a result of Employee's resignation), if the Company elects not
to renew the Term pursuant to Section 6(g), if Employee terminates the term
pursuant to Section 6(e), or if the Term is terminated in connection with a
"Change in Control" under a circumstance where Employee will receive payments
as specified in Section 16A below, then if Employee elects to continue health
insurance coverage under COBRA, the Company shall pay Employee's monthly
COBRA premium payments for a period that in no event exceeds the shorter of
(i) the 18-month COBRA period, or (ii) the period during which Employee is
receiving severance from the Company; PROVIDED, that if Employee accepts
other employment during this period and is offered reasonably comparable
health insurance coverage through that new employer, he shall
6
<PAGE>
promptly notify the Company and the Company shall be relieved of any further
obligation to make COBRA payments once Employee's new coverage begins. All
other rights and obligations the Company and Employee under this Agreement
shall cease as of the effective date of termination, except that the
Employee's obligations under Section 7, 8, 9 and 10 below, and the rights of
both Employee and the Company under Section 10A below, shall survive such
termination in accordance with their terms. Employee's rights under the
Option Plan, any option agreement, and the incentive program contemplated by
Section 3(c) above shall be governed by the respective terms of such plan,
agreement, and program.
(i) TOTAL SHORT-TERM COMPENSATION. For purposes of this Section 6,
the term "Total Short-Term Compensation" for any fiscal year shall mean the
sum of (i) Employee's base salary in such fiscal year, plus (ii) the amount
of incentive compensation awarded to Employee under any incentive program
covering a single fiscal year (or any shorter period), whether paid in cash,
stock options, or other non-cash compensation, in respect of such fiscal
year. For purposes of avoiding doubt, this term shall not include (i) stock
options, restricted stock, or other non-cash awards granted to Employee under
the Option Plan (or any similar or successor plan), unless such grants are
made in payment or partial payment of an incentive award under a program with
a duration of one fiscal year or less; (ii) any amounts awarded to Employee
in accordance with the special two-year bonus program contemplated by Section
3(c) above (or any similar or substitute program); or (iii) any payments of
perquisites (including matching contributions under the Company's 401(k)
Plan) or any reimbursement or payment of expenses. If Employee's employment
is terminated before the end of fiscal 2000, then the Total Short-Term
Compensation amount for a fiscal year, for purposes of determining any
applicable severance payment, shall equal the sum of (i) Employee's
annualized base salary, at the then-applicable rate, plus (ii) the greater of
(x) $500,000, and (y) the amount of incentive compensation (up to $1,000,000)
that Employee would have earned if he had worked for a complete fiscal year,
based upon the Company's and Employee's performance as of the employment
termination date (as determined by the Board of a compensation committee
thereof, in accordance with the then-applicable targets and criteria). From
the end of fiscal 2000 through the end of fiscal 2001, the Total Short-Term
Compensation amount for a fiscal year shall be subject to adjustment to an
annualized rate, to the extent that Employee's salary and/or incentive
payments for fiscal 2000 represent only the portion of the fiscal year that
Employee was employed by the Company. As an illustration only, if Employee
were to be awarded 100% of his targeted annual incentive compensation in
fiscal 2000, the Total Short-Term Compensation amount for that fiscal year
would be $2,000,000.
(j) RIGHT TO OFFSET. In the event of any termination of Employee's
employment under this Agreement (including in the event of non-renewal),
Employee shall have no obligation to seek other employment; PROVIDED, that in
the event that Employee secures employment or any consulting or other similar
arrangement during the period that begins on the first anniversary of the
effective date of termination of the Term and ends when no further payment is
due pursuant to the provisions of this Section 6 (the "Offset Period"), the
Company shall have the right to reduce the amounts to be paid hereunder
during the Offset Period by the amount of Employee's earnings from such other
employment or consulting or similar arrangement during the Offset Period.
This Section 6(j) shall not apply in the event of a "Change in Control"
situation, as provided for a Section 16A below.
7
<PAGE>
7. RESTRICTION ON COMPETITION.
(a) During the Term, thereafter if Employee continues to be
employed by the Company and/or any other entity owned by or affiliated with
the Company on an "at will" basis for the duration of such period, and
thereafter for a period equal to the longer of (x) one year, or (y) the period
during which Employee is receiving any severance pay from the Company (which
shall be deemed to include payments made to Employee in connection with a
Change in Control transaction, pursuant to Section 16A below), Employee shall
not, directly or indirectly, for himself or on behalf of or in conjunction
with any other person, company, partnership, corporation, business, group, or
other entity (each, a "Person"):
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant, advisor, or sales representative, in any
Competing Business (as such term is defined below) located within 100 miles
of any location where the Company conducts business (the "Territory");
(ii) call upon any Person who is, at that time, within the
Territory, an employee of the Company for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company; or
(iii) call upon any Person who or that is, at that time, or
has been, within one year period to that time, a customer of the Company
within the Territory for the purpose of soliciting or selling products or
services in direct competition with the Company within the Territory.
(b) The foregoing covenants shall not be deemed to prohibit
Employee from acquiring as an investment interest of not more than one
percent of the capital stock of a competing business, whose stock is traded
on a national securities exchange or through the automated quotation system
of a registered securities association.
(c) For purposes of this Section 7, the term "Competing Business"
shall mean any business that is materially involved in any of the following:
(i) business-to-business distribution of office supplies, (ii)
business-to-business distribution of office furniture, (iii) office coffee
service, (iv) vending service for businesses, (v) the operation of postal,
pack-and-ship, and business service centers competitive with those being
franchised by Mail Boxes, Etc., and (vi) in New Zealand and Australia only,
commercial printing and retail book and stationery stores. In addition, and
without limiting the breadth of the foregoing enumeration of competitive
businesses, each of the following companies (as well as their respective
successors) will be considered a Competing Business: Corporate Express, BT
Office Products, Boise Office Products, Staples, Office Depot, OfficeMax,
United Stationers, and S.P. Richards Co. In addition, for purposes of this
Section 7, the term "Company" shall be deemed to include US Office Products
Company and all of its subsidiaries and affiliates. During the Term, as and
to the extent the business of the Company changes, the parties will cooperate
to supplement this definition (whether by amendment, addition, or deletion,
as appropriate) so that it reasonably reflects the business of the Company.
(d) If Employee has no actual knowledge that his actions violate
the terms of this Section 7, Employee shall not be deemed to have breached
the restrictive covenants contained
8
<PAGE>
herein if, promptly after being notified by the Company of such breach,
Employee ceases the prohibited actions.
(e) The covenants in the Section 7 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions
of any other covenant. If any provision of this Section 7 relating to the
time period or geographic area of the restrictive covenants shall be declared
by a court of competent jurisdiction to exceed the maximum time period or
geographic area, as applicable, that such court deems reasonable and
enforceable, said time period or geographic area shall be deemed to be, and
thereafter shall become, the maximum time period or largest geographic area
that such court deems reasonable and enforceable and this Agreement shall
automatically be considered to have been amended and revised to reflect such
determination.
(f) All of the covenants in this Section 7 shall be construed as
an agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants; PROVIDED, that
upon the failure of the Company to make any payments required under this
Agreement, Employee may, upon 30-days' prior written notice to the Company,
unless the Company cures its failure within the 30-day notice period, waive
his right to receive any additional compensation pursuant to this Agreement
and engage in any activity prohibited by the covenants of this Section 7. It
is specifically agreed that the period stated at the beginning of this
Section 7, during which the agreements and covenants of Employee made in this
Section 7 shall be effective, shall be computed by excluding from such
computation any time during which Employee is in violation of any provision
of this Section 7.
(g) Employee has carefully read and considered the provisions of
this Section 7 and, having done so, agrees that the restrictive covenants in
this Section 7 impose a fair and reasonable restraint on Employee and are
reasonably required to protect the interests of the Company, and it's
respective officers, directors, employees, and stockholders. It is further
agreed that the Company and Employee intend that such covenants be construed
and enforced in accordance with the changing activities, business, and
locations of the Company throughout the term of these covenants.
7A. RELINQUISHMENT OF SEVERANCE. At Employee's option, if he is to
receive severance from the Company for a period of more than one year from
the date of termination of the Term, he may elect to relinquish his right
to receive additional severance from the Company at any time after the first
anniversary of the effective date of termination of the Term, and in the
event of such election the restrictive covenants contained in Section 7 above
shall terminate on the date on which such severance payments are ceased. If
Employee elects to exercise this right, he shall give the Company no less
than 10 business days' prior written notice of such election, which election
may in no event become effective prior to the first anniversary of the
effective date of termination of the Term. If requested by the Company,
Employee shall enter into a written agreement setting forth a full and
complete release of the Company from additional severance obligations in
exchange for the early termination of the provisions of Section 7 above.
8. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business, financial, technical, economic, sales,
and/or other types of proprietary business information relating
9
<PAGE>
to the Company (including all trade secrets), in whatever form, whether oral,
written, or electronic (collectively, the "Confidential Information"), to
which Employee has, or is given (or has had or been given), access as a
result of his employment by the Company. It is agreed that the Confidential
Information is confidential and proprietary to the Company because such
Confidential Information encompasses technical know-how, trade secrets, or
technical, financial, organizational, sales, or other valuable aspects of the
Company's business and trade, including, without limitation, technologies,
products, processes, plans, clients, personnel, operations, and business
activities. This restriction shall not apply to any Confidential Information
that (a) becomes known generally to the public through no fault of the
Employee; (b) is required by applicable law, legal process, or any order or
mandate of a court or other governmental authority to be disclosed; or (c)
is reasonably believed by Employee, based upon the advice of legal counsel,
to be required to be disclosed in defense of a lawsuit or other legal or
administrative action brought against Employee; PROVIDED, that in the case of
clauses (b) or (c), Employee shall give the Company reasonable advance
written notice of the Confidential Information intended to be disclosed and
the reasons and circumstances surrounding such disclosure, in order to permit
the Company to seek a protective order or other appropriate request for
confidential treatment of the applicable Confidential Information.
9. INVENTIONS. Employee shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, that are conceived or made
by Employee, solely or jointly with another, during the period of employment
or within one year thereafter, and that are directly related to the business
or activities of the Company and that Employee conceives as a result of his
employment by the Company, regardless of whether or not such ideas,
inventions, or improvements qualify as "works for hire." Employee hereby
assigns and agrees to assign all his interests therein to the Company or its
nominee. Whenever requested to do so by the Company, Employee shall execute
any and all applications, assignments, or other instruments that the Company
shall deem necessary to apply for and obtain Letters Patent of the United
States or any foreign country or to otherwise protect the Company's interest
therein.
10. RETURN OF COMPANY PROPERTY. Promptly upon termination of
Employee's employment by the Company for any reason or no reason, Employee or
Employees' personal representative shall return to the Company (a) all
Confidential Information; (b) all other records, designs, patents, business
plans, financial statements, manuals, memoranda, lists, correspondence,
reports, records, charts, advertising materials, and other data or property
delivered to or compiled by Employee by or on behalf of the Company or it's
respective representatives, vendors, or customers that pertain to the
business of the Company, whether in paper, electronic, or other form; and (c)
all keys, credit cards, vehicles, and other property of the Company.
Employee shall not retain or cause to be retained any companies of the
foregoing. Employee hereby agrees that all of the foregoing shall be and
remain the property of the Company and be subject at all times to its
discretion and control.
10A. INDEMNIFICATION. If Employee is made a party to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by the Company against
Employee), by reason of the fact that he is or was performing services under
this Agreement, or as an officer or director of the Company, or at the
direction or request of the Company as an officer or director of a subsidiary
or affiliate of the Company (and whether or not the basis of such action is
the Employee's action in such official capacity), then to the fullest extent
permitted by the Delaware General Corporation Law, and unless the Board
determines that indemnification is improper pursuant to the terms of the
10
<PAGE>
Company's By-Laws, the Company shall indemnify Employee against all expenses
(including attorneys' fees), judgments, fines, and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith and such indemnification shall continue as to the Employee even if
he has ceased to be an employee, officer, or director of the Company (or of
the applicable subsidiary or affiliate) and shall inure to the benefit of his
heirs and estate. Except where indemnification is determined to be improper,
the Company shall advance to Employee all reasonable costs and expenses
directly related to the defense of such action, suit, or proceeding within 20
days after a written request therefore by the Employee to the Company,
PROVIDED that such request shall include an undertaking by the Employee to
repay such advances if it shall ultimately be determined that Employee is or
was not entitled to be indemnified by the Company against such costs and
expenses. If both Employee and the Company are made a party to the same
third-party action, complaint, suit, or proceeding, the Company agrees to
engage competent legal representation, and Employee agrees to use the same
representation; PROVIDED, that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel. The provisions of this Section 10A are in
addition to, and not in derogation of, the indemnification provisions of the
Company's By-Laws.
11. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to
the Company that the execution of this Agreement by Employee, his employment
by the Company, and the performance of his duties hereunder will not violate
or be a breach of any agreement with a former employer, client or any other
Person. Further, Employee agrees to indemnify and hold harmless the Company
and its officers, directors, and representatives for any claim, including,
but not limited to, reasonable attorneys' fees and expenses of investigation,
of any such third party that such third party may now have or may hereafter
come to have against the Company or such other persons, based upon or arising
out of any non-competition agreement, invention, secrecy, or other agreement
between Employee and such third party that was in existence as of the date of
this Agreement. To the extent that Employee had any oral or written
employment agreement or understanding with the Company, this Agreement shall
automatically supersede such agreement or understanding, and upon execution
of this Agreement by Employee and the Company, such prior agreement or
understanding automatically shall be deemed to have been terminated and shall
be null and void.
12. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience, and skills. Employee agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
This Agreement may not be assigned or transferred by the Company without the
prior written consent of Employee. Subject to the preceding two sentences,
this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties hereto and their respective heirs, legal
representatives, successors, and assigns.
13. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not a
promise of future employment. Employee has no oral representations,
understandings, or agreements with the Company or any of its officers,
directors, or representatives covering the same subject matter as this
Agreement. This Agreement is the final, complete, and exclusive statement and
expression of the agreement between the Company and Employee with respect to
the subject matter hereof and cannot be varied, contradicted, or supplemented
by evidence of any prior or contemporaneous oral or written agreements. This
written Agreement may not be later modified except by a further writing
signed by a duly authorized officer of the Company and Employee,
11
<PAGE>
and no term of this Agreement may be waived except by a writing signed by the
party waiving the benefit of such term.
14. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: Chairman of the Board of Directors
with a copy to: U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attn: General Counsel
To Employee: Mr. Warren D. Feldberg
75 Buttrick's Hill Road
Concord, Massachusetts 01742
with a copy to: Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attn: John N. Turitzin, Esq.
Notice shall be deemed given and effective three days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or, if sent by express delivery, hand
delivery, or facsimile, when actually received. Either party may change the
address for notice by notifying the other party of such change in accordance
with this Section 14.
15. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall
be given to the intent manifested by the portion held invalid or inoperative.
This severability provision shall be in addition to, and not in place of, the
provisions of Section 7(e) above. The paragraph hearings herein are for
reference purposes only and are not intended in any way to describe,
interpret, define or limit the extent or intent of the Agreement or of any
part hereof.
16A. CHANGE IN CONTROL.
(a) Subject to the term of this Section 16A, Employee understands
and acknowledges that the Company may be merged or consolidated with or into
another entity and that such entity shall automatically succeed to the rights
and obligations of the Company hereunder.
12
<PAGE>
(b) If, (i) within 180 days following the closing of a transaction
giving rise to a "Change in Control" (as defined below)(x) the Company
terminates the Term and Employee's employment without cause pursuant to
Section 6(d) above; or (y) Employee voluntarily resigns; or (ii) the Company
terminates the Term and Employee's employment without cause pursuant to
Section 6(d) above directly in connection with, and in anticipation of, the
completion of a "Change in Control" transaction, and such a "Change in
Control" transaction is in fact completed within 90 days of the effective
date of such termination of the Term, then Employee shall receive from the
Company, in lieu of any other severance under Section 6 above (but in
addition to other amounts referenced in Section 6(h) above, including COBRA
premium payments), an amount equal to 200% of Employee's Total Short-Term
Compensation for the most recently completed fiscal year. This amount shall
be paid within 15 business days of the date on which the Change in Control
transaction is completed. For purposes of this Section 16A(b), if Employee's
Total Short-Term Compensation for the most recently completed fiscal year
included an annual incentive payment of less than 100% of his annual
incentive compensation target for such fiscal year (pro-rated in the event of
a partial year), the payment under this Section 16A(b) shall be made as if
Employee had been paid annual incentive compensation equal to 100% of the
target in such fiscal year. All other exclusions from, and qualifications to,
the term "Total Short-Term Compensation," as contained in Section 6(i) above,
shall remain applicable.
(c) A "Change in Control" shall be deemed to have occurred if:
(i) any person (which includes any group, as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules promulgated thereunder),
other than the Company or an employee benefit plan of the
Company, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the 1934 Act) of
any voting security of the Company and immediately after
such acquisition such Person is, directly or indirectly,
the Beneficial Owner of voting securities representing 50%
or more of the total voting power of all of the
then-outstanding voting securities of the Company.
(ii) the individuals (A) who, as of the Commencement Date (the
"Original Directors") or (B) who thereafter are elected to
the Board and whose election, or nomination for election, to
the Board was approved by a vote of at least two-thirds (2/3)
of the Original Directors then still in office (such
directors becoming "Additional Original Directors"
immediately following their election) or (C) who are elected
to the Board and whose election, or nomination for election,
to the Board was approved by a vote of at least two-thirds
(2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also
becoming "Additional Original Directors" immediately
following their election) (such individuals being the
"Continuing Directors"), cease for any reason to constitute
a majority of the members of the Board;
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the
Company, a reverse stock split of outstanding voting
securities, or consummation of any such transaction if
stockholder approval is not sought or obtained, other than
any such transaction which would result in at least 75% of
the total
13
<PAGE>
voting power represented by the voting securities of the
surviving entity outstanding immediately after such
transaction being Beneficially Owned by at least 75% of
the holders of outstanding voting securities of the Company
immediately prior to the transaction, with the voting power
of each such continuing holder relative to other such
continuing holders not substantially altered in the
transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or a substantial
portion of the Company's assets (i.e., 50% or more of the
total assets of the Company).
Notwithstanding any other provision of the Section 16A to the contrary,
any transaction of a type (x) falling within clause (i) above that is
effected, led, or sponsored (solely or partially) by Clayton, Dubilier &
Rice, Inc. ("CD&R"), or any entity controlled or managed by, or affiliated
with, CD&R, and that otherwise would fall within such clause (i); or (y)
falling within clause (iii) above and in which CD&R or any entity controlled
or managed by, or affiliated with, CD&R, will retain Beneficial Ownership of
at least 20% of the outstanding voting securities of the Company (or the
surviving entity), shall not constitute a "Change in Control" for purposes of
this Section 16A.
(d) In the event that any payment or benefit to Employee or for
his benefit paid or payable or distributed or pursuant to the terms of this
Agreement or otherwise in connection with Employee's employment with the
Company (a "Payment" or "Payments") is an excess parachute payment (all
within the meaning of Section 280G(b) of the Internal Revenue Code of 1986,
as amended (the "Code")) with respect to the Company and would be subject to
the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then
Employee will be entitled to receive and additional payment (the "Gross-Up
Payment") in an amount such that after the payment by Employee of all taxes
imposed on the Gross-Up Payment (including interest and penalties, other
that interest and penalties imposed by reason of Employee's failure to file
timely a tax return or pay taxes due on his return, imposed with respect to
such taxes and the Excise Tax, and including any Excise Tax imposed upon the
Gross-Up Payment), Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments, and Employee shall be
responsible for paying the Excise Tax. The Gross-Up Payment will be due and
payable within 15 business days after Employee delivers a written request for
payment accompanied by documentation setting forth Employee's calculation of
the amount of taxes owed; PROVIDED, that the Company or its successor will not
be required to make the Gross-Up Payment more than 30 days before the date on
which the applicable taxes are due to be paid. Employee shall provide the
Company or its successor with such additional or supporting information as is
reasonably requested to permit an appropriate review and verification of the
applicable tax calculations.
16. EQUITABLE REMEDY. Because of the difficulty of measuring economic
losses to the Company as a result of a breach of the restrictive covenants
set forth in Sections 7, 8, 9, and 10, and because of the immediate and
irreparable damage that would be caused to the Company for which monetary
damages would not be a sufficient remedy, it is hereby agreed that in
addition to all other remedies that may be available to the Company at law or
in equity, the Company shall be entitled to specific performance and any
injunctive or other equitable relief as a remedy for any breach or threatened
breach of the aforementioned restrictive covenants.
14
<PAGE>
17. ARBITRATION. Any unresolved dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration
Association then in effect. The arbitrators shall not have the authority to
add to, detract from, or modify any provision hereof nor to award punitive
damages to any injured party. A decision by a majority of the arbitration
panel shall be final and binding. Judgment may be entered on the arbitrators'
award in any court having jurisdiction. the direct expense of any arbitration
proceeding shall be borne by the Company. Each party shall bear its own
counsel fees. The arbitration proceeding shall be held in the city where the
Company is located. Notwithstanding the foregoing, the Company shall be
entitled to seek injunctive or other equitable relief, as contemplated by
Section 16 above, from any court of competent jurisdiction, without the need
to resort to arbitration.
18. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Delaware, without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
duly executed as of the date first written above.
US OFFICE PRODUCTS COMPANY
By: /s/ Charles P. Pieper
------------------------
Name: Charles P. Pieper
Title: Chairman
EMPLOYEE:
/s/ Warren D. Feldberg
- -------------------------
Warren D. Feldberg
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN
THE COMPANY'S FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> APR-25-1999
<PERIOD-END> OCT-23-1999
<CASH> 29,296
<SECURITIES> 0
<RECEIVABLES> 345,442
<ALLOWANCES> (11,056)
<INVENTORY> 198,509
<CURRENT-ASSETS> 675,585
<PP&E> 388,476
<DEPRECIATION> (158,131)
<TOTAL-ASSETS> 1,989,599
<CURRENT-LIABILITIES> 370,039
<BONDS> 1,165,349
0
0
<COMMON> 37
<OTHER-SE> 425,402
<TOTAL-LIABILITY-AND-EQUITY> 1,989,599
<SALES> 642,511
<TOTAL-REVENUES> 642,511
<CGS> 463,381
<TOTAL-COSTS> 171,237<F1>
<OTHER-EXPENSES> 15,902<F2>
<LOSS-PROVISION> 990
<INTEREST-EXPENSE> 27,873
<INCOME-PRETAX> (36,872)
<INCOME-TAX> 9,449
<INCOME-CONTINUING> (27,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,423)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
<FN>
<F1>INCLUDES $5,188 OF OPERATING RESTRUCTURING COSTS.
<F2>INCLUDES $12,198 OF FOREIGN CURRENCY TRANSACTION LOSS.
</FN>
</TABLE>
