<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15( ) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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)
<TABLE>
<S> <C>
DELAWARE 52-1906050
(State of other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization.)
1025 THOMAS JEFFERSON STREET, N.W. 20007
SUITE 600 EAST (Zip Code)
WASHINGTON, D.C.
(Address of principal
executive offices)
</TABLE>
(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 8, 2000, there were 37,926,751 shares of common stock
outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
US OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet.................................. 2
October 28, 2000 (unaudited) and April 29, 2000
Consolidated Statement of Operations........................ 3
For the three months ended October 28, 2000 (unaudited)
and October 23, 1999 (unaudited) and the six months
ended October 28, 2000 (unaudited) and October 23, 1999
(unaudited)
Consolidated Statement of Cash Flows........................ 4
For the six months ended October 28, 2000 (unaudited) and
October 23, 1999 (unaudited)
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 41
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 42
Item 4. Submission of Matters to a Vote of Security Holders......... 42
Item 6. Exhibits and Reports on Form 8-K............................ 42
Signatures............................................................ 44
Exhibit Index......................................................... 45
</TABLE>
1
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 28, APRIL 29,
2000 2000
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 34,329 $ 39,711
Accounts receivable, less allowance for doubtful accounts
of $9,494 and $11,766, respectively..................... 221,304 259,287
Inventories, net.......................................... 115,704 155,206
Prepaid expenses and other current assets................. 100,022 89,184
---------- ----------
Total current assets.................................. 471,359 543,388
Property and equipment, net................................. 179,243 210,903
Intangible assets, net...................................... 606,276 791,393
Other assets................................................ 119,727 199,982
---------- ----------
Total assets.......................................... $1,376,605 $1,745,666
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 305,818 $ 78,956
Accounts payable.......................................... 128,180 156,840
Accrued compensation...................................... 35,909 39,861
Other accrued liabilities................................. 71,561 100,386
---------- ----------
Total current liabilities............................. 541,468 376,043
Long-term debt.............................................. 781,790 1,055,069
Other long-term liabilities and minority interests.......... 28,742 28,512
---------- ----------
Total liabilities..................................... 1,352,000 1,459,624
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, 73,262 and 73,262 shares issued and
outstanding, respectively...............................
Common stock, $.001 par value, 500,000,000 shares
authorized, 37,616,147 and 37,100,642 shares issued,
37,457,107 and 36,941,602 shares outstanding, 159,040
and 159,040 shares held in treasury, respectively....... 37 37
Additional paid-in capital................................ 728,607 728,443
Accumulated other comprehensive loss...................... (75,636) (120,506)
Accumulated deficit....................................... (628,403) (321,932)
---------- ----------
Total stockholders' equity............................ 24,605 286,042
---------- ----------
Total liabilities and stockholders' equity............ $1,376,605 $1,745,666
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
OCTOBER 28, OCTOBER 23, OCTOBER 28, OCTOBER 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues........................................ $ 533,283 $642,511 $1,079,055 $1,268,014
Cost of revenues................................ 397,023 463,381 799,307 914,102
--------- -------- ---------- ----------
Gross profit.................................. 136,260 179,130 279,748 353,912
Selling, general and administrative expenses.... 132,270 160,787 268,753 319,396
Amortization expense............................ 13,011 6,252 24,867 12,242
Impaired asset write-offs....................... 30,245 30,245
Operating restructuring costs................... 2,349 5,188 5,143 7,097
--------- -------- ---------- ----------
Operating income (loss)....................... (41,615) 6,903 (49,260) 15,177
Interest expense................................ 29,391 27,873 59,176 55,590
Interest income................................. (592) (455) (962) (1,525)
Unrealized foreign currency transaction loss.... 45,074 12,198 64,742 25,754
Equity in (income) loss of affiliates........... (852) 964 1,316 1,991
Loss on sale or closure of businesses........... 143,290 3,066 145,846 4,020
Other (income) expense.......................... (92) 129 (3,576) 598
--------- -------- ---------- ----------
Loss before provision for (benefit from) income
taxes......................................... (257,834) (36,872) (315,802) (71,251)
Provision for (benefit from) income taxes....... 3,522 (9,449) (9,331) (16,301)
--------- -------- ---------- ----------
Net loss........................................ $(261,356) $(27,423) $ (306,471) $ (54,950)
========= ======== ========== ==========
Basic and diluted per share amounts:
Net loss...................................... $ (6.98) $ (0.75) $ (8.22) $ (1.49)
========= ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
OCTOBER 28, OCTOBER 23,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(306,471) $(54,950)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 45,706 33,793
Loss on sale or closure of businesses................... 145,846 4,020
Unrealized foreign currency transaction loss............ 64,742 25,754
Impaired asset write-offs............................... 30,245
Gain on investments..................................... (3,999)
Equity in loss of affiliates............................ 1,316 1,991
Changes in assets and liabilities (net of changes in
assets and liabilities related to business
combinations):
Accounts receivable, net.............................. (6,644) (39,973)
Inventories, net...................................... (13,479) (5,126)
Prepaid expenses and other current assets............. (7,007) (15,018)
Accounts payable...................................... (1,880) 30,492
Accrued liabilities................................... (5,596) (3,228)
--------- --------
Net cash used in operating activities............... (57,221) (22,245)
--------- --------
Cash flows from investing activities:
Proceeds from sale of businesses.......................... 117,680 13,590
Additions to property and equipment, net of disposals..... (18,700) (35,632)
Proceeds from sale of investments......................... 7,496
Cash paid in acquisition, net of cash received............ (2,050) (9,329)
Investments in affiliates................................. (1,000) (4,000)
Other..................................................... (2,604) 1,313
--------- --------
Net cash provided by (used in) investing
activities........................................ 100,822 (34,058)
--------- --------
Cash flows from financing activities:
Proceeds from short-term debt, net........................ 27,181 11,039
Payments of long-term debt................................ (73,209) (2,140)
Proceeds from issuance of long-term debt.................. 520
Proceeds from issuance of common stock.................... 164 460
--------- --------
Net cash provided by (used in) financing
activities........................................ (45,864) 9,879
--------- --------
Effect of exchange rates on cash and cash equivalents..... (3,119) (382)
--------- --------
Net decrease in cash and cash equivalents................. (5,382) (46,806)
Cash and cash equivalents, beginning of period............ 39,711 76,102
--------- --------
Cash and cash equivalents, end of period.................. $ 34,329 $ 29,296
========= ========
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................ $ 1,368 $ 2,952
Cash paid for interest.................................... $ 61,241 $ 52,817
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 28, 2000
(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 US Office Products
Company (the "Company" or "US Office Products"), the companies acquired in
business combinations accounted for under the purchase method from their
respective acquisition dates and the companies sold through their respective
sale dates. The Company's operations consist of US Office Products-North America
(which includes office supplies and office furniture businesses referred to
herein as "US Office Products-North America" or "USOP-NA"), vending and office
coffee service businesses ("USRefresh"), 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.
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. Certain reclassifications have been made to fiscal 2000 to
conform to the current period presentation. 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 29, 2000, included in the Company's Annual
Report on Form 10-K, as amended.
NOTE 2--LIQUIDITY
During September 2000, the Company further amended its credit facility to
provide the Company with additional liquidity. As a result of the amendment, the
Company is also required to reduce the amounts outstanding under its term loans
through the sale of $50,000 of additional assets before December 8, 2000 (see
"Note 12 -- Subsequent Events") and $150,000 of additional assets before
January 29, 2001. Should the Company fail to reduce the term loans by such
amounts, it would be in violation of its financial covenants under the credit
facility. If not waived, this violation could trigger acceleration of all
amounts outstanding.
As a result of the Company's obligation to reduce its outstanding balance
under the term loans by $200,000 before January 29, 2001, the Company has
reclassified $200,000 of debt from long-term debt to short-term debt. Also, in
order to meet this requirement of the amended credit facility, the Company is
pursuing the sale of certain of its assets and businesses. Given the need to
sell assets on an expedited basis, it is possible that the Company may not be
able to realize the carrying value of such assets in a sale transaction.
NOTE 3--CHANGES IN ESTIMATES
During the first quarter of fiscal 2001, the Company revised the
amortization period for goodwill associated with all of its businesses, except
MBE, from principally 40 years down to 15 years. The change in the amortization
period resulted in an increase in amortization expense during the six month
period ended October 28, 2000 of approximately $15,021. The additional
amortization expense increased net loss by $15,021, or $0.40 loss per share, for
the six months ended October 28, 2000.
5
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 3--CHANGES IN ESTIMATES (CONTINUED)
During the second quarter of fiscal 2001, the Company established valuation
allowances against deferred tax assets of approximately $17,372 related to
foreign net operating losses generated by the Blue Star Group's Australian
operations and the Company's domestic state net operating losses as it is more
likely than not these items will expire before the Company is able to realize
their benefits.
NOTE 4--IMPAIRED ASSET WRITE-OFFS
During the three months ended October 28, 2000, the Company evaluated the
recoverability of its equity interest in Dudley due to continuing negative
operating results at that business. The Company determined that the carrying
value of the investment exceeded the Company's proportionate share of Dudley's
future undiscounted cash flow projections. As a result, the Company recorded an
impairment loss of $27,863, which reduced the Company's investment by the amount
equal to the excess of the carrying value of the investment over the Company's
proportionate share of Dudley's future undiscounted cash flows. The Company's
investment in Dudley is included in other assets on the consolidated balance
sheet.
In addition, during the three months ended October 28, 2000, the Company
made the decision to close one of its furniture businesses. As a result of this
decision, future undiscounted cash flow projections were less than the carrying
value of the related unamortized goodwill, thus indicating impairment.
Therefore, the Company recorded an impairment loss of $2,382, representing the
carrying value of the unamortized goodwill.
NOTE 5--STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the six months ended October 28,
2000, were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 29, 2000.............. $ 286,042
Issuance of common stock in conjunction with:
Employee stock purchase plan............................ 164
Comprehensive loss........................................ (261,601)
---------
Stockholder's equity balance at October 28, 2000............ $ 24,605
=========
</TABLE>
6
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
OCTOBER 28, OCTOBER 23, OCTOBER 28, OCTOBER 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss......................................... $(261,356) $(27,423) $(306,471) $(54,950)
Other comprehensive income (loss):
Cumulative translation adjustment:
Foreign currency translation adjustments..... (2,945) 111 (3,310) 387
Reclassification adjustment for sale of
investment in foreign subsidiary........... 65,260 65,260
Unrealized losses on securities:
Unrealized holding losses arising during the
period..................................... (281) (13,081)
Reclassification adjustment for gains
included in net loss....................... (413) (3,999)
--------- -------- --------- --------
Total other comprehensive income............... 61,621 111 44,870 387
--------- -------- --------- --------
Comprehensive loss............................... $(199,735) $(27,312) $(261,601) $(54,563)
========= ======== ========= ========
</TABLE>
Foreign currency translation adjustments are recorded as other comprehensive
income (loss), a component of stockholders' equity. Translation losses are
realized upon the divestiture of foreign subsidiaries and are recognized in the
consolidated statement of operations. During the three months ended October 28,
2000, the Company completed the divestiture of the Blue Star Group's New Zealand
and Australian office supplies business ("Blue Star Business Supplies") and
realized $65,260 in translation losses. These translation losses were
reclassified from accumulated other comprehensive loss to the consolidated
statement of operations during the three month period ended October 28, 2000 and
were recorded as a component of the loss on sale or closure of businesses.
In fiscal 2000, MBE, as part of a strategic business relationship, invested
$4,000 in Stamps.com (for 1,317,973 shares of Stamps.com common stock). The
price of Stamps.com stock declined from $16.00 per share at April 29, 2000 to
$3.28 per share at October 28, 2000. During the three months ended October 28,
2000, the Company sold 207,505 shares of Stamps.com common stock, at an average
price of $5.02 per share for total proceeds of $1,043. In addition, during the
three months ended July 29, 2000 the Company sold 945,000 shares of Stamps.com
common stock, at an average price of $6.83 per share for total proceeds of
$6,453. As of October 28, 2000, the Company's remaining investment in Stamps.com
common stock totaled 165,468 shares with a fair market value of approximately
$543 ($3.28 per share). Included in the Company's investment in Stamps.com is
$5,000 for warrants to purchase 658,986 additional shares of Stamps.com common
stock at an exercise price of $6.07 per share. Because the common stock
underlying the warrants are not registered securities and MBE cannot freely sell
the shares of common stock underlying the warrants until after April 2001, the
warrants are carried at a cost of $5,000 and are included in the Company's
investment in other assets on the consolidated balance sheet.
7
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 5--STOCKHOLDERS' EQUITY (CONTINUED)
Since the Company considers its investment in Stamps.com to be an
available-for-sale security, the unrealized loss on the Company's investment in
Stamps.com during the six months ended October 28, 2000 was recorded as other
comprehensive loss, a component of stockholders' equity, and any realized gain
or loss from the sale of its investment was recognized in the consolidated
statement of operations. Therefore, the $413 and $3,999 of realized gains on the
sale of Stamps.com common stock during the three and six month periods ended
October 28, 2000, respectively, were reclassified from accumulated other
comprehensive loss and were recorded as other (income) expense in the
consolidated statement of operations during the three and six month periods
ended October 28, 2000, respectively. The unrealized holding losses that arose
during the three and six month periods ended October 28, 2000 from the decline
in the fair market value of MBE's investment in Stamps.com totaled $281 and
$13,081, respectively.
NOTE 6--EARNINGS PER SHARE
The following information presents the Company's computations of basic and
diluted loss per share 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 28, 2000:
Basic and diluted loss per share........................ $(261,356) 37,457 $(6.98)
======
Three months ended October 23, 1999:
Basic and diluted loss per share........................ $ (27,423) 36,800 $(0.75)
======
Six months ended October 28, 2000:
Basic and diluted loss per share........................ $(306,471) 37,281 $(8.22)
======
Six months ended October 23, 1999:
Basic and diluted loss per share........................ $ (54,950) 36,768 $(1.49)
======
</TABLE>
As a result of the net loss for the three and six month periods ended
October 28, 2000 and October 23, 1999, 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, the two series
of convertible debt securities outstanding and the convertible preferred stock
outstanding during the periods were anti-dilutive.
NOTE 7--BUSINESS DIVESTITURES AND ACQUISITIONS
The Company completed two business divestitures during the three months
ended October 28, 2000 for total proceeds of $109,439. The two business
divestitures included the sale of Blue Star Business Supplies and one furniture
business. The proceeds from these divestitures were used to reduce the Company's
outstanding debt. The Company recorded a $141,906 loss on the sale of Blue Star
Business
8
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 7--BUSINESS DIVESTITURES AND ACQUISITIONS (CONTINUED)
Supplies. The loss included the realization of $65,260 in currency translation
losses related to the decline in the New Zealand and Australian dollars since
the dates the Blue Star Business Supplies businesses were acquired, a loss on
the net assets of Blue Star Business Supplies totaling $57,594, substantially
all of which is attributed to goodwill, and a loss of $19,052 on the Company's
remaining 40% interest in Blue Star Business Solutions, which was transferred to
companies controlled by Eric Watson, the former CEO of the Blue Star Group. In
consideration for the Company's interest in this business, Mr. Watson agreed to
relinquish potential claims against the Company and agreed to limitations on his
contractual rights to participate in any future divestitures by the Blue Star
Group.
In addition, during the three months ended July 29, 2000, the Company
completed two business divestitures for total proceeds of $9,782, including
$8,241 of cash, and acquired one business for $2,300, including $2,000 of cash,
which was accounted for under the purchase method.
During the six months ended October 23, 1999, the Company acquired one
business, which was accounted for under the purchase method for a purchase price
of $9,329 and completed five business divestitures for total proceeds of
$13,590.
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 28, 2000 and
October 23, 1999. These results include the Company's consolidated financial
statements and the results of the companies acquired in business combinations
accounted for under the purchase method, 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 2000. The results presented below include
certain pro forma adjustments to reflect the amortization of intangible assets
and the inclusion of an appropriate income tax provision or benefit on all
earnings and losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
OCTOBER 28, OCTOBER 23, OCTOBER 28, OCTOBER 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $ 486,592 $501,400 $ 958,205 $972,114
Net loss......................................... (132,088) (28,424) (175,652) (42,447)
Basic and diluted loss per share................. (3.53) (0.76) (4.71) (1.14)
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions and business divestitures occurred at the
beginning of fiscal 2000 or the results that may occur in the future.
NOTE 8--SEGMENT REPORTING
BUSINESS SEGMENTS
The Company has six 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;
9
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 8--SEGMENT REPORTING (CONTINUED)
- NORTH AMERICAN OFFICE FURNITURE--a group of operating companies that offer
middle-market and contract furniture products and related services;
- NORTH AMERICAN CORPORATE--the corporate costs associated with USOP-NA,
including finance, human resources, legal, merchandising, sales and
marketing, catalog production, supply chain management, administration,
and information technology;
- USREFRESH--a group of operating companies that offer vending and office
coffee services in North America and includes the corporate costs
associated with the USRefresh management team;
- BLUE STAR GROUP--a group of operating companies that include business
supplies, print and consumer retailing operations that operate in New
Zealand and Australia and includes the corporate costs associated with the
Blue Star Group management team. (The business supplies operations were
sold in October 2000 and are included in the results of operations of the
Blue Star Group through the date of divestiture);
- 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 US Office Products Parent Company, a specialty retail
business, and the Company's equity interests in Dudley and the technology
business formerly owned by the Blue Star Group ("Business Solutions,") which was
disposed of in October 2000 as part of the sale of Blue Star Business Supplies.
During July 2000, the Company shut down its standalone e-commerce business and
has integrated certain of the technology and operations of the USOPNET.com
business into the North American Office Supplies business. Prior to its closure,
the e-commerce business was included in Other. Eliminations consist of the
elimination of the Company's investments in subsidiaries.
At the beginning of fiscal 2001, the Company reorganized the structure of
its operations in North America. It combined the North American office supplies
and office furniture businesses, as well as a reorganized corporate management
group for North American operations into a new business unit, US Office
Products-North America. During fiscal 2000, the Company's North American
operations had also included USRefresh, the specialty retail business and the
Company's USOPNET.com e-commerce business. As a result of the change, and in
order to permit a useful discussion of prior year comparative results, the
Company has restated the fiscal 2000 business segment results of operations and
other significant items to reflect the organizational structure implemented at
the start of fiscal 2001.
Management measures the performance of the business segments based on
several factors, including revenues, gross profit, operating income (loss)
before impaired asset write-offs and restructuring costs 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
10
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 8--SEGMENT REPORTING (CONTINUED)
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the fiscal year ended April 29, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 28, 2000
-------------------------------------------------------------------------------
US OFFICE PRODUCTS-NORTH AMERICA
-------------------------------------------
OFFICE OFFICE BLUE STAR
SUPPLIES FURNITURE CORPORATE SUBTOTAL USREFRESH GROUP MBE
-------- --------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $256,861 $102,315 $ 395 $359,571 $ 31,076 $108,425 $ 22,173
Gross profit.................. 63,955 20,126 205 84,286 7,766 28,777 11,459
Depreciation and
amortization................ 6,907 1,556 2,302 10,765 2,291 7,933 2,073
Operating income (loss) before
impaired asset write-offs
and restructuring costs..... 7,404 1,263 (11,965) (3,298) 298 (3,862) 1,992
EBITDA(a)..................... 14,311 2,819 (9,663) 7,467 2,589 4,071 4,065
Other significant items:
Identifiable assets......... 397,213 159,810 97,080 654,103 101,675 234,865 322,038
Net capital expenditures.... 42 66 2,262 2,370 2,622 2,617 706
<CAPTION>
THREE MONTHS ENDED OCTOBER 28, 2000
----------------------------------------
CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues...................... $ 12,038 $ 533,283
Gross profit.................. 3,972 136,260
Depreciation and
amortization................ 266 23,328
Operating income (loss) before
impaired asset write-offs
and restructuring costs..... (4,151) (9,021)
EBITDA(a)..................... (3,885) 14,307
Other significant items:
Identifiable assets......... 1,032,909 $(968,985) 1,376,605
Net capital expenditures.... 108 8,423
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 23, 1999
-------------------------------------------------------------------------------
US OFFICE PRODUCTS-NORTH AMERICA
-------------------------------------------
OFFICE OFFICE BLUE STAR
SUPPLIES FURNITURE CORPORATE SUBTOTAL USREFRESH GROUP MBE
-------- --------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $266,021 $103,662 $ 671 $370,354 $ 27,611 $189,977 $ 20,363
Gross profit.................. 70,667 22,203 1,612 94,482 6,256 58,084 11,066
Depreciation and
amortization................ 4,386 968 1,565 6,919 1,786 6,292 1,971
Operating income (loss) before
restructuring costs......... 14,320 4,387 (11,708) 6,999 178 4,298 1,929
EBITDA(a)..................... 18,706 5,355 (10,143) 13,918 1,964 10,590 3,900
Other significant items:
Identifiable assets......... 452,608 176,255 35,501 664,364 82,784 729,028 316,582
Net capital expenditures.... (636) 315 9,398 9,077 1,632 9,114 474
<CAPTION>
THREE MONTHS ENDED OCTOBER 23, 1999
----------------------------------------
CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues...................... $ 34,206 $ 642,511
Gross profit.................. 9,242 179,130
Depreciation and
amortization................ 560 17,528
Operating income (loss) before
restructuring costs......... (1,313) 12,091
EBITDA(a)..................... (753) 29,619
Other significant items:
Identifiable assets......... 1,155,855 $(959,014) 1,989,599
Net capital expenditures.... 1,534 21,831
</TABLE>
11
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 8--SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 28, 2000
-------------------------------------------------------------------------------
US OFFICE PRODUCTS-NORTH AMERICA
-------------------------------------------
OFFICE OFFICE BLUE STAR
SUPPLIES FURNITURE CORPORATE SUBTOTAL USREFRESH GROUP MBE
-------- --------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $504,471 $201,507 $ 1,023 $707,001 $ 59,208 $248,869 $ 41,564
Gross profit.................. 127,668 41,470 53 169,191 14,937 66,616 21,756
Depreciation and
amortization................ 12,498 3,382 4,380 20,260 4,503 16,211 4,133
Operating income (loss) before
impaired asset write-offs
and restructuring costs..... 15,033 3,605 (23,481) (4,843) 542 (5,824) 4,893
EBITDA(a)..................... 27,531 6,987 (19,101) 15,417 5,045 10,387 9,026
Other significant items:
Identifiable assets......... 397,213 159,810 97,080 654,103 101,675 234,865 322,038
Net capital expenditures.... 210 289 6,049 6,548 5,668 5,464 908
<CAPTION>
SIX MONTHS ENDED OCTOBER 28, 2000
----------------------------------------
CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues...................... $ 22,413 $1,079,055
Gross profit.................. 7,248 279,748
Depreciation and
amortization................ 599 45,706
Operating income (loss) before
impaired asset write-offs
and restructuring costs..... (8,640) (13,872)
EBITDA(a)..................... (8,041) 31,834
Other significant items:
Identifiable assets......... 1,032,909 $(968,985) 1,376,605
Net capital expenditures.... 112 18,700
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 23, 1999
-------------------------------------------------------------------------------
US OFFICE PRODUCTS-NORTH AMERICA
-------------------------------------------
OFFICE OFFICE BLUE STAR
SUPPLIES FURNITURE CORPORATE SUBTOTAL USREFRESH GROUP MBE
-------- --------- --------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $515,259 $198,380 $ 1,163 $714,802 $ 54,502 $391,488 $ 38,226
Gross profit.................. 138,362 42,707 1,882 182,951 13,254 119,721 20,508
Depreciation and
amortization................ 7,910 2,606 2,286 12,802 3,150 12,778 3,926
Operating loss before
restructuring costs......... 26,984 6,103 (23,297) 9,790 1,866 10,648 3,224
EBITDA(a)..................... 34,894 8,709 (21,011) 22,592 5,016 23,426 7,150
Other significant items:
Identifiable assets......... 452,608 176,255 35,501 664,364 82,784 729,028 316,582
Net capital expenditures.... 58 640 14,394 15,092 2,916 14,605 683
<CAPTION>
SIX MONTHS ENDED OCTOBER 23, 1999
----------------------------------------
CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues...................... $ 68,996 $1,268,014
Gross profit.................. 17,478 353,912
Depreciation and
amortization................ 1,137 33,793
Operating loss before
restructuring costs......... (3,254) 22,274
EBITDA(a)..................... (2,117) 56,067
Other significant items:
Identifiable assets......... 1,155,855 $(959,014) 1,989,599
Net capital expenditures.... 2,336 35,632
</TABLE>
----------------------------------
(a) EBITDA represents earnings before interest expense, interest income,
provision for (benefit from) income taxes, depreciation expense,
amortization expense, impaired asset write-offs, operating restructuring
costs, unrealized foreign currency transaction loss, equity in (income) loss
of affiliates, loss on sale or closure of businesses and other (income)
expense. 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.
12
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 8--SEGMENT REPORTING (CONTINUED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
NEW ZEALAND
NORTH AND
AMERICA AUSTRALIA TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 28, 2000:
Revenues................................................. $ 424,858 $108,425 $ 533,283
Operating loss before impaired asset write-offs and
restructuring costs.................................... (5,159) (3,862) (9,021)
Identifiable assets of continuing operations at
period-end............................................. 1,209,512 167,093 1,376,605
THREE MONTHS ENDED OCTOBER 23, 1999:
Revenues................................................. $ 452,534 $189,977 $ 642,511
Operating income before restructuring costs.............. 7,793 4,298 12,091
Identifiable assets of continuing operations at
period-end............................................. 1,260,571 729,028 1,989,599
SIX MONTHS ENDED OCTOBER 28, 2000:
Revenues................................................. 830,186 248,869 $1,079,055
Operating loss before impaired asset write-offs and
restructuring costs.................................... (8,048) (5,824) (13,872)
Identifiable assets of continuing operations at
period-end............................................. 1,209,512 167,093 1,376,605
SIX MONTHS ENDED OCTOBER 23, 1999:
Revenues................................................. $ 876,526 $391,488 $1,268,014
Operating income before restructuring costs.............. 11,626 10,648 22,274
Identifiable assets of continuing operations at
period-end............................................. 1,260,571 729,028 1,989,599
</TABLE>
NOTE 9--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 Company's credit facility and the senior subordinated
notes due 2008. 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.
13
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 28, 2000
----------------------------------------------------------------------------------
US OFFICE
PRODUCTS COMPANY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,261 $ 15,741 $ 17,327 $ 34,329
Accounts receivable, less allowance for
doubtful accounts.................... 199,486 21,818 221,304
Inventories, net....................... 73,909 41,785 $ 10(b) 115,704
Prepaid expenses and other current
assets............................... 77,476 16,526 6,020 100,022
---------- ---------- --------- --------- ----------
Total current assets............... 78,737 305.662 86,950 10 471,359
Property and equipment, net.............. 5,480 105,740 68,433 (410)(b) 179,243
Intangible assets, net................... 518,881 87,395 606,276
Investment in subsidiaries............... 968,985 (968,985)(a)
Other assets............................. 48,759 46,975 23,993 119,727
---------- ---------- --------- --------- ----------
Total assets....................... $1,101,961 $ 977,258 $ 266,771 $(969,385) $1,376,605
========== ========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................ $ 303,810 $ 1,055 $ 953 $ 305,818
Short-term intercompany balances....... 202,590 (202,576) (14)
Accounts payable....................... 3,919 96,883 27,378 128,180
Accrued compensation................... 7,929 21,298 6,682 35,909
Other accrued liabilities.............. 20,531 6,344 44,874 (188)(b) 71,561
---------- ---------- --------- --------- ----------
Total current liabilities.......... 538,779 (76,996) 79,873 (188) 541,468
Long-term debt........................... 775,020 4,327 2,443 781,790
Other long-term liabilities and minority
interests.............................. 24,089 4,710 (57) 28,742
Long-term intercompany balances.......... (193,355) 4,604 188,751
---------- ---------- --------- --------- ----------
Total liabilities.................. 1,144,533 (63,355) 271,010 (188) 1,352,000
---------- ---------- --------- --------- ----------
Stockholders' equity:
Preferred stock........................
Common stock........................... 37 37
Additional paid-in capital............. (384,982) 1,765,722 316,866 (968,999)(a) 728,607
Accumulated other comprehensive loss... (109,250) (16) 33,630 (75,636)
Retained earnings (accumulated
deficit)............................. 451,623 (725,093) (354,735) (198)(b) (628,403)
---------- ---------- --------- --------- ----------
Total stockholders' equity......... (42,572) 1,040,613 (4,239) (969,197) 24,605
---------- ---------- --------- --------- ----------
Total liabilities and stockholders'
equity........................... $1,101,961 $ 977,258 $ 266,771 $(969,385) $1,376,605
========== ========== ========= ========= ==========
</TABLE>
14
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
APRIL 29, 2000
----------------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,120 $ 18,489 $ 20,102 $ 39,711
Accounts receivable, less allowance for
doubtful accounts.................... 200,117 59,170 259,287
Inventories, net....................... 70,780 84,476 $ (50)(b) 155,206
Prepaid expenses and other current
assets............................... 74,577 3,974 10,633 89,184
---------- ---------- --------- --------- ----------
Total current assets............... 75,697 293,360 174,381 (50) 543,388
Property and equipment, net.............. 5,391 105,983 99,939 (410)(b) 210,903
Intangible assets, net................... 538,433 252,960 791,393
Investment in subsidiaries............... 954,779 (954,779)(a)
Other assets............................. 159,926 66,262 (26,206) 199,982
---------- ---------- --------- --------- ----------
Total assets....................... $1,195,793 $1,004,038 $ 501,074 $(955,239) $1,745,666
========== ========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................ $ 76,889 $ 700 $ 1,367 $ 78,956
Short-term intercompany balances....... 479,845 (480,813) 968
Accounts payable....................... 6,635 102,643 47,562 156,840
Accrued compensation................... 2,799 23,346 13,716 39,861
Other accrued liabilities.............. 34,510 18,306 47,797 $ (227)(b) 100,386
---------- ---------- --------- --------- ----------
Total current liabilities.......... 600,678 (335,818) 111,410 (227) 376,043
Long-term debt........................... 1,047,664 3,755 3,650 1,055,069
Other long-term liabilities and minority
interests.............................. 24,089 4,210 213 28,512
Long-term intercompany balances.......... (872,959) 577,013 295,946
---------- ---------- --------- --------- ----------
Total liabilities.................. 799,472 249,160 411,219 (227) 1,459,624
---------- ---------- --------- --------- ----------
Stockholders' equity:
Preferred stock........................
Common stock........................... 37 37
Additional paid-in capital............... 670,381 714,619 298,222 (954,779)(a) 728,443
Accumulated other comprehensive loss..... (76,443) 17,063 (61,126) (120,506)
Retained earnings (accumulated
deficit)............................... (197,654) 23,196 (147,241) (233)(b) (321,932)
---------- ---------- --------- --------- ----------
Total stockholders' equity......... 396,321 754,878 89,855 (955,012) 286,042
---------- ---------- --------- --------- ----------
Total liabilities and stockholders'
equity........................... $1,195,793 $1,004,038 $ 501,074 $(955,239) $1,745,666
========== ========== ========= ========= ==========
</TABLE>
15
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 28, 2000
------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $ $422,751 $ 111,843 $(1,311)(c) $ 533,283
Cost of revenues................... 316,403 81,931 (1,311)(c) 397,023
-------- -------- --------- ------- ---------
Gross profit..................... 106,348 29,912 136,260
Selling, general and administrative
expenses......................... 12,639 90,708 28,923 132,270
Amortization expense............... 8,387 4,624 13,011
Impaired asset write-offs.......... 2,382 27,863 30,245
Operating restructuring costs...... 137 1,411 801 2,349
-------- -------- --------- ------- ---------
Operating income (loss).......... (12,776) 3,460 (32,299) (41,615)
Interest expense................... 31,022 (5,006) 3,375 29,391
Interest income.................... (16) (250) (326) (592)
Unrealized foreign currency
transaction loss................. 22,117 22,957 45,074
Equity in (income) loss of
affiliates....................... (1) (851) (852)
Loss (gain) on sale or closure of
businesses....................... 14,857 (50) 128,483 143,290
Other (income) expense............. (27) (158) 93 (92)
-------- -------- --------- ------- ---------
Income (loss) before provision for
(benefit from) income taxes...... (80,729) 8,925 (186,030) (257,834)
Provision for (benefit from) income
taxes............................ (5,658) 4,012 5,168 3,522
-------- -------- --------- ------- ---------
Net income (loss).................. $(75,071) $ 4,913 $(191,198) $ $(261,356)
======== ======== ========= ======= =========
</TABLE>
16
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 23, 1999
-------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <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
Equity in loss of affiliates....... 964 964
Loss (gain) on sale or closure of
businesses....................... 1,394 1,674 (2) 3,066
Other (income) expense............. (41,822) 41,524 330 97 (c) 129
-------- -------- -------- ------- --------
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 income (loss).................. $ (6,354) $ (7,149) $(13,790) $ (130) $(27,423)
======== ======== ======== ======= ========
</TABLE>
17
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 28, 2000
-------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $ $825,539 $ 255,770 $(2,254)(c) $1,079,055
Cost of revenues....................... 614,818 186,840 (2,351)(c) 799,307
--------- -------- --------- ------- ----------
Gross profit......................... 210,721 68,930 97 279,748
Selling, general and administrative
expenses............................. 23,841 179,921 64,954 37 (c) 268,753
Amortization expense................... 15,674 9,193 24,867
Impaired asset write-offs.............. 2,382 27,863 30,245
Operating restructuring costs.......... 265 3,663 1,215 5,143
--------- -------- --------- ------- ----------
Operating income (loss).............. (24,106) 9,081 (34,295) 60 (49,260)
Interest expense....................... 62,108 (9,817) 6,885 59,176
Interest income........................ (21) (481) (460) (962)
Unrealized foreign currency transaction
loss................................. 33,885 30,857 64,742
Equity in loss of affiliates........... (1) 1,317 1,316
Loss on sale or closure of
businesses........................... 14,622 1,801 129,423 (c) 145,846
Other (income) expense................. (45) (3,819) 288 (3,576)
--------- -------- --------- ------- ----------
Income (loss) before provision for
(benefit from) income taxes.......... (134,655) 21,398 (202,605) 60 (c) (315,802)
Provision for (benefit from) income
taxes................................ (26,112) 11,866 4,890 25 (9,331)
--------- -------- --------- ------- ----------
Net income (loss)...................... $(108,543) $ 9,532 $(207,495) $ 35 $ (306,471)
========= ======== ========= ======= ==========
</TABLE>
18
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 23, 1999
-------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
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
Equity in loss of affiliates............ 1,991 1,991
Loss on sale or closure of businesses... (4,413) 6,982 1,451 4,020
Other (income) expense.................. (40,480) 40,544 437 97 (c) 598
-------- -------- -------- -------- ----------
Income (loss) before provision for
(benefit from) income taxes........... (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>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 28, 2000
----------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities...... $(60,209) $ 2,099 $ 889 $ $(57,221)
Cash flows from investing activities...... 108,528 (7,198) (508) 100,822
Cash flows from financing activities...... (48,178) 2,351 (37) (45,864)
Effect of exchange rates on cash and cash
equivalents............................. (3,119) (3,119)
-------- -------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. 141 (2,748) (2,775) (5,382)
Cash and cash equivalents at beginning of
period.................................. 1,120 18,489 20,102 39,711
-------- -------- ------- ------- --------
Cash and cash equivalents at end of
period.................................. $ 1,261 $ 15,741 $17,327 $ $ 34,329
======== ======== ======= ======= ========
</TABLE>
19
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED OCTOBER 23, 1999
----------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY NON-
(PARENT GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
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 increase (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>
The "US Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investments 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.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 2000, the Company adopted Statement of Position ("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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (fiscal 2002 for the Company). SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain
20
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Hedging Activities" as an amendment to SFAS No. 133. This statement provides
clarification with regard to certain implementation issues under SFAS No. 133 on
specific types of hedges. Management anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 and SFAS No. 138 will not
have a significant effect on the results of operations or financial position of
the Company.
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. In June 2000, the SEC staff
extended the effective date of SAB No. 101 until the fourth quarter of fiscal
2001. Management does not expect SAB No. 101 to have a material effect on the
Company's financial position or results of operations.
NOTE 11--COMMITMENTS AND CONTINGENCIES
During fiscal 1999, individuals purporting to represent various classes of
the Company's stockholders filed actions in U.S. District Courts for the
Southern District of New York and for the District of Columbia. The actions
claim the named defendants, including the Company, made misstatements and failed
to disclose material information in connection with the Company's strategic
restructuring plan, which was completed in June 1998. Two of the actions allege
breach of contract under California law in conjunction with the Company's
acquisition of MBE in November 1997. The actions seek declaratory relief,
damages and attorney's fees. A consolidated amended complaint was filed by the
plaintiffs in all of these actions in fiscal 2000. An additional action making
factual allegations similar to those made in the consolidated amended complaint
was filed in fiscal 2000, but has not been served on the Company. The Company
intends to vigorously contest these actions.
Complaints were also filed in fiscal 1999 and fiscal 2000 by sellers of
businesses that the Company acquired in the fall of 1997, some of which were
spun off in connection with the Company's strategic restructuring plan. The
complaints assert violation of Federal and/or state securities and other laws
and include claims of 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, in part, under the terms of the
distribution agreement executed in connection with the Company's 1998 strategic
restructuring plan. The Company intends to vigorously contest these actions.
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 12--SUBSEQUENT EVENTS
On November 20, 2000, the Company completed the sale of one of its contract
furniture businesses for proceeds of approximately $11,670. In addition, on
December 1, 2000, the Company completed the sale of one of its business machine
businesses for proceeds of approximately $1,346. The Company will record these
transactions in the third quarter of fiscal 2001.
In November 2000, the Company settled interest rate swap agreements with
notional amounts totaling $250,000 for proceeds of $2,309. Subsequent to the
settlement of the swap agreements, as of November 30,
21
<PAGE>
US OFFICE PRODUCTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 28, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 12--SUBSEQUENT EVENTS (CONTINUED)
2000, the Company has fixed the interest rates on 57.8% of the debt outstanding.
The remaining swaps begin to expire on June 15, 2001.
On December 7, 2000, the Company and its bank lenders amended the Company's
credit facility to extend the date on which the Company is required to reduce
its outstanding term loans by $50,000 through the sale of assets from
December 8, 2000 to January 8, 2001.
22
<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--IN ADDITION TO FACTORS IDENTIFIED IN THE
DISCUSSION BELOW--INCLUDE THE FOLLOWING:
- THE COMPANY'S HIGH LEVEL OF DEBT AND ABILITY TO COMPLY WITH THE TERMS OF
ITS CREDIT FACILITY
- THE IMPACT OF INCREASES IN INTEREST RATES
- THE COMPANY'S ABILITY TO GET REASONABLE TERMS FOR BUSINESSES IT WANTS TO
SELL
- THE COMPANY'S ABILITY TO STABILIZE ITS NORTH AMERICAN OPERATIONS
- THE IMPACT OF DEPARTING EMPLOYEES ON EXISTING BUSINESS
- THE IMPACT OF CHANGES IN MANAGEMENT
- THE IMPACT OF CHANGES IN THE EXCHANGE RATES FOR THE NEW ZEALAND AND
AUSTRALIAN DOLLARS
- THE IMPACT OF COMPETITION FROM NATIONAL, REGIONAL AND LOCAL COMPETITORS
AND COMPETITIVE PRESSURES FROM CUSTOMERS
- THE IMPACT OF COMPETITION ON THE INTERNET
- UNCERTAINTY ATTENDANT TO MANAGING FOREIGN OPERATIONS
- UNPREDICTABILITY OF MBE REVENUES AND ABILITY TO EXPLOIT A SIGNIFICANT
TECHNOLOGY UPGRADE BY MBE
PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR
THE FISCAL YEAR ENDED APRIL 29, 2000 FOR A DISCUSSION OF THESE AND OTHER
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE 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 29, 2000,
including the related notes thereto, included in the Company's fiscal 2000
Annual Report on Form 10-K, as amended.
OPERATING ORGANIZATION
At the end of fiscal 2000, the Company made changes to its management and
organizational structure, affecting all of its North American businesses. The
Company's office supplies (contract stationer) and office furniture
(middle-market and contract furniture) businesses operate as US Office
Products-North America ("USOP-NA"). The Company's office coffee and vending
businesses are operated as "USRefresh." In the following discussion of
"--Business Segment Results of Operations," results for both fiscal 2000 and
2001 are discussed based upon the organizational structure adopted at the
beginning of fiscal 2001. See Note 8 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The Company's international operations in New Zealand and Australia are
owned and operated through its Blue Star subsidiaries. The Blue Star
subsidiaries include operating companies that include business supplies (which
was sold in October 2000), print and consumer retailing businesses. The Company
also owns Mail Boxes Etc. ("MBE"), the world's largest franchisor of retail
business, communications and
23
<PAGE>
postal service centers, and 49% of Dudley Stationery Limited ("Dudley"), a
contract stationer in the United Kingdom.
REPORTING OF EBITDA
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 before interest expense, interest income, provision for
(benefit from) income taxes, depreciation expense, amortization expense,
impaired asset write-offs, operating restructuring costs, unrealized foreign
currency transaction loss, equity in (income) loss of affiliates, loss on sale
or closure of businesses, and other (income) expense ("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
services and related products, and vending products and services to corporate
customers. MBE derives revenues primarily from royalties and marketing fees,
franchise fees and the sale of supplies and equipment to MBE locations.
Cost of revenues represents the purchase price for a wide variety of office
supplies and other office products, office furniture, office coffee services and
related products, and vending products and services and includes occupancy,
delivery, installation and certain depreciation costs. Rebates and discounts on
inventory reduce these costs when such inventory is sold. MBE's cost of revenues
represents primarily franchise operation expenses and the cost of supplies and
equipment sold to MBE locations.
Selling, general and administrative expenses represent product marketing and
selling costs, customer service and product design costs, warehouse costs, and
other administrative expenses.
FACTORS AFFECTING COMPARABILITY
The Company's financial condition and results of operations in fiscal 2001
have been negatively impacted by significant non-cash charges, business
divestitures, and fluctuating exchange rates. These factors have had a
significant impact on the Company and should be considered in comparing the
Company's financial condition and results of operations in fiscal 2001 to those
in fiscal 2000.
SIGNIFICANT NON-CASH CHARGES
The Company's loss before provision for (benefit from) income taxes includes
the negative impact of approximately $227.3 million and $255.7 million of
non-cash charges recorded during the three month and six month periods ended
October 28, 2000, respectively. These significant non-cash charges represent
approximately 88% and 81% of such losses in these three month and six month
periods, respectively. These non-cash charges include the following:
- Losses on the sale or closure of businesses totaling $143.3 million and
$145.8 million during the three and six month periods ended October 28,
2000, respectively. This loss consists primarily of the $141.9 million
loss realized on the sale of Blue Star Business Supplies and the Company's
remaining investment in Business Solutions;
- Foreign currency transaction losses of $45.1 million and $64.7 million
during the three and six month periods ended October 28, 2000,
respectively, due to the declines in the New Zealand and Australian dollar
exchange rates (see "--Effects of Fluctuating Exchange Rates");
24
<PAGE>
- Impaired asset write-offs of $30.2 million during the three and six month
periods ended October 28, 2000 on goodwill primarily related to the
Company's equity investment in Dudley; and
- An increase in amortization expense of approximately $8.7 million and
$15.0 million during the three and six month periods ended October 28,
2000 as a result of the Company's decision at the beginning of fiscal 2001
to change the amortization period related to the Company's goodwill from
principally 40 years down to 15 years.
For a detailed discussion of these non-cash charges, see "--Consolidated
Results of Operations." These non-cash charges have a significant negative
impact on the Company's consolidated results for the first six months of fiscal
2001 (and particularly for the three months ended October 28, 2000). Other than
the foreign currency transaction loss (which was much smaller during the first
six months of the last fiscal year), there were no comparable, significant
non-cash charges recorded in the first six months of fiscal 2000. For a
discussion of the trends in revenues and EBITDA associated with the Company's
business segments, as well as pro forma basis trends where applicable, see
"--Business Segment Results of Operations."
DIVESTITURES
The Company believes that its high level of indebtedness is excessive for
the level of operating cash flow being produced by its businesses. Among other
things, this situation has caused the Company to require significant changes to
the financial covenants contained in its bank credit facility. The Company's
current covenant levels are significantly higher than levels typically agreed to
by bank lenders, and although the Company's bank lenders generally have
supported the Company and its plans, there can be no assurance such support will
continue for an extended period. See "--Liquidity and Capital Resources." As a
result, the Company is (and has been) actively pursuing a strategy to reduce
debt by selling certain of its businesses. In the first six months of fiscal
2001, the Company completed four business divestitures, including the sale of
Blue Star Business Supplies, for total proceeds of $117.7 million. Approximately
$109.4 million of such proceeds were used to reduce indebtedness. See
"--Liquidity and Capital Resources." In fiscal 2000, the Company completed nine
business divestitures. Proceeds from the fiscal 2000 divestitures were used
primarily to reduce indebtedness.
How many and which businesses the Company ultimately sells will depend on a
wide variety of factors, including the level of interest of prospective buyers,
the condition of the capital markets (which affects both the value of a business
sold and the ability of a buyer to finance the acquisition), the performance of
the Company's retained businesses, and the debt-reduction requirements of the
Company's lenders. For a discussion of current requirements for the Company to
complete assets sales sufficient to reduce its outstanding bank loans by a total
of $200.0 million before the end of January 2001, see "--Liquidity and Capital
Resources." The Company has retained Wasserstein Perella & Co. to provide it
with advice on potential divestitures and other strategic matters related to its
capital structure. In addition, the Company is working with other investment
banks in the United States and Australasia regarding potential business
divestitures. (For a discussion of the increased costs associated with the
outside professionals that the Company has engaged, see "--Business Segment
Results of Operations--Other.") At any given time, the Company may be involved
in discussions with one or more parties relating to potential transactions
involving one or more of its businesses. There can be no assurance that any of
these or other negotiations will lead to definitive agreements or, if agreement
are reached, that any transaction will be consummated. As dispositions occur,
the Company's revenues and EBITDA will decline.
EFFECTS OF FLUCTUATING EXCHANGE RATES
Results of operations have been negatively affected in both fiscal 2001 and
2000 by significant declines in the exchange rates for the New Zealand and
Australian dollars. Approximately one-third of the Company's revenues have
historically been generated by its operations in New Zealand and Australia. As a
result of the sale of Blue Star Business Supplies in October 2000, in future
periods, approximately
25
<PAGE>
one-sixth of the Company's revenues are generated by its operations in New
Zealand and Australia. Consequently, the Company's results of operations, cash
flows, and financial position will continue to be affected by fluctuations in
foreign currency exchange rates, but to a lesser extent than in prior periods.
The exchange rate for the New Zealand dollar ("NZD"), as compared to the U.S.
dollar ("USD"), declined approximately 11.3% (from USD$0.55 to USD$0.49) during
fiscal 2000 and declined an additional 17.6% (from USD$0.49 to USD$0.40) from
the start of fiscal 2001 through October 28, 2000. The exchange rate for the
Australian dollar ("AUD"), as compared to the USD, declined approximately 9.9%
(from USD$0.65 to USD$0.59) during fiscal 2000 and has declined an additional
11.4% (from USD$0.59 to USD$0.52) from the start of fiscal 2001 through
October 28, 2000. See "--Liquidity and Capital Resources" and "Quantitative and
Qualitative Disclosures about Market Risk--Foreign Currency Exchange Rate Risk."
As a result, the U.S. dollar value of revenues from operations in New Zealand
and Australia has declined.
Declines in foreign currency exchange rates also could reduce the USD
proceeds to the Company from any sale of non-core assets outside of the United
States, if the Company is paid in New Zealand or Australian dollars or if a
buyer values such non-U.S. assets on the basis of their cash flows after
translation to USD. From October 28, 2000 through December 8, 2000, the exchange
rates for the NZD and AUD have increased by approximately 6.5% (from USD$0.40 to
USD$0.43) and 5.0% (from USD$0.52 to USD$0.55), respectively. These currencies
have been volatile in recent months, and there can be no assurance as to whether
such increases will continue. The currencies could decline or rise further. Any
increase in exchange rates from October 28, 2000 will positively affect the
Company's results in future periods, particularly during the third fiscal
quarter when the New Zealand and Australian operations generally have seasonally
higher levels of revenue. (See "--Fluctuations in Quarterly Results of
Operations.")
ACCELERATED CHANGE ACTIVITIES
The results of operations in fiscal 2000 were negatively affected by
significant operational disruptions arising from a broad series of operating
change initiatives, including an accelerated information system implementation,
facility consolidations, and the conversion to a single primary wholesaler
relationship. These activities caused significant disruption to the Company's
business, particularly in its North American office supplies unit, where the
change activities were most wide-ranging. In addition to the disruption of
normal operating processes, these activities increased expenses, and failed to
deliver the anticipated level of savings and margin enhancements within the
projected timeframes. These activities also resulted in additional selling,
general and administrative expense related to outside resources to refine the
Company's financial and operating change management strategies. The accelerated
change activities also disrupted customer service levels in many locations,
contributed to an increase in employee turnover, and distracted resources from
sales growth and margin enhancement efforts. As of the beginning of fiscal 2001,
the Company discontinued its reliance on these change initiatives and redirected
its operational focus toward sales growth, margin enhancement and cost
reduction, driven by improvements in operational efficiencies and improved
customer service levels. While the Company believes that these strategies are
producing a more stable operating environment, the Company has not yet recovered
from the negative effect of the disruptions experienced during fiscal year 2000.
See "--Business Segment Results of Operations." In addition, there can be no
assurance that the current operating strategies will prove successful or will
yield improved financial results.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 28, 2000, COMPARED TO THREE MONTHS ENDED OCTOBER 23,
1999
REVENUES
Revenues decreased 17.0%, from $642.5 million for the three months ended
October 23, 1999, to $533.3 million for the three months ended October 28, 2000.
The decrease in revenues was due primarily
26
<PAGE>
to the sale of ten businesses after the beginning of the second quarter of
fiscal 2000 (the most significant of which were the sales of 60% of the Blue
Star Group's technology division ("Business Solutions") in December 1999 and
Blue Star Business Supplies in October 2000), and 18.5% (from USD$0.52 to
USD$0.43) and 13.9% (from USD$0.65 to USD $0.56) declines in the average
exchange rates of the New Zealand and Australian dollars, respectively, versus
the second quarter of fiscal 2000. On a pro forma basis, giving effect to the
acquisitions and business closures and divestitures completed after the
beginning of fiscal 2000, as if such transactions had been completed as of the
beginning of fiscal 2000, and assuming that the average exchange rates for the
New Zealand and Australian dollars in the three months ended October 23, 1999
were equal to the average exchange rates for the three months ended October 28,
2000 ("Pro Forma Currency Adjusted"), revenues declined by 0.3%.
GROSS PROFIT
Gross profit decreased 23.9%, from $179.1 million for the three months ended
October 23, 1999, to $136.3 million for the three months ended October 28, 2000.
The decrease in gross profit dollars is due primarily to a decline in revenues
resulting from the divestiture of several high margin businesses in fiscal 2000
and the decline in the exchange rates for the New Zealand and Australian
dollars. See "--Introduction--Factors Affecting Comparability--Effects of
Fluctuating Exchange Rates." On a Pro Forma Currency Adjusted basis, gross
profit decreased 7.3%. Gross profit as a percentage of revenues ("gross margin")
decreased from 27.9% for the three months ended October 23, 1999, to 25.6% for
the three months ended October 28, 2000. The decrease in gross margin, on a
consolidated basis, was driven primarily by the divestiture of several high
margin businesses and gross margin declines in USOP-NA and at the Blue Star
Group's print and retail businesses. See "--Business Segment Results of
Operations" for additional discussion of the gross margin declines in USOP-NA
and the Blue Star Group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 17.7%, from
$160.8 million for the three months ended October 23, 1999, to $132.3 million
for the three months ended October 28, 2000. The decrease in selling, general
and administrative expenses is due primarily to the decline in revenues as a
result of business divestitures and the decline in the exchange rates for the
New Zealand and Australian dollars. See "--Introduction--Factors Affecting
Comparability--Effects of Fluctuating Exchange Rates." On a Pro Forma Currency
Adjusted basis, selling, general and administrative expenses increased 1.8%. As
a percentage of revenues, selling, general and administrative expenses decreased
from 25.0% for the three months ended October 23, 1999, to 24.8% for the three
months ended October 28, 2000. This increase was primarily due to the incurrence
of costs related to information system implementations in the Blue Star Group's
retail businesses, partially offset by a decrease in selling, general and
administrative expenses in USOP-NA as a result of cost reduction activities. See
"--Business Segment Results of Operations."
AMORTIZATION EXPENSE
Amortization expense increased $6.7 million from $6.3 million for the three
months ended October 23, 1999 to $13.0 million for the three months ended
October 28, 2000. This increase was primarily the result of the Company's
decision to revise the amortization period for goodwill associated with all of
its businesses, except MBE, from principally 40 years down to 15 years. The
increase is partially offset by the impact of the decline in the exchange rates
for the New Zealand and Australian dollars and the sale of Blue Star Business
Supplies. See Note 3 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
IMPAIRED ASSET WRITE-OFFS
During the three months ended October 28, 2000, the Company evaluated the
recoverability of its equity interest in Dudley due to continuing negative
operating results at that business. The Company determined that the carrying
value of the investment exceeded the Company's proportionate share of
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Dudley's future undiscounted cash flow projections. As a result, the Company
recognized an impairment loss of $27.9 million, which reduced the Company's
investment by the amount equal to the excess of the carrying value of the
investment over the Company's proportionate share of Dudley's future
undiscounted cash flows. In addition, the Company made the decision to close one
of its furniture businesses. As a result of this decision, future undiscounted
cash flow projections were less than the carrying value of the related
unamortized goodwill, thus indicating impairment. Therefore, the Company
recorded an impairment loss of $2.4 million, representing the carrying value of
the unamortized goodwill, during the three months ended October 28, 2000.
OPERATING RESTRUCTURING COSTS
The Company recorded operating restructuring costs of $2.3 million and
$5.2 million during the three months ended October 28, 2000, 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
Interest expense, net of interest income, increased 5.0%, from
$27.4 million for the three months ended October 23, 1999, to $28.8 million for
the three months ended October 28, 2000. This increase is due primarily to
higher interest rates under the Company's credit facility. See "--Liquidity and
Capital Resources--Long-Term Debt."
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
The Company recorded an unrealized foreign currency transaction loss of
$45.1 million during the three months ended October 28, 2000. This loss
represents the impact of the devaluation of the NZD and AUD on intercompany
loans to, and the related accrued interest due from, the Blue Star Group. The
NZD declined from approximately USD $0.46 at July 29, 2000 to approximately USD
$0.40 at October 28, 2000. The AUD declined from approximately at USD $0.59 at
July 29, 2000 to approximately USD $0.52 at October 28, 2000. See
"--Introduction--Factors Affecting Comparability--Effects of Fluctuating
Exchange Rates," "--Liquidity and Capital Resources" and "Quantitative and
Qualitative Disclosures about Market Risk--Foreign Currency Exchange Rate Risk."
During the three months ended October 23, 1999, the Company recorded an
unrealized foreign currency transaction loss of $12.2 million. This loss was the
result of a decline in the NZD from USD $0.53 at July 24, 1999 to approximately
USD $0.52 at October 23, 1999. The AUD remained at USD$0.65 from July 24, 1999
to October 23, 1999.
EQUITY IN (INCOME) LOSS OF AFFILIATES
The equity in (income) loss of affiliates represents the Company's
proportionate share of the operating results of its investments in Dudley and
Business Solutions. The equity in (income) loss of affiliates changed from a
loss of $1.0 million for the three months ended October 23, 1999 to income of
$0.9 million in the three months ended October 28, 2000. The increase in income
is due primarily to gains at Dudley that resulted from a sale-leaseback
transaction involving Dudley's national distribution facility and the sale of
Dudley's office automation business, which were partially offset by continued
operating losses at Dudley.
28
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LOSS ON SALE OR CLOSURE OF BUSINESSES
As reported in the Company's Current Report on Form 8-K (filed October 20,
2000), the Company recorded a $141.9 million loss on the sale of Blue Star
Business Supplies and its remaining investment in Business Solutions during the
three months ended October 28, 2000. The loss on the sale of Blue Star Business
Supplies included a loss on the net assets of Blue Star Business Supplies
totaling approximately $57.6 million, substantially all of which is attributed
to goodwill, and the realization of $65.3 million in currency translation losses
related to the declines in the New Zealand and Australian dollars since the
dates the Blue Star Business Supplies businesses were acquired. Such amounts
were previously recorded as a reduction to stockholders' equity. The remaining
$19.0 million reflects the loss that the Company recorded in connection with the
transfer of Business Solutions as part of the Blue Star Business Supplies
transaction. See Note 7 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q. In
addition, the Company recorded a loss of $1.4 million on the sale of one North
American furniture business. The Company recorded a $3.1 million loss on the
sale of two businesses in North America during the three months ended
October 23, 1999.
OTHER (INCOME) EXPENSE
The change in other (income) expense from expense of $0.1 million for the
three months ended October 23, 1999 to income of $0.1 million for the three
months ended October 28, 2000 is due primarily to the $0.4 million gain on the
sale of Stamps.com common stock. During the three months ended October 28, 2000,
the Company sold 207,505 shares of Stamps.com common stock in a series of open
market transactions for gross proceeds of $1.0 million. See Note 5 of the Notes
to the Company's consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
INCOME TAXES
The provision for income taxes of $3.5 million for the three months ended
October 28, 2000 represents an effective income tax rate of 1.4%. The effective
income tax rate reflects the recording of an income tax benefit at the federal
statutory rate of 35.0%, plus appropriate state, local and foreign taxes, offset
by the establishment of a valuation allowance against certain of the Company's
deferred tax assets. The effective income tax benefit rate was reduced to
reflect non-deductible goodwill amortization expense and non-deductible losses
on divestitures. The Company established valuation allowances totaling
$17.4 million during the three months ended October 28, 2000 against the foreign
net operating losses generated by the Blue Star Group's Australian operations
and the Company's domestic state net operating losses as it is more likely than
not these items will expire before the Company is able to realize their
benefits. See Note 3 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
The benefit from income taxes of $9.4 million for the three months ended
October 23, 1999 represents an effective income tax benefit rate of 25.6%. The
effective income tax benefit rate reflects the recording of an income tax
benefit at the federal statutory rate of 35.0%, plus appropriate state, local
and foreign taxes. The effective income tax benefit rate was reduced to reflect
non-deductible goodwill amortization expense.
SIX MONTHS ENDED OCTOBER 28, 2000 COMPARED TO SIX MONTHS ENDED OCTOBER 23, 1999
REVENUES
Revenues decreased 14.9%, from $1,268.0 million for the six months ended
October 23, 1999, to $1,079.1 million for the six months ended October 28, 2000.
The decrease in revenues was due primarily to (i) the sale of nine businesses
during fiscal 2000 (the most significant of which was the sale of 60% of
Business Solutions), (ii) the sale of four businesses since the beginning of
fiscal 2001 (the most significant of which was the sale of Blue Star Business
Supplies), and (iii) the 16.4% (from USD$0.53 to USD$0.45) and 12.7% (from
USD$0.65 to USD$0.57) declines in the average exchange rates of the New Zealand
and
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Australian dollars, respectively, versus the six months ended October 23, 1999.
On a Pro Forma Currency Adjusted Basis, revenues increased 1.2% due primarily to
an increase in sales in the North American office furniture business arising
from the uneven timing of contract furniture projects and an increase in sales
in the Blue Star Group's print business in the six months ended October 28, 2000
versus the six months ended October 23, 1999.
GROSS PROFIT
Gross profit decreased 21.0%, from $353.9 million for the six months ended
October 23, 1999, to $279.7 million for the six months ended October 28, 2000.
The decrease in gross profit dollars is due primarily to a decline in revenues
resulting from the divestiture of several businesses in fiscal 2000 and 2001 and
the decline in the exchange rates for the New Zealand and Australian dollars.
See "--Introduction--Factors Affecting Comparability--Effects of Fluctuating
Exchange Rates." On a Pro Forma Currency Adjusted basis, gross profit decreased
4.5%. Pro Forma Currency Adjusted gross margin decreased from 27.3% for the six
months ended October 23, 1999, to 25.8% for the six months ended October 28,
2000. The decrease in Pro Forma Currency Adjusted gross margin, on a
consolidated basis, was driven primarily by declines in gross margin in USOP-NA
and at the Blue Star Group. For additional discussion of the gross margin
declines in USOP-NA and the Blue Star Group, see "--Business Segment Results of
Operations."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 15.9%, from
$319.4 million for the six months ended October 23, 1999, to $268.8 million for
the six months ended October 28, 2000. The decrease in selling, general and
administrative expenses is due primarily to the divestitures during fiscal 2000
and 2001 and the decline in the exchange rates for the New Zealand and
Australian dollars. See "--Introduction--Factors Affecting
Comparability--Effects of Fluctuating Exchange Rates." As a percentage of
revenues, selling, general and administrative expenses decreased from 25.2% for
the six months ended October 23, 1999, to 24.9% for the six months ended
October 28, 2000. On a Pro Forma Currency Adjusted basis, selling, general and
administrative expenses increased 2.3%. This increase was primarily due to the
incurrence of costs related to information system implementations in the Blue
Star Group's retail and office supplies businesses, partially offset by a
decrease in selling, general and administrative expenses in USOP-NA as a result
of cost reduction activities. See "--Business Segment Results of Operations."
AMORTIZATION EXPENSE
Amortization expense increased $12.7 million from $12.2 million for the six
months ended October 23, 1999 to $24.9 million for the six months ended
October 28, 2000. This increase was the result of the Company's decision to
revise the amortization period for goodwill associated with all of its
businesses, except MBE, from principally 40 years down to 15 years. The change
in the amortization period resulted in an increase in amortization expense
during the six months ended October 28, 2000 of approximately $15.0 million. The
increase was partially offset by the impact of the decline in the exchange rates
for the New Zealand and Australian dollars. See Note 3 of the Notes to the
Company's consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
OPERATING RESTRUCTURING COSTS
The Company recorded operating restructuring costs of $5.1 million and
$7.1 million during the six months ended October 28, 2000, 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.
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INTEREST EXPENSE
Interest expense, net of interest income, increased 7.7%, from
$54.1 million for the six months ended October 23, 1999, to $58.2 million for
the six months ended October 28, 2000. This increase is due primarily to higher
interest rates under the Company's credit facility. See "--Liquidity and Capital
Resources--Long-Term Debt."
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
The Company recorded an unrealized foreign currency transaction loss of
$64.7 million during the six months ended October 28, 2000. This loss represents
the impact of the devaluation of the New Zealand and Australian dollars on
intercompany loans to, and the related accrued interest due from, the Blue Star
Group. The NZD declined from approximately USD $0.49 at April 29, 2000 to
approximately USD $0.40 at October 28, 2000. The AUD declined from approximately
USD $0.59 at April 29, 2000 to approximately USD $0.52 at October 28, 2000. See
"--Introduction--Factors Affecting Comparability--Effects of Fluctuating
Exchange Rates," "--Liquidity and Capital Resources" and "Quantitative and
Qualitative Disclosures about Market Risk--Foreign Currency Exchange Rate Risk."
During the six months ended October 23, 1999, the Company recorded an
unrealized foreign currency transaction loss of $25.8 million. This loss was the
result of a decline in the NZD from USD $0.55 at April 24, 1999 to approximately
USD $0.52 at October 23, 1999. The AUD remained at USD$0.65 from April 24, 1999
to October 23, 1999.
EQUITY IN (INCOME) LOSS OF AFFILIATES
The equity in (income) loss of affiliates represents the Company's
proportionate share of the operating results of its investments in Dudley and
Business Solutions. The equity in (income) loss of affiliates changed from a
loss of $2.0 million for the six months ended October 23, 1999 to a loss of
$1.3 million in the six months ended October 28, 2000. The decrease in the loss
is due primarily to gains at Dudley during the second quarter of fiscal 2001
that resulted from a sale-leaseback transaction involving Dudley's national
distribution facility and the sale of Dudley's office automation business.
LOSS ON SALE OR CLOSURE OF BUSINESSES
The Company recorded a $145.8 million loss on the sale of four businesses,
including Blue Star Business Supplies and the Company's remaining investment in
Business Solutions, two North American furniture businesses, and an Australian
supply business during the six months ended October 28, 2000. The Company
recorded a $4.0 million loss 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. See Note 7 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
OTHER (INCOME) EXPENSE
The change in other (income) expense from expense of $0.6 million for the
six months ended October 23, 1999 to income of $3.6 million for the six months
ended October 28, 2000 is due primarily to a $4.0 million gain on the sale of
Stamps.com common stock. The Company sold 1,152,500 shares of Stamps.com common
stock in a series of open market transactions for gross proceeds of
$7.5 million. See Note 5 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
INCOME TAXES
The benefit for income taxes of $9.3 million for the six months ended
October 28, 2000 represents an effective income tax benefit rate of 3.0%. The
effective income tax benefit rate reflects the recording of an
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income tax benefit at the federal statutory rate of 35.0%, plus appropriate
state, local and foreign taxes, offset by the establishment of a valuation
allowance against certain of the Company's deferred tax assets in the second
quarter of fiscal 2001. The effective income tax benefit rate was reduced to
reflect non-deductible goodwill amortization expense and non-deductible losses
on divestitures.
The benefit from income taxes of $16.3 million for the six months ended
October 23, 1999 represents an effective income tax benefit rate of 22.9%. The
effective income tax benefit rate reflects the recording of an income tax
benefit at the federal statutory rate of 35.0%, plus appropriate state, local
and foreign taxes. The effective income tax benefit rate was reduced to reflect
non-deductible goodwill amortization expense.
BUSINESS SEGMENT RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 28, 2000, COMPARED TO THREE MONTHS ENDED OCTOBER 23,
1999
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 8 of the Notes to the Company's
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. Comparisons of pro forma and Pro Forma Currency Adjusted amounts are
included where such comparisons are helpful to explain periodic variances.
NORTH AMERICAN OFFICE SUPPLIES--Revenues for the three months ended
October 28, 2000 decreased 3.4% on a historical basis versus the three months
ended October 23, 1999. EBITDA for the three months ended October 28, 2000
decreased approximately 23.5% on a historical basis versus the three months
ended October 23, 1999. The decrease in EBITDA is due primarily to a 170 basis
point decline in gross margins resulting from the residual impact of the
disruptive operating changes that were made throughout fiscal 2000 from which
the office supplies businesses have not yet recovered. The disruptive operating
changes included system conversions, warehouse and customer service center
consolidations, and the conversion to a single wholesaler relationship. See
"--Introduction--Factors Affecting Comparability--Accelerated Change
Activities." Selling, general and administrative expenses for the three months
ended October 28, 2000 were $2.3 million lower than during the three months
ended October 23, 1999. This is the result of cost reduction activities during
the first half of fiscal 2001, which have reduced these expenses significantly
from their levels during the second half of fiscal 2000.
NORTH AMERICAN OFFICE FURNITURE--Revenues for the three months ended
October 28, 2000 decreased 1.3% on a historical basis and increased 1.0% on a
pro forma basis versus the three months ended October 23, 1999. The decrease on
a historical basis is due to the sale of two furniture businesses since the
beginning of fiscal 2001. The increase on a pro forma basis is due primarily to
a significant increase in contract furniture revenues, offset in large part by a
decline in mid-market furniture sales. EBITDA for the three months ended
October 28, 2000 decreased 47.4% on a historical basis and 48.2% on a pro forma
basis versus the three months ended October 23, 1999. The significant decrease
in EBITDA is due primarily to a 170 basis point decline in gross margin. The
decline in gross margin results from the combined effect of an increase in lower
margin contract furniture projects and a decline in higher margin mid-market
furniture business. In addition, selling, general and administrative expenses
increased, as a percentage of revenues, due primarily to the fixed cost
structure within the Company's mid-market furniture businesses, which were
incurred against a lower level of revenues (within the mid-market furniture
business) versus the three months ended October 23, 1999.
NORTH AMERICAN CORPORATE--EBITDA for the three months ended October 28, 2000
increased 4.7% on a historical basis versus the three months ended October 23,
1999. The increase in EBITDA is due primarily to headcount reductions in the
North American corporate staff.
USREFRESH--Revenues for the three months ended October 28, 2000 increased
12.5% on a historical basis and 9.4% on a pro forma basis versus the three
months ended October 23, 1999. The increase on a historical basis is partially
attributed to the acquisition of a vending business in the first quarter of
fiscal
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2001. The increase in revenues on a pro forma basis is primarily the result of
sales growth in the vending businesses due to an increase in the number of sales
personnel. EBITDA for the three months ended October 28, 2000 increased 31.9% on
a historical basis and 23.6% on a pro forma basis versus the three months ended
October 23, 1999. The increase in EBITDA on a pro forma basis is due primarily
to the 230 basis point improvement in gross margins, partially offset by an
increase in selling, general and administrative expenses arising from the costs
associated with the addition of sales personnel and the development of a
separate corporate management team.
BLUE STAR GROUP--Revenues for the three months ended October 28, 2000
decreased 42.9% on a historical basis versus the three months ended October 23,
1999 and increased 4.5% on a Pro Forma Currency Adjusted basis. The decrease on
a historical basis is due primarily to the sale of 60% of Business Solutions
during the third quarter of fiscal 2000, the sale of the Business Supplies
Division during the second quarter of fiscal 2001, and significant declines in
the exchange rates for the New Zealand and Australian dollars. See
"--Introduction--Factors Affecting Comparability--Effects of Fluctuating
Exchange Rates," "--Liquidity and Capital Resources" and "Quantitative and
Qualitative Disclosures about Market Risk--Foreign Currency Exchange Rate Risk."
On a Pro Forma Currency Adjusted basis, the increase is due primarily to
increases in sales in both the print and retail businesses. EBITDA for the three
months ended October 28, 2000 decreased 61.6% on a historical basis due
primarily to the divestitures of Business Solutions and Blue Star Business
Supplies and the declines in the exchange rates for the New Zealand and
Australian dollars. On a Pro Forma Currency Adjusted basis, EBITDA for the three
months ended October 28, 2000 declined 39.3% versus the three months ended
October 23, 1999, due primarily to declines in gross margins in Blue Star's
print and retail businesses, arising from the negative impact of sluggish
economic conditions in New Zealand. In addition, general and administrative
expenses increased in the retail businesses as a result of costs incurred in
conjunction with information system implementations.
MBE--Revenues for the three months ended October 28, 2000 increased 8.9%
versus the three months ended October 23, 1999. The increase in revenues is
primarily due to growth in royalties, as MBE continues to increase the number of
MBE franchised centers open around the world. EBITDA for the three months ended
October 28, 2000 increased approximately 4.2%, versus the three months ended
October 23, 1999. This increase in EBITDA is primarily the result of the
increase in revenues.
OTHER--Revenues for the three months ended October 28, 2000 decreased 64.8%
on a historical basis and 0.7% on a pro forma basis versus the three months
ended October 23, 1999. The decrease in revenues on a historical basis is due to
the sale of four non-core businesses in fiscal 2000. EBITDA for the three months
ended October 28, 2000 decreased approximately $3.1 million on a historical
basis and $1.8 million on a pro forma basis versus the three months ended
October 23, 1999. On a historical basis, the decrease is primarily the result of
the sale of certain of its businesses and an increase in general and
administrative expenses associated with outside legal and financial advisors
engaged by the Company to assist with its divestitures and other strategic
matters. See "--Introduction--Factors Affecting Comparability--Divestitures." In
future periods, the Company expects to incur approximately $1.0 million in fees
on a monthly basis related to the work of its outside professional advisors.
SIX MONTHS ENDED OCTOBER 28, 2000, COMPARED TO SIX MONTHS ENDED OCTOBER 23, 1999
NORTH AMERICAN OFFICE SUPPLIES--Revenues for the six months ended
October 28, 2000 decreased 2.1% on a historical basis versus the six months
ended October 23, 1999. EBITDA for the six months ended October 28, 2000
decreased approximately 21.1% on a historical basis versus the six months ended
October 23, 1999. The decrease in EBITDA is due primarily to a 160 basis point
decline in gross margins resulting from the residual impact of the disruptive
operating changes that were made throughout fiscal 2000 from which the office
supplies businesses have not yet recovered. The disruptive operating changes
included system conversions, warehouse and customer service center
consolidations, and the conversion to a single wholesaler relationship. See
"--Introduction." Selling, general and administrative expenses for the
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six months ended October 28, 2000 were $3.3 million lower than during the six
months ended October 23, 1999. This is the result of cost reduction activities
during the first half of fiscal 2001, which have reduced these expenses
significantly from their levels during the second half of fiscal 2000.
NORTH AMERICAN OFFICE FURNITURE--Revenues for the six months ended
October 28, 2000 increased 1.6% on a historical basis and 6.0% on a pro forma
basis versus the six months ended October 23, 1999. The increase on a historical
basis is partially offset by the impact of the sale of two furniture businesses
since the beginning of fiscal 2001. The increases in revenues on a pro forma
basis are due primarily to the timing of contract furniture projects, partially
offset by a decline in mid-market furniture sales during the six months ended
October 28, 2000 versus the six months ended October 23, 1999. EBITDA for the
six months ended October 28, 2000 decreased 19.8% on a historical basis and
14.9% on a pro forma basis versus the six months ended October 23, 1999. The
decrease in EBITDA was driven by a 90 basis point decline in gross margin. The
decline in gross margin results from the combined effect of the increase in
contract furniture projects and a decline in higher margin mid-market furniture
business. In addition, selling, general and administrative expenses increased,
as a percentage of revenues, due primarily to the fixed cost structure within
the Company's mid-market furniture businesses, which were incurred against a
lower level of revenues (within the mid-market furniture business) versus the
six months ended October 23, 1999.
NORTH AMERICAN CORPORATE--EBITDA for the six months ended October 28, 2000
increased 9.1% on a historical basis versus the six months ended October 23,
1999. The increase in EBITDA is due primarily to headcount reductions in the
North American corporate staff.
USREFRESH--Revenues for the six months ended October 28, 2000 increased 8.6%
on a historical basis and 6.7% on a pro forma basis versus the six months ended
October 23, 1999. The increase on a historical basis is partially attributed to
the acquisition of a vending business in the first quarter of fiscal 2001. The
increase in revenues on a pro forma basis is primarily the result of sales
growth in the vending businesses due to an increase in the number of sales
personnel. EBITDA for the six months ended October 28, 2000 increased 0.6% on a
historical basis and decreased 3.7% on a pro forma basis versus the six months
ended October 23, 1999. The pro forma decrease in EBITDA is due primarily to an
increase in selling, general and administrative expenses arising from the costs
associated with the addition of sales personnel and the development of a
separate corporate management team. These costs were partially offset by the
increase in revenues and a 90 basis point improvement in gross margins.
BLUE STAR GROUP--Revenues for the six months ended October 28, 2000
decreased 36.4% on a historical basis versus the six months ended October 23,
1999 and increased 2.7% on a Pro Forma Currency Adjusted basis. The decrease on
a historical basis is due to the sale of 60% of Business Solutions during the
third quarter of fiscal 2000, the sale of the Blue Star Business Supplies during
the second quarter of fiscal 2001, and the significant declines in the exchange
rates for the New Zealand and Australian dollars. See "--Introduction--Factors
Affecting Comparability--Effects of Fluctuating Exchange Rates," "--Liquidity
and Capital Resources" and "Quantitative and Qualitative Disclosures about
Market Risk--Foreign Currency Exchange Rate Risk." The increase in revenues on a
Pro Forma Currency Adjusted basis is due primarily to sales growth in the print
businesses. EBITDA for the six months ended October 28, 2000 decreased 55.7% on
a historical basis due primarily to the divestitures of Business Solutions and
Blue Star Business Supplies and the declines in the exchange rates for the New
Zealand and Australian dollars. On a Pro Forma Currency Adjusted basis, EBITDA
for the six months ended October 28, 2000 declined 29.5% versus the six months
ended October 23, 1999, due primarily to declines in gross margins in Blue
Star's print and retail businesses, arising from the negative impact of sluggish
economic conditions in New Zealand. In addition, general and administrative
expenses in the retail businesses increased as a result of costs incurred in
conjunction with information system implementations.
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MBE--Revenues for the six months ended October 28, 2000 increased 8.7%
versus the six months ended October 23, 1999. The increase in revenues is
primarily due to growth in royalties, as MBE continues to grow the number of MBE
franchised centers open around the world. EBITDA for the six months ended
October 28, 2000 increased approximately $1.9 million, or 26.2%, versus the six
months ended October 23, 1999. This increase in EBITDA is primarily the result
of an increase in gross profit, which is directly related to the increase in
revenues, and a decrease in the costs associated with the roll-out of MBE's
information technology initiatives..
OTHER--Revenues for the six months ended October 28, 2000 decreased 67.5% on
a historical basis and 2.1% on a pro forma basis versus the six months ended
October 23, 1999. The decrease in revenues on a historical basis is due to the
sale of four non-core businesses in fiscal 2000. On a pro forma basis, the
decrease in revenues is due to a decline in sales in the Company's specialty
retail business due to the closure of two stores. EBITDA for the six months
ended October 28, 2000 decreased approximately $5.9 million on a historical
basis and $1.6 million on a pro forma basis versus the six months ended
October 23, 1999. On a historical basis, the decrease is primarily the result of
the sale of certain of its businesses and an increase in general and
administrative expenses associated with outside legal and financial advisors
engaged by the Company to assist with its divestitures and other strategic
matters. See "--Introduction--Factors Affecting Comparability--Divestitures."
LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At October 28, 2000, the Company had cash and cash equivalents of
approximately $34.3 million. Approximately $17.3 million of the Company's cash
on hand was in New Zealand and Australia and is being used to fund the liquidity
requirements of the Blue Star businesses. In September 2000, the Company amended
its credit facility to obtain additional liquidity. As permitted by that
amendment, the Company retained approximately $45 million of the proceeds from
the October 2000 sale of Blue Star Business Supplies, which it used to reduce
the amount outstanding under its revolving credit facility and thereby increase
availability under the revolver. See "--Long-Term Debt." Despite this
improvement in liquidity and the reductions in debt resulting from the Company's
divestiture program, the Company remains highly leveraged and must carefully
manage its cash flow to maintain adequate liquidity to operate its businesses.
As a result of the September 2000 amendment and a subsequent December 2000
amendment to the bank credit facility, the Company is required to reduce the
amount of its outstanding term loans through the sale of additional assets by
$50 million before January 8, 2001 and by an additional $150 million before
January 29, 2001. As a result of these requirements, the Company has
reclassified $200 million of long-term debt on its balance sheet to short-term
debt. As a result, current liabilities exceed current assets by $70.1 million.
See also Note 2 of the Notes to the Company's consolidated financial statements
appearing elsewhere in this Quarterly Report on Form 10-Q (regarding the impact
of divestiture requirements on the recoverability of the carrying value of
assets). As of December 8, 2000, the Company had repaid approximately
$15 million of the $50 million required to be repaid by January 8, 2001. See
"--Introduction--Factors Affecting Comparability--Divestitures." If the
Company's current divestiture strategies do not result in transactions that
enable it to pay down an additional $35 million by January 8, 2001 and
$150 million more by January 29, 2001, the Company will require further waivers
or amendments of its bank credit facility. There can be no assurance that the
necessary amount of asset sales will be completed by the deadlines included in
the credit facility or that any necessary waivers or amendments will be
obtained. Should the Company either fail to meet these debt-reduction covenants
or obtain appropriate waivers or amendments, there would be an event of default
under the credit facility. For a discussion of the potential consequences of a
default, see "--Long-Term Debt."
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In order to meet its liquidity requirements for its operations, capital
expenditures, and debt service obligations for fiscal 2001, the Company must
meet its cash flow projections. If the Company fails to achieve these objectives
in a timely manner or is unsuccessful in maintaining customary terms from its
trade creditors, it may need to obtain funds in excess of the current
availability under the credit facility. (Such events also could cause the
Company to fail to remain in compliance with the financial covenants in its
credit facility. See "--Long-Term Debt.") The Company continues to actively
explore alternatives to secure additional sources of funding, should they be
needed. There can be no assurance that the Company will be able to obtain
additional funds from its lenders or from other sources, if they are required.
CASH FLOWS
During the six months ended October 28, 2000, net cash used in operating
activities was $57.2 million. This use of cash includes the payment of
$61.2 million in interest expense which became payable during the six months
ended October 28, 2000, partially offset by an income tax refund of
$22.1 million. Net cash provided by investing activities for the six months
ended October 28, 2000, was $100.8 million, including $117.7 million in proceeds
from sales of businesses and $7.5 million in proceeds from sales of investments,
offset by $18.7 million used for net additions to property and equipment and
$2.1 million paid related to an acquisition. Net borrowings decreased by
$45.9 million, consisting of payments of $73.2 million, offset by $27.2 million
of additional borrowings on the Company's revolving credit facility.
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 expense which became payable during the period. Net
cash used in investing activities for the six months ended October 23, 1999, was
$34.1 million, including $35.6 million used for net additions to property and
equipment, $9.3 million paid for an acquisition, and $4.0 million used for
investment in affiliates, partially offset by proceeds from the sale of
businesses and real estate of $13.6 million. Net borrowings increased
$8.9 million during the six months ended October 23, 1999.
LONG-TERM DEBT
In September 2000, the Company and its bank lenders further amended the
Company's credit facility. The credit facility, as amended, provides for an
aggregate principal amount of approximately $1.1 billion, consisting of (i) a
seven-year term loan facility totaling $200.0 million, (ii) a seven-year
revolving credit facility totaling $150.0 million, (iii) a seven-year multi-draw
term loan facility totaling $34.2 million, and (iv) an eight-year term loan
facility totaling $675.0 million. Interest rates on such borrowings bear
interest, at the Company's option, at the lending bank's base rate plus an
applicable margin of up to 2.0%, or a eurodollar rate plus an applicable margin
of up to 4.0%. These margins reflect increases of 1.25% to 1.50% on all loans as
a result of the amendments to the credit facility in fiscal 2001. The commitment
fee for the revolving credit facility is fixed at 0.5%.
The September 2000 amendment provided the Company with additional liquidity
by increasing the amount of permitted asset disposition proceeds that the
Company was allowed to retain for investment in the business in fiscal 2001 from
$25 million to $60 million. As a result of this increase in the amount of
permitted asset disposition proceeds that the Company was allowed to retain, the
Company applied approximately $45 million of the $109.4 million in proceeds from
the sale of Blue Star Business Supplies against the outstanding balance on its
revolving credit facility. Prior to the amendment, the Company had retained
approximately $15 million of permitted asset disposition proceeds. See "--Cash
and Working Capital."
Also as a result of the September 2000 amendment, the financial covenants in
the Company's bank credit facility agreement were amended through the end of
April 2001. In addition, the agreement now prohibits the Company and its
domestic subsidiaries from allowing its aggregate accounts payable balance
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to go below $70 million as of the last day of any fiscal month. This minimum
will be proportionately decreased if there is a disposition of a domestic
subsidiary, product line or business unit.
At October 28, 2000, the Company had total debt outstanding of
$1,087.6 million and had available borrowings of approximately $68.2 million
under its revolving credit facility. Under the terms of the credit facility,
approximately $16.9 million of this availability is restricted until the
outstanding principal amounts of the Company's convertible subordinated notes
due 2001 ($12.8 million) and 2003 ($4.1 million) are repaid. The Company's
ability to draw on the credit facility is also subject to its ability to meet
certain financial ratios, and it may not be able to draw the full amount if
doing so would violate those ratios. The outstanding balance under the revolving
credit facility fluctuates daily. The Company's borrowings, net of cash on hand
(including the cash on hand in New Zealand and Australia, discussed above in
"--Cash and Working Capital"), have generally been at levels consistent with the
Company's anticipated cash flow plan. The Company's ability to continue to
operate at a level consistent with its plan is dependent primarily upon ongoing
cash flow from operations and working capital levels (which are particularly
affected by the credit terms extended by suppliers). Market conditions,
competition, operating risks, and the impact of the Company's high level of
indebtedness on its ability to attract and retain customers and employees can
all affect the Company's ability to generate cash flow and successfully manage
its working capital.
The credit facility also limits the permitted level of capital expenditures
during fiscal 2001, investments and acquisitions the Company can make, and the
amount of additional indebtedness and guarantees the Company may incur.
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 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 senior subordinated notes due 2008 (the "2008 Notes") is at a
fixed rate of interest. As a result, the Company entered into interest rate swap
arrangements to limit the LIBOR-based interest rate exposure on $500 million of
the outstanding balance under the credit facility to rates ranging from 5.8% 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 $865.9 million (79.6%) of
the debt outstanding at October 28, 2000. In November 2000, the Company settled
interest rate swap agreements with notional amounts totaling $250 million for
proceeds of $2.3 million. Subsequent to the settlement of the swap agreements,
as of November 30, 2000, the Company has fixed the interest rates on 57.8% of
the debt outstanding. The remaining swap agreements begin to expire on June 15,
2001.
The credit facility includes, among others, (1) restrictions on the
Company's ability to incur additional indebtedness, sell assets, pay dividends,
or engage in certain other transactions, (2) requirements that the Company
maintain certain financial ratios, and (3) 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).
Among other things, the revisions to the credit facility in fiscal 2001
increased the Company's permissible leverage ratio and reduced the minimum
required ratio of operating cash flow to cash interest expense through the end
of the third quarter of fiscal 2001, provided that the Company meets the
requirements for reducing outstanding term debt by $50 million as of January 8,
2001 and an additional $150 million as of January 29, 2001. If the Company fails
to meet these requirements, the financial covenants would return to levels that
are substantially lower than the Company would expect to be able to meet,
thereby requiring the Company to seek a further amendment or waiver from its
banks. The changes
37
<PAGE>
made to the financial covenant levels in the fiscal 2001 amendments reflect the
reduced level of EBITDA that the Company has reported and are intended to permit
the Company to remain in compliance with the financial covenants in the bank
agreement through the third quarter of fiscal 2001, assuming the Company's
EBITDA is at or near anticipated levels and assuming the Company is able to
achieve the required levels of long-term debt reductions. After the third
quarter of fiscal 2001, the Company's financial covenants require a
substantially lower leverage ratio and an increase in the minimum required ratio
of operating cash flow to cash interest expense. Based upon current projections
of its operating performance, the Company anticipates that by the end of its
fourth quarter in fiscal 2001 it likely will be required to seek further
amendments of the financial covenants under the credit facility applicable to
the fourth quarter of fiscal 2001 and subsequent periods. There can be no
assurance that the Company's lenders will agree to additional amendments to the
terms of the credit facility. There can be no assurance that the Company will be
able to remain in compliance, as various factors could affect the Company's
financial results and its reported EBITDA.
Among other things, the continued significant decline in the exchange rates
of the New Zealand and Australian dollars, which lowers the Company's reported
results after translation to U.S. dollars, could adversely affect the Company's
ability to maintain compliance with the financial covenants. See "--Foreign
Currency" and "Quantitative and Qualitative Disclosures about Market
Risk--Foreign Currency Exchange Rate Risk."
Should the Company's cash flow from operations be insufficient to maintain
compliance with the financial covenants (principally related to the permissible
leverage ratio and ratio of operating cash flow to cash interest expense), or
should the Company be unable to meet the long term debt reduction targets set by
its banks, there would be an event of default under the credit facility. In this
event, the Company's lenders would have the right to declare all amounts
outstanding under the credit facility to be immediately due and payable. Due to
cross-default provisions in the Company's other borrowing agreements,
substantially all of the Company's long-term debt, including the 2008 Notes,
could also be callable.
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.
The Company's capitalization, defined as the sum of long-term debt and
stockholders' equity, at October 28, 2000, was approximately $806.4 million.
FOREIGN CURRENCY
During the six months ended October 28, 2000, there was a net reduction in
stockholders' equity, through a cumulative translation adjustment of
approximately $3.3 million, reflecting primarily the impact of the declining
currency exchange rate on the Company's investments in its New Zealand
subsidiaries. In addition, the devaluation throughout the year has adversely
affected the return on the Company's investment in its New Zealand and
Australian operations. See "--Introduction--Factors Affecting
Comparability--Effects of Fluctuating Exchange Rates." The Company cannot
predict whether exchange rates will increase or decline in the future. If
exchange rates were to decline further, the Company's return on assets and
equity from its New Zealand and Australian operations would be further
depressed. Subsequent to October 28, 2000, the New Zealand dollar strengthened
against the USD. As of December 8, 2000, the New Zealand dollar equaled USD
$0.43 (an increase from USD $0.40 at October 28, 2000).
In addition to the impact of the declining currency exchange rate, the
Company realized certain translation losses upon the sale of Blue Star Business
Supplies. Translation losses are realized upon the
38
<PAGE>
divestiture of foreign subsidiaries and are recognized in the consolidated
statement of operations. During the three months ended October 28, 2000, the
Company completed the divestiture of Blue Star Business Supplies unit and
realized $65.3 million in translation losses. These translation losses were
reclassified from accumulated other comprehensive loss to the consolidated
statement of operations during the three month period ended October 28, 2000 and
were recorded as a component of the loss on sale or closure of businesses.
The Company does not consider its intercompany loans to Blue Star to be a
long-term investment. Accordingly, during the six months ended October 28, 2000
and October 23, 1999, the Company recorded unrealized foreign currency
transaction losses of $64.7 million and $25.8 million, respectively, related to
its intercompany loans with Blue Star as a component of net income. See
"--Introduction--Factors Affecting Comparability--Effects of Fluctuating
Exchange Rates."
As a result of the Company's high level of indebtedness, a portion of the
cash flows from the Company's international operations is required to service
debt and interest payments. The Company can incur certain costs when accessing
cash flows from international operations including such items as New Zealand and
Australian withholding and other taxes and foreign currency hedging costs. As of
October 28, 2000, the Company had remaining outstanding foreign currency forward
contracts with an aggregate notional amount of approximately $3.0 million
against the New Zealand dollar.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's businesses are subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
typically been lower in the first quarter of its fiscal year, primarily due to
the lower level of business activity in North America during the summer months.
The revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
Quarterly results also may be affected by the timing and magnitude of
acquisitions and dispositions, the timing and magnitude of costs related to such
acquisitions and dispositions, variations in the prices paid by the Company for
the products it sells, the mix of products sold, and general economic
conditions. Results for any quarter are not necessarily indicative of the
results that the Company may achieve for any subsequent fiscal quarter or for a
full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during fiscal 2000 or the first two quarters of fiscal
2001.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 2000, the Company adopted Statement of Position ("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 Company's results of operations or its financial
position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (fiscal 2002 for the Company). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" as an amendment to SFAS No. 133. This statement
provides clarification with regard
39
<PAGE>
to certain implementation issues under SFAS No. 133 on specific types of hedges.
Management anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 and SFAS No. 138 will not have a significant effect
on the Company's results of operations or its financial position.
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. In June 2000, the SEC staff
extended the effective date of SAB No. 101 until the fourth quarter of fiscal
2001. Management does not expect SAB No. 101 to have a material effect on the
Company's financial position or results of operations.
40
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures arise from changes in interest
rates and fluctuations in the exchange rates related primarily to the New
Zealand, Australian and Canadian dollars. The Company utilizes interest rate
swaps and foreign currency forward contracts to reduce its exposure to adverse
fluctuations in interest rates and exchange rates. The Company does not hold or
issue derivative instruments for trading purposes.
INTEREST RATE RISK
See the disclosure included in the Company's 2000 Annual Report on
Form 10-K, as amended. At the Company's current debt levels, a hypothetical 10%
increase in the weighted average interest rate would result in approximately
$1.6 million net of taxes, of additional interest expense on an annual basis.
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),
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 and sales of goods to overseas markets, as well
as on the interest paid related to intercompany debt obligations denominated in
U.S. dollars. The Company 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 currencies are 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
translation effects for the subsidiaries using functional currencies other than
the U.S. dollar are included in accumulated other comprehensive loss in
stockholders' equity, with the exception of the Company's intercompany loans to,
and the related accrued interest due from, 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 $0.01 change in the NZD exchange rate would result
in the recording of an unrealized foreign currency transaction gain or loss of
approximately $7.0 million. See "--Introduction--Factors Affecting
Comparability--Effects of Fluctuating Exchange Rates." In addition, as of
October 28, 2000, the stockholders' equity of the Blue Star Group totaled
$80.5 million.
As of October 28, 2000, Blue Star held foreign currency forward contracts
for a notional amount of approximately $3.0 million at an average rate of $0.49.
These contracts expire January 25, 2001. The potential unrealized loss that
would result from a hypothetical 10% change in exchange rates would be
approximately $0.3 million.
41
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the disclosure included in the Company's 2000 Annual Report on
Form 10-K, as amended. Since the filing of that Report, a motion by plaintiffs
to obtain interlocutory review in one of the cases was denied, and, in
November 2000, the District Court in which the matters have been consolidated
granted motions to re-open the cases. The Court has set a schedule for briefing
a motion to dismiss the consolidated amended complaint in the purported class
action and for decisions with respect to motions to dismiss two of the other
cases. The Company does not believe that the status of legal proceedings
otherwise is materially different than at the date of the 2000 Annual Report.
For a summary of legal proceedings, refer to Note 11 of the Notes to the
Company's consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's stockholders was held on September 15,
2000. 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.......................... 32,456,977 1,172,301
Kevin J. Conway............................ 32,710,252 919,026
Frank P. Doyle............................. 32,707,781 921,497
Brian D. Finn.............................. 32,710,060 919,218
L. Dennis Kozlowski........................ 32,711,326 917,952
Milton H. Kuyers........................... 32,709,981 919,297
Allon H. Lefever........................... 32,711,981 917,297
Edward J. Mathias.......................... 32,710,981 918,297
Warren D. Feldberg......................... 32,700,359 928,919
</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 28, 2001, pursuant to the following votes:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ---------- --------- ---------
<S> <C> <C> <C>
33,218,668 379,566 31,044
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Fourth Amendment, dated as of September 29, 2000, to the Credit
Agreement, dated as of June 9, 1998, as amended by the First Amendment
dated as of August 21, 1998, the Second Amendment dated as of April 15,
1999, and the Third Amendment dated as of April 28, 2000, among U.S.
Office Products Company, Blue Star Group Limited, the Lenders thereunder,
Bankers Trust Company, as Syndication Agent, Merrill Lynch Capital
Corporation, as Documentation Agent, and The Chase Manhattan Bank, as
Administrative Agent
10.2 Fifth Amendment, dated as of December 7, 2000, to the Credit Agreement,
dated as of June 9, 1998, as amended by the First Amendment dated as of
August 21, 1998, the Second Amendment dated as of April 15, 1999, the
Third Amendment dated as of April 28, 2000, and the Fourth Amendment
dated as of September 29, 2000, among U.S. Office Products Company, Blue
Star Group Limited, the Lenders thereunder, Bankers Trust Company, as
Syndication Agent, Merrill
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<PAGE>
Lynch Capital Corporation, as Documentation Agent, and The Chase
Manhattan Bank, as Administrative Agent
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:
i. Form 8-K dated October 6, 2000 and filed with the Commission on
October 20, 2000 reporting information under Items 2 and 5.
43
<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.
<TABLE>
<S> <C> <C>
US OFFICE PRODUCTS COMPANY
December 12, 2000 By: /s/ WARREN D. FELDBERG
Date --------------------------------------------------------
Warren D. Feldberg
PRESIDENT AND CHIEF EXECUTIVE OFFICER
December 12, 2000 By: /s/ JOSEPH T. DOYLE
Date --------------------------------------------------------
Joseph T. Doyle
CHIEF FINANCIAL OFFICER
</TABLE>
44
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Fourth Amendment, dated as of September 29, 2000, to the
Credit Agreement, dated as of June 9, 1998, as amended by
the First Amendment dated as of August 21, 1998, the Second
Amendment dated as of April 15, 1999, and the Third
Amendment dated as of April 28, 2000, among U.S. Office
Products Company, Blue Star Group Limited, the Lenders
thereunder, Bankers Trust Company, as Syndication Agent,
Merrill Lynch Capital Corporation, as Documentation Agent,
and The Chase Manhattan Bank, as Administrative Agent
10.2 Fifth Amendment, dated as of December 7, 2000, to the Credit
Agreement, dated as of June 9, 1998, as amended by the
First Amendment dated as of August 21, 1998, the Second
Amendment dated as of April 15, 1999, the Third Amendment
dated as of April 28, 2000, and the Fourth Amendment dated
as of September 29, 2000, among U.S. Office Products
Company, Blue Star Group Limited, the Lenders thereunder,
Bankers Trust Company, as Syndication Agent, Merrill Lynch
Capital Corporation, as Documentation Agent, and The Chase
Manhattan Bank, as Administrative Agent
27 Financial Data Schedule
</TABLE>
45
