US OFFICE PRODUCTS CO, 10-Q, 2000-09-12

US OFFICE PRODUCTS CO
10-Q, 2000-09-12
CATALOG & MAIL-ORDER HOUSES

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<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 JULY 29, 2000

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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
incorporation or organization.) Identification No.)

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 September 11, 2000, there were 37,457,107 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
July 29, 2000 (unaudited) and April 29, 2000

Consolidated Statement of Operations........................ 3
For the three months ended July 29, 2000 (unaudited) and
July 24, 1999 (unaudited)

Consolidated Statement of Cash Flows........................ 4
For the three months ended July 29, 2000 (unaudited) and
July 24, 1999 (unaudited)

Notes to Consolidated Financial Statements.................. 5

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18

Item 3. Quantitative and Qualitative Disclosures about Market 29
Risk......................................................

PART II--OTHER INFORMATION

Item 1. Legal Proceedings........................................... 30

Item 6. Exhibits and Reports on Form 8-K............................ 30

Signatures........................................................... 31

Exhibit Index........................................................ 32
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

US OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JULY 29, APRIL 29,
2000 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,759 $ 39,711
Accounts receivable, less allowance for doubtful accounts
of $11,169 and $11,766, respectively.................... 259,600 259,287
Inventories, net.......................................... 153,239 155,206
Prepaid expenses and other current assets................. 109,424 89,184
---------- ----------
Total current assets.................................. 568,022 543,388

Property and equipment, net................................. 205,730 210,903
Intangible assets, net...................................... 764,987 791,393
Other assets................................................ 179,182 199,982
---------- ----------
Total assets.......................................... $1,717,921 $1,745,666
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 142,177 $ 78,956
Accounts payable.......................................... 163,332 156,840
Accrued compensation...................................... 31,957 39,861
Other accrued liabilities................................. 76,159 100,386
---------- ----------
Total current liabilities............................. 413,625 376,043

Long-term debt.............................................. 1,051,329 1,055,069
Other long-term liabilities and minority interests.......... 28,627 28,512
---------- ----------
Total liabilities..................................... 1,493,581 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...................... (137,257) (120,506)
Accumulated deficit....................................... (367,047) (321,932)
---------- ----------
Total stockholders' equity............................ 224,340 286,042
---------- ----------
Total liabilities and stockholders' equity............ $1,717,921 $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
-------------------
JULY 29, JULY 24,
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $545,771 $625,503
Cost of revenues............................................ 402,283 450,720
-------- --------
Gross profit.............................................. 143,488 174,783

Selling, general and administrative expenses................ 136,483 158,610
Amortization expense........................................ 11,856 5,990
Operating restructuring costs............................... 2,795 1,909
-------- --------
Operating income (loss)................................... (7,646) 8,274

Interest expense............................................ 29,785 27,717
Interest income............................................. (370) (1,070)
Unrealized foreign currency transaction loss................ 19,668 13,555
Equity in loss of affiliates................................ 2,167 1,122
Loss on sale or closure of businesses....................... 1,700 954
Other (income) expense...................................... (2,628) 375
-------- --------
Loss before benefit from income taxes....................... (57,968) (34,379)
Benefit from income taxes................................... (12,853) (6,852)
-------- --------
Net loss.................................................... $(45,115) $(27,527)
======== ========

Basic and diluted per share amounts:
Net loss.................................................. $ (1.22) $ (0.75)
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE>
US OFFICE PRODUCTS COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
JULY 29, JULY 24,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(45,115) $(27,527)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 22,378 16,265
Unrealized foreign currency transaction loss............ 19,668 13,555
Equity in loss of affiliates............................ 2,167 1,122
Gain on investments..................................... (2,729)
Loss on sale or closure of businesses................... 1,700 954
Changes in assets and liabilities (net of changes in
assets and liabilities related to business
combinations):
Accounts receivable, net.............................. (7,197) (5,207)
Inventories, net...................................... (8,501) 1,074
Prepaid expenses and other current assets............. (20,508) (10,416)
Accounts payable...................................... 11,174 14,631
Accrued liabilities................................... (23,189) (14,963)
-------- --------
Net cash used in operating activities............... (50,152) (10,512)
-------- --------
Cash flows from investing activities:
Additions to property and equipment, net of disposals..... (10,277) (12,754)
Proceeds from sale of businesses.......................... 8,241 255
Proceeds from sale of investments......................... 4,520
Cash paid in acquisition, net of cash received............ (1,500)
Investments in affiliates................................. (1,000) (4,000)
Other..................................................... (2,280) 1,287
-------- --------
Net cash used in investing activities............... (2,296) (15,212)
-------- --------
Cash flows from financing activities:
Proceeds from (payments of) short-term debt, net.......... 63,211 (6,516)
Proceeds from (payments of) long-term debt................ (4,186) 890
Proceeds from issuance of common stock.................... 164
-------- --------
Net cash provided by (used in) financing
activities........................................ 59,189 (5,626)
-------- --------
Effect of exchange rates on cash and cash equivalents....... (693) (293)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 6,048 (31,643)
Cash and cash equivalents, beginning of period.............. 39,711 76,102
-------- --------
Cash and cash equivalents, end of period.................... $ 45,759 $ 44,459
======== ========
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................ $ 431 $ 1,044
Cash paid for interest.................................... $ 38,426 $ 36,426
</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JULY 29, 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--CHANGE IN ESTIMATE

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 three months
ended July 29, 2000 of approximately $6,257. The additional amortization expense
increased net loss by $6,257, or $0.17 loss per share, for the three months
ended July 29, 2000.

NOTE 3--STOCKHOLDERS' EQUITY

Changes in stockholders' equity during the three months ended July 29, 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........................................ (61,866)
--------
Stockholder's equity balance at July 29, 2000............... $224,340
========
</TABLE>

5
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 3--STOCKHOLDERS' EQUITY (CONTINUED)
The components of comprehensive loss are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
JULY 29, JULY 24,
2000 1999
-------- --------
<S> <C> <C>
Net loss.................................................... $(45,115) $(27,527)
Other comprehensive income (loss):
Cumulative translation adjustment......................... (365) 276
Unrealized losses on securities:
Unrealized holding losses arising during the period..... (12,800)
Reclassification adjustment for gains included in net
loss.................................................. (3,586)
-------- --------
Total other comprehensive income (loss)................... (16,751) 276
-------- --------
Comprehensive loss.......................................... $(61,866) $(27,251)
======== ========
</TABLE>

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). During
the three months ended July 29, 2000, the price of Stamps.com stock declined
from $16.00 per share at April 29, 2000 to $4.94 per share at July 29, 2000.
During this period, 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, of which
$4,520 was received during the three months ended July 29, 2000. As of July 29,
2000, the Company's remaining investment in Stamps.com common stock totaled
372,973 shares. Subsequent to July 29, 2000, the Company sold an additional
207,505 shares, at an average price of $5.02 per share for total proceeds of
$1,042.

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 three months ended July 29, 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 $3,586 realized gain on the sale of
Stamps.com common stock was reclassified from accumulated other comprehensive
loss and was recorded as other (income) expense in the consolidated statement of
operations in the three months ended July 29, 2000. As of July 29, 2000, the
fair market value of MBE's investment in Stamps.com common stock was
approximately $1,842 ($4.94 per share). The unrealized holding losses arising
during the period from the decline in the fair market value of MBE's investment
in Stamps.com was $12,800.

6
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 4--EARNINGS PER SHARE

The following information presents the Company's computations of basic and
diluted 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 July 29, 2000:
Basic and diluted loss per share........................ $(45,115) 37,106 $(1.22)
======
Three months ended July 24, 1999:
Basic and diluted loss per share........................ $(27,527) 36,735 $(0.75)
======
</TABLE>

As a result of the net loss for the three months ended July 29, 2000 and
July 24, 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 5--BUSINESS COMBINATIONS

The Company completed three business divestitures during the three months
ended July 24, 1999 for total proceeds of $255 and two business divestitures
during the three months ended July 29, 2000 for total proceeds of $9,782,
including $8,241 of cash. During the three months ended July 29, 2000, the
Company acquired one business for $2,300, including $1,500 of cash, which was
accounted for under the purchase method.

The following presents the unaudited pro forma results of operations of the
Company for the three months ended, July 29, 2000 and July 24, 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
-------------------
JULY 29, JULY 24,
2000 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $541,985 $550,952
Net loss.................................................... (42,342) (29,572)
Basic and diluted loss per share............................ (1.14) (0.80)
</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 business divestitures occurred at the beginning of fiscal 2000
or the results that may occur in the future.

7
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 6--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;

- 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, 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;

- 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, the Company's e-commerce operation (USOPNET.com) and the Company's
equity interests in Dudley and the technology business formerly owned by the
Blue Star Group ("Business Solutions"). 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 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
financial statements

8
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 6--SEGMENT REPORTING (CONTINUED)
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 JULY 29, 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.............. $247,610 $ 99,192 $ 628 $347,430 $28,132 $140,443 $ 19,391
Gross profit.......... 62,818 21,344 744 84,906 7,171 37,839 10,297
Depreciation and
amortization........ 5,591 1,825 2,078 9,494 2,213 8,278 2,060
Operating income
(loss) before
restructuring
costs............... 5,779 1,983 (9,306) (1,544) 244 (1,962) 2,901
EBITDA (a)............ 11,370 3,808 (7,228) 7,950 2,457 6,316 4,961
Other significant
items:
Identifiable
assets............ 399,582 165,603 69,021 634,206 99,464 497,164 324,452
Net capital
expenditures...... 168 223 3,787 4,178 3,046 2,847 202

<CAPTION>
THREE MONTHS ENDED JULY 29, 2000
----------------------------------------

CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues.............. $ 10,375 $ 545,771
Gross profit.......... 3,275 143,488
Depreciation and
amortization........ 333 22,378
Operating income
(loss) before
restructuring
costs............... (4,490) (4,851)
EBITDA (a)............ (4,157) 17,527
Other significant
items:
Identifiable
assets............ 817,165 $(654,530) 1,717,921
Net capital
expenditures...... 4 10,277
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 24, 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.............. $249,238 $ 94,718 $ 492 $344,448 $26,891 $201,512 $ 17,863
Gross profit.......... 67,694 20,504 272 88,470 6,997 61,637 9,442
Depreciation and
amortization........ 3,525 1,638 722 5,885 1,364 6,487 1,956
Operating income
(loss) before
restructuring
costs............... 12,664 1,716 (11,589) 2,791 1,688 6,349 1,294
EBITDA (a)............ 16,189 3,354 (10,867) 8,676 3,052 12,836 3,250
Other significant
items:
Identifiable
assets............ 431,871 165,058 52,755 649,684 81,523 720,770 315,444
Net capital
expenditures...... 694 325 3,689 4,708 1,284 5,491 211

<CAPTION>
THREE MONTHS ENDED JULY 24, 1999
----------------------------------------

CONSOLIDATED
OTHER ELIMINATIONS TOTALS
---------- ------------ ------------
<S> <C> <C> <C>
Revenues.............. $ 34,789 $ 625,503
Gross profit.......... 8,237 174,783
Depreciation and
amortization........ 573 16,265
Operating income
(loss) before
restructuring
costs............... (1,939) 10,183
EBITDA (a)............ (1,366) 26,448
Other significant
items:
Identifiable
assets............ 1,176,593 $(967,084) 1,976,930
Net capital
expenditures...... 805 12,499
</TABLE>

------------------------------

(a) EBITDA represents earnings before interest expense, interest income, benefit
from income taxes, depreciation expense, amortization expense, operating
restructuring costs, unrealized foreign currency transaction loss, equity in
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.

9
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 6--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 July 29, 2000:
Revenues............................................... $ 405,328 $140,443 $ 545,771
Operating loss before restructuring costs.............. (2,889) (1,962) (4,851)
Identifiable assets of continuing operations at
period-end........................................... 1,220,757 497,164 1,717,921

Three months ended July 24, 1999:
Revenues............................................... $ 423,991 $201,512 $ 625,503
Operating income before restructuring costs............ 3,834 6,349 10,183
Identifiable assets of continuing operations at
period-end........................................... 1,256,160 720,770 1,976,930
</TABLE>

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following is summarized condensed consolidating financial information
for the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the 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.

10
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS

<TABLE>
<CAPTION>
JULY 29, 2000
------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 1,140 $ 18,200 $ 26,419 $ 45,759
Accounts receivable, less
allowance for doubtful
accounts..................... 203,342 56,258 259,600
Inventories, net............... 73,430 79,799 $ 10 (b) 153,239
Prepaid expenses and other
current assets............... 85,827 13,131 10,264 202 (b) 109,424
---------- --------- --------- --------- ----------
Total current assets....... 86,967 308,103 172,740 212 568,022
Property and equipment, net...... 5,780 106,473 93,887 (410)(b) 205,730
Intangible assets, net........... 530,373 234,614 764,987
Investment in subsidiaries....... 945,080 (945,080)(a)
Other assets..................... 159,125 47,444 (27,387) 179,182
---------- --------- --------- --------- ----------
Total assets............... $1,196,952 $ 992,393 $ 473,854 $(945,278) $1,717,921
========== ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................ $ 139,779 $ 1,115 $ 1,283 $ 142,177
Short-term intercompany
balances..................... 116,375 (116,175) (200)
Accounts payable............... 7,376 104,976 50,980 163,332
Accrued compensation........... 3,351 16,708 11,898 31,957
Other accrued liabilities...... 17,915 10,270 47,974 76,159
---------- --------- --------- --------- ----------
Total current
liabilities.............. 284,796 16,894 111,935 413,625
Long-term debt................... 1,044,174 4,192 2,963 1,051,329
Other long-term liabilities and
minority interests............. 24,089 4,672 (134) 28,627
Long-term intercompany
balances....................... (212,296) (71,883) 284,179
---------- --------- --------- --------- ----------
Total liabilities.......... 1,140,763 (46,125) 398,943 1,493,581
---------- --------- --------- --------- ----------
Stockholders' equity:
Preferred stock................
Common stock................... 37 37
Additional paid-in capital..... (388,612) 1,769,352 292,947 $(945,080)(a) 728,607
Accumulated other comprehensive
loss......................... (83,153) 654 (54,758) (137,257)
Retained earnings (accumulated
deficit)..................... 527,917 (731,488) (163,278) (198) (367,047)
---------- --------- --------- --------- ----------
Total stockholders'
equity................... 56,189 1,038,518 74,911 (945,278) 224,340
---------- --------- --------- --------- ----------
Total liabilities and
stockholders' equity..... $1,196,952 $ 992,393 $ 473,854 $(945,278) $1,717,921
========== ========= ========= ========= ==========
</TABLE>

11
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
APRIL 29, 2000
------------------------------------------------------------------------
US OFFICE
PRODUCTS
COMPANY
(PARENT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 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>

12
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

STATEMENTS OF OPERATIONS

Selling, general and administrative
expenses........................... $ 11,203 89,213 36,030 37 (c) 136,483
Amortization expense................. 7,287 4,569 11,856
Operating restructuring costs........ 128 2,253 414 2,795
-------- -------- -------- ------- --------
Operating income (loss)............ (11,331) 5,621 (1,996) 60 (7,646)

Interest expense..................... 31,086 (4,810) 3,509 29,785
Interest income...................... (4) (232) (134) (370)
Unrealized foreign currency
transaction loss................... 11,767 7,901 19,668
Equity in loss of affiliates......... 2,167 2,167
Loss on sale or closure of
businesses......................... 1,700 1,700
Other (income) expense............... 6 (3,510) 876 (2,628)
-------- -------- -------- ------- --------
Income (loss) before provision for
(benefit from) income taxes........ (54,186) 12,473 (16,315) 60 (57,968)
Provision for (benefit from) income
taxes.............................. (20,455) 7,854 (277) 25 (12,853)
-------- -------- -------- ------- --------
Net income (loss).................... $(33,731) $ 4,619 $(16,038) $ 35 $(45,115)
======== ======== ======== ======= ========
</TABLE>

13
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)

Selling, general and administrative
expenses........................... $ 12,203 92,335 54,082 (10)(c) 158,610
Amortization expense................. 3,923 2,067 5,990
Operating restructuring costs........ 102 1,333 474 1,909
-------- -------- -------- ------- --------
Operating income (loss)............ (12,305) 14,411 6,170 (2) 8,274

Interest expense..................... 31,961 (14,035) 9,791 27,717
Interest income...................... (280) (640) (150) (1,070)
Unrealized foreign currency
transaction loss................... 13,555 13,555
Equity in loss of affiliates......... 1,122 1,122
Loss on sale or closure of
businesses......................... (5,808) 5,309 1,453 954
Other (income) expense............... 1,345 (981) 11 375
-------- -------- -------- ------- --------
Income (loss) before provision for
(benefit from) income taxes........ (39,523) 24,758 (19,612) (2) (34,379)
Provision for (benefit from) income
taxes.............................. (16,175) 13,077 (3,754) (6,852)
-------- -------- -------- ------- --------
Net income (loss).................... $(23,348) $ 11,681 $(15,858) $ (2) $(27,527)
======== ======== ======== ======= ========
</TABLE>

14
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 29, 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......................... $(44,022) $(8,203) $ 2,073 $(50,152)
Cash flows from investing
activities......................... (860) (4,441) 1,783 $ 1,222 (2,296)
Cash flows from financing
activities......................... 44,902 12,355 3,154 (1,222) 59,189
Effect of exchange rates on cash and
cash equivalents................... (693) (693)
-------- ------- ------- ------- --------
Net increase (decrease) in cash and
cash equivalents................... 20 (289) 6,317 6,048
Cash and cash equivalents at
beginning of period................ 1,120 18,489 20,102 39,711
-------- ------- ------- ------- --------
Cash and cash equivalents at end of
period............................. $ 1,140 $18,200 $26,419 $ $ 45,759
======== ======= ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 24, 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......................... $(44,908) $ 23,132 $ 11,264 $ $(10,512)
Cash flows from investing
activities......................... (416) (10,413) (4,383) (15,212)
Cash flows from financing
activities......................... 14,002 (9,587) (10,041) (5,626)
Effect of exchange rates on cash and
cash equivalents................... (293) (293)
-------- -------- -------- ---- --------
Net increase (decrease) in cash and
cash equivalents................... (31,322) 3,132 (3,453) (31,643)
Cash and cash equivalents at
beginning of period................ 48,094 9,281 18,727 76,102
-------- -------- -------- ---- --------
Cash and cash equivalents at end of
period............................. $ 16,772 $ 12,413 $ 15,274 $ $ 44,459
======== ======== ======== ==== ========
</TABLE>

The "US Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.

15
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 7--CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
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:

Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:

(d) Elimination of intercompany profits.

NOTE 8--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 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 9--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

16
<PAGE>
US OFFICE PRODUCTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JULY 29, 2000

(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)

NOTE 9--COMMITMENTS AND CONTINGENCIES (CONTINUED)
failed to disclose material information in connection with the Company's
strategic restructuring plan. Two of the actions allege breach of contract under
California law in conjunction with the Company's acquisition of MBE. The actions
seek declaratory relief, damages and attorney's fees. 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 this action.

Complaints were also filed in fiscal 1999 by sellers of businesses that the
Company acquired in the fall of 1997 and that were spun off in connection with
the Company's strategic restructuring plan. The complaints assert violation of
Federal and/or state securities and other laws, claims of fraud,
misrepresentation, conspiracy, breach of contract, negligence and/or breach of
fiduciary duty. The Company believes that these claims may be subject to
indemnification, in part, under the terms of the distribution agreement executed
in connection with the Company's 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 10--SUBSEQUENT EVENTS

As reported in the Company's Annual Report on Form 10-K for the fiscal year
ended April 29, 2000, the Company's common stock had been listed on The Nasdaq
SmallCap Market pursuant to a temporary exception to the listing maintenance
standards for the SmallCap Market. The Company was unable to achieve compliance
with the maintenance standards by September 6, 2000, which was the last day on
which the exception was made available to the Company. As a result, the
Company's common stock was moved to the OTC Bulletin Board effective
September 11, 2000.

17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE FOLLOWING:

- THE COMPANY'S HIGH LEVEL OF DEBT

- 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 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.

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, print
and consumer retailing businesses. The Company also owns Mail Boxes Etc.
("MBE"), the world's largest franchisor retail business, communications and
postal service centers, and 49% of Dudley Stationery Limited ("Dudley"), a
contract stationer in the United Kingdom.

18
<PAGE>
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, benefit from income taxes,
depreciation expense, amortization expense, operating restructuring costs,
unrealized foreign currency transaction loss, equity in 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, office furniture, and vending products and
services to corporate customers. MBE derives revenues primarily from royalties
and marketing fees, franchise fees and the sale of supplies and equipment to MBE
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, office furniture, and vending products and services and
includes occupancy, delivery and certain depreciation costs. Rebates and
discounts on inventory reduce these costs when such inventory is sold. MBE's
cost of revenues represents primarily franchise operation expenses and the cost
of supplies and equipment sold to MBE 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

Certain factors should be considered in comparing the Company's financial
condition and results of operations in fiscal 2001 to those in fiscal 2000.

DIVESTITURES

In fiscal 2000, the Company completed nine business divestitures, and it
used the proceeds of the divestitures primarily to reduce indebtedness. In the
first quarter of fiscal 2001, the Company completed two business divestitures.
The Company is actively pursuing a strategy to reduce debt by selling certain of
its non-core businesses. See "--Liquidity and Capital Resources." The Company
expects that this strategy is necessary to ensure that the remaining businesses
have sufficient liquidity and financial flexibility. At any given time, the
Company may be involved in discussions with one or more parties relating to
potential transactions involving certain of its businesses. There can be no
assurance that any of these or other negotiations will lead to definitive
agreements or, if agreements are reached, that any transactions will be
consummated. As dispositions occur, the Company's revenues will decline. If
reductions in operating costs relating to the dispositions, reductions in debt
service costs resulting from repayment of indebtedness from proceeds of the
dispositions, and/or reductions in depreciation and amortization costs related
to the dispositions do not offset this decrease in revenue, the Company's EBITDA
may also 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 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

19
<PAGE>
fluctuations in foreign currency exchange rates. The exchange rate for the New
Zealand dollar, as compared to the U.S. dollar, declined approximately 11.3%
during fiscal 2000 and has declined an additional 14.4% from the start of fiscal
2001 through September 8, 2000. The exchange rate for the Australian dollar, as
compared to the U.S. dollar declined approximately 9.9% during fiscal 2000 and
has declined an additional 4.9% from the start of fiscal 2001 through September
8, 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 ("USD") value of revenues from operations in New
Zealand and Australia have 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 U.S. buyer values such non-U.S. assets on the basis
of their cash flows after translation to USD.

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 resulted in additional selling, general
and administrative expense related to outside resources to refine the Company's
financial and operating change management strategies. In addition, the
accelerated change activities 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. The Company is in the early
stages of these strategies, and there is no assurance that it will be
successful. In addition, the disruptions experienced during fiscal 2000 have had
some residual impact on operations during fiscal 2001.

CONSOLIDATED RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 29, 2000, COMPARED TO THREE MONTHS ENDED JULY 24, 1999

REVENUES

Revenues decreased 12.7%, from $625.5 million for the three months ended
July 24, 1999, to $545.8 million for the three months ended July 29, 2000. The
decrease in revenues was due primarily to the sale of nine businesses during
fiscal 2000 (the most significant of which was the sale of 60% of the Blue Star
Group's technology division ("Business Solutions")), and the 13.7% and 10.6%
declines in the average exchange rates of the New Zealand and Australian
dollars, respectively, since the first 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 July 24, 1999 were equal to the average exchange rates for the three
months ended July 29, 2000 ("Pro Forma Currency Adjusted"), revenues increased
2.4%. The increase in revenues on a Pro Forma Currently Adjusted basis is due
primarily to an increase in sales in the North American office furniture
business arising from the uneven timing of contract furniture projects in the
three months ended July 24, 1999 versus the three months ended July 29, 2000.

20
<PAGE>
GROSS PROFIT

Gross profit decreased 17.9%, from $174.8 million for the three months ended
July 24, 1999, to $143.5 million for the three months ended July 29, 2000. The
decrease in gross profit dollars is due primarily to the divestiture of several
high margin businesses and the decline in the exchange rates for the New Zealand
and Australian dollars. Gross profit as a percentage of revenues ("gross
margin") decreased from 27.9% for the three months ended July 24, 1999, to 26.3%
for the three months ended July 29, 2000. The decrease in gross margin, on a
consolidated basis, was driven primarily by gross margin declines in the North
American office supplies business and at the Blue Star Group. See "--Business
Segment Results of Operations."

The decline in gross margin in the North American office supplies business
was as a result of changes in the costs and selling prices of products, as well
as increased delivery expenses, arising from the disruptive changes that the
business experienced in fiscal 2000, including major system conversions,
warehouse consolidations and the change to a single wholesaler arrangement. The
gross margin reported in the first quarter of fiscal 2001 reflects an increase
from the gross margin reported in the fourth quarter of fiscal 2000. Prior to
the first quarter of fiscal 2001, gross margin in the North American office
supplies business had declined in each of the last four consecutive quarters.
While the Company believes that the quarter-over-quarter increase in gross
margin reported in the first quarter of fiscal 2001 reflects the efforts of the
management team at USOP-NA to reduce operational disruption and stabilize the
business, there can be no assurance that gross margin will increase in future
quarters. The office supplies business in North America is highly competitive,
and gross margin in the Company's North American office supplies business is
affected by many factors, including customer mix, vendor pricing and terms, and
the Company's warehousing and distribution practices and strategies.

The declines in the gross margin in the Blue Star Group businesses resulted
primarily from competitive pressures in the office supplies business and the
impact of a sluggish economy in New Zealand on the Blue Star Group's print and
retail businesses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased 14.0%, from
$158.6 million for the three months ended July 24, 1999, to $136.5 million for
the three months ended July 29, 2000. The decrease in selling, general and
administrative expenses is primarily due to the divestiture of nine businesses
during fiscal 2000 and the decline in the exchange rates for the New Zealand and
Australian dollars. On a Pro Forma Currency Adjusted basis, selling, general and
administrative expenses increased 1.2%. 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. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.4% for the three months ended
July 24, 1999, to 25.0% for the three months ended July 29, 2000. The decrease
in selling, general and administrative expenses as a percentage of revenues is
primarily due to the cost reduction activities in USOP-NA.

AMORTIZATION EXPENSE

Amortization expense increased 97.9% from $6.0 million for the three months
ended July 24, 1999 to $11.9 million for the three months ended July 29, 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 three months
ended July 29, 2000 of approximately $6.3 million. See Note 2 of the Notes to
the consolidated financial statements included elsewhere in this Quarterly
Report.

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OPERATING RESTRUCTURING COSTS

The Company recorded operating restructuring costs of $2.8 and $1.9 million
during the three months ended July 29, 2000, and July 24, 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 10.4%, from
$26.6 million for the three months ended July 24, 1999, to $29.4 million for the
three months ended July 29, 2000. This increase is due primarily to higher
interest rates.

UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS

The Company recorded an unrealized foreign currency transaction loss of
$19.7 million during the three months ended July 29, 2000. This loss represents
the impact of the devaluation of the New Zealand dollar ("NZD") 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
$0.46 at July 29, 2000. The Australian dollar remained at USD $0.59 from
April 29, 2000 to July 29, 2000. See "--Liquidity and Capital Resources" and
"Quantitative and Qualitative Disclosures about Market Risk--Foreign Currency
Exchange Rate Risk."

During the three months ended July 24, 1999, the Company recorded an
unrealized foreign currency transaction loss of $13.6 million during the three
months ended July 24, 1999. This loss represents the impact of the devaluation
of the NZD on intercompany loans to, and the related accrued interest due from,
the Blue Star Group. The NZD declined from USD $0.55 at April 24, 1999 to
approximately USD $0.53 at July 24, 1999.

EQUITY IN LOSS OF AFFILIATES

The equity in loss of affiliates represents the Company's proportionate
share of the operating results of its investments in Dudley and Business
Solutions. The equity in loss of affiliates increased from $1.1 million in the
three months ended July 24, 1999 to $2.2 million in the three months ended
July 29, 2000. The increase is due primarily to the continuing operating losses
at Dudley arising from continuing higher operating costs related to stocking and
distribution problems in Dudley's national distribution facility and the
increased cost and negative operating effects of the implementation of an
enterprise-wide computer system. These activities also negatively affected
customer service levels, which have had a negative impact on sales.

LOSS ON SALE OR CLOSURE OF BUSINESSES

The Company recorded a $1.7 million loss on the sale of two businesses and
the closure of one business during the three months ended July 29, 2000. The
Company recorded a $1.0 million loss on the sale of various properties owned by
the Blue Star Group during the three months ended July 24, 1999.

OTHER (INCOME) EXPENSE

The change in other (income) expense from expense of $0.4 million for the
three months ended July 24, 1999 to income of $2.6 million for the three months
ended July 29, 2000 is due primarily to the $3.6 million gain on the sale of
Stamps.com common stock. The Company sold 945,000 shares of Stamps.com common
stock in a series of open market transactions for gross proceeds of
$6.5 million, of

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which $4.5 million was received during the three months ended July 29, 2000.
Subsequent to July 29, 2000, the Company sold an additional 207,505 shares for
gross proceeds of $1.0 million. The Company continues to own 165,468 shares of
Stamps.com common stock as of September 8, 2000. See "--Liquidity and Capital
Resources--Stockholders' Equity." The gain on the sale of Stamps.com common
stock was partially offset by the writedown of the value of an equity investment
held by the Blue Star Group of $0.9 million.

INCOME TAXES

The benefit from income taxes of $12.9 million and $6.9 million for the
three months ended July 29, 2000 and July 24, 1999, respectively, represent
effective income tax benefit rates of 22.2% and 19.9%, respectively. The
effective income tax benefit rates reflect the recording of income tax benefits
at the federal statutory rate of 35.0%, plus appropriate state, local and
foreign taxes. The effective income tax benefit rates were reduced to reflect
non-deductible goodwill amortization expense.

BUSINESS SEGMENT RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 29, 2000, COMPARED TO THREE MONTHS ENDED JULY 24, 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 6 of the notes to the Company's
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.

NORTH AMERICAN OFFICE SUPPLIES--Revenues for the three months ended
July 29, 2000 decreased 0.7% on a historical basis versus the three months ended
July 24, 1999. EBITDA for the three months ended July 29, 2000 decreased
approximately 30.0% on a historical basis versus the three months ended
July 24, 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, including system
conversions, warehouse and customer service center consolidations, and the
conversion to a single wholesaler relationship. See "--Introduction." The
decline in gross margin was partially offset by lower selling, general and
administrative expenses.

NORTH AMERICAN OFFICE FURNITURE--Revenues for the three months ended
July 29, 2000 increased 4.7% on a historical basis and 11.2% on a pro forma
basis versus the three months ended July 24, 1999. The increases in revenues are
due primarily to the uneven timing of contract furniture projects in the three
months ended July 24, 1999. EBITDA for the three months ended July 29, 2000
increased 13.5% on a historical basis and 31.5% on a pro forma basis versus the
three months ended July 24, 1999. The significant increase in EBITDA was driven
by the increase in revenues, an increase in gross margin dollars and a decrease
in selling, general and administrative expenses as a percentage of revenues.

NORTH AMERICAN CORPORATE--EBITDA for the three months ended July 29, 2000
increased 33.5% on a historical basis versus the three months ended July 24,
1999. The increase in EBITDA is due primarily to headcount reductions in the
North American corporate staff.

USREFRESH--Revenues for the three months ended July 29, 2000 increased 4.6%
on a historical basis and 4.0% on a pro forma basis versus the three months
ended July 24, 1999. The increase in revenues is primarily the result of sales
growth in the vending businesses due to an increase in the number of sales force
personnel. EBITDA for the three months ended July 29, 2000 decreased 19.5% on a
historical basis and 21.7% on a pro forma basis versus the three months ended
July 24, 1999. The decline in EBITDA is due primarily to an increase in selling,
general and administrative expenses arising from the costs associated with the
development of a separate corporate management team.

BLUE STAR GROUP--Revenues for the three months ended July 29, 2000 decreased
30.3% on a historical basis versus the three months ended July 24, 1999 and
increased 1.2% 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 and the significant decline in the exchange rates
for the New Zealand and Australian

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<PAGE>
dollars. See "--Liquidity and Capital Resources" and "Quantitative and
Qualitative Disclosures about Market Risk--Foreign Currency Exchange Rate Risk."
EBITDA for the three months ended July 29, 2000 decreased 50.8%, on a historical
basis primarily due to the sale of Business Solutions during fiscal 2000. On a
Pro Forma Currency Adjusted basis, EBITDA for the three months ended July 29,
2000 declined 29.6% versus the three months ended July 24, 1999, due primarily
to declines in gross margins in Blue Star's businesses, with increased
competition negatively affecting the office supplies business and the generally
sluggish economic conditions in New Zealand negatively affecting the retail and
print businesses. In addition, general and administrative expenses increased due
to information system implementations in the office supplies and retail
businesses.

MBE--Revenues for the three months ended July 29, 2000 increased 8.6% versus
the three months ended July 24, 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 three months ended July 29, 2000
increased approximately $1.7 million, or 52.7%, versus the three months ended
July 24, 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, which totaled $2.1 million during the three months ended
July 24, 1999 versus $1.0 million during the three months ended July 29, 2000.
MBE's information technology initiatives include the roll-out of a national
point of sale system and a satellite communication system to its domestic
franchisees and the development of a customer data warehouse.

OTHER--Revenues for the three months ended July 29, 2000 decreased 70.2% on
a historical basis and 3.6% on a pro forma basis versus the three months ended
July 24, 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. EBITDA for the three months ended July 29, 2000 decreased
approximately $2.8 million on a historical basis and $0.2 million on a pro forma
basis versus the three months ended July 24, 1999. On a historical basis, the
decrease is primarily the result of the sale of non-core businesses and an
increase in general and administrative expenses associated with the Company's
e-commerce activities in North America.

LIQUIDITY AND CAPITAL RESOURCES

CASH AND WORKING CAPITAL

At July 29, 2000, the Company had cash and cash equivalents of approximately
$45.8 million and working capital of $154.4 million. Approximately
$26.4 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
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, which includes the retention of approximately
$10 million from the sale of assets. 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 is actively exploring
alternatives to secure additional sources of funding, if 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 three months ended July 29, 2000, net cash used in operating
activities was $50.2 million. This use of cash includes the payment of $38.4
million in interest expense which became payable during the quarter. Net cash
used in investing activities for the three months ended July 29, 2000, was $2.3
million, including $10.3 million used for net additions to property and
equipment and $1.5 million paid related to an acquisition, offset by $8.2
million in proceeds from sales of businesses and $4.5 million in proceeds from

24
<PAGE>
sales of investments. Net borrowings increased by $59.0 million, consisting of
$63.2 million of additional borrowings on the Company's revolving credit
facility, offset by payments of $4.2 million.

During the three months ended July 24, 1999, net cash used in operating
activities was $10.5 million. This use of cash included the payment of
$36.4 million in interest expense which became payable during the quarter. Net
cash used in investing activities for the three months ended July 24, 1999, was
$15.2 million, including $12.5 million used for net additions to property and
equipment and $4.0 million used for investment in affiliates. Net borrowings
decreased $5.6 million.

The $39.7 million increase in net cash used in operating activities--from
$10.5 million during the three months ended July 24, 1999 to $50.2 million
during the three months ended July 29, 2000--reflects the cumulative impact of
changes in cash flow use from a number of operating activities. First, the
Company's net loss increased by $12.3 million, after the impact on cash flows of
increases in the benefit from income taxes, depreciation and amortization
expense, unrealized foreign currency transaction losses, equity in loss of
affiliates and loss on sale or closure of businesses and the gain on
investments. Second, differences in working capital levels used $15.1 million of
cash, representing the impact of the greater increases in accounts receivable
($2.0 million) and inventory ($9.6 million, primarily at the Blue Star Group)
during this year's first quarter, and the lesser increase in accounts payable
balances ($3.5 million) during this year's first quarter. Third, cash used by
prepaid expenses and other current assets increased by $4.1 million, after
removing the impact of the increase in the income tax benefit. This was due
primarily to the recording of a $1.9 million receivable related to the sale of
Stamps.com common stock (representing cash not received by the Company as of the
end of this year's first quarter). Fourth, cash used by accrued liabilities
increased by $8.2 million, as a result of the timing of interest payments (which
came due during this year's first quarter but after the end of last year's first
quarter) and the impact of other miscellaneous accrued liabilities.

LONG-TERM DEBT

In fiscal 2000, the Company and its bank lenders 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 2.50%, or a eurodollar rate plus an applicable margin of up to 3.50%.
These margins reflect an increase of 0.75% to 1.00% on all loans as a result of
the amendment to the credit facility in fiscal 2000. The commitment fee for the
revolving credit facility is fixed at 0.5%.

If the Company does not reduce the aggregate debt outstanding under the
credit facility by a total of at least $100.0 million by October 31, 2000 and,
cumulatively, $425.0 million by January 31, 2001, the applicable interest rate
margins will increase by an additional 0.5%. This additional interest will not
become payable until earlier of the date on which the aggregate debt outstanding
is reduced by the specified amounts or April 29, 2001 (the first day of the
fiscal year ending April 27, 2002). The Company expects to use the proceeds from
the sale of certain of its non-core assets to reduce outstanding indebtedness
under the credit facility, but there can be no assurance that it will be able to
sell assets to generate sufficient proceeds to reduce the indebtedness to the
required levels. The Company is permitted to retain up to $25 million of
proceeds from the sale of assets in a fiscal year for reinvestment in the
Company's business. In fiscal 2001, the Company has retained approximately
$15 million of sale proceeds. The credit facility 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

25
<PAGE>
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 has 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 5.7% to 6.0%. The interest rate swap agreements expire over a
period ranging from 2001 to 2003. As a result of these swap agreements (and
including the fixed-rate 2008 Notes), the Company has fixed the interest rates
on $878.6 million (73.6%) of the debt outstanding at July 29, 2000. At the
Company's current debt levels, a hypothetical 10% increase in the weighted
average interest rate would result in approximately $1.9 million, net of taxes,
of additional interest expense on an annual basis.

At July 29, 2000, the Company had total debt outstanding of
$1,193.5 million and had undrawn borrowings of approximately $37.1 million under
the revolving credit facility. The Company's ability to draw on the credit
facility is 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 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 2000
increased the Company's permissible leverage ratio through the end of fiscal
2001 and reduced the minimum required ratio of operating cash flow to cash
interest expense. These changes 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 during fiscal
2001, assuming the Company's EBITDA in fiscal 2001 is at or near anticipated
levels. However, 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), 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. After fiscal
2001, the Company's financial covenants will revert to the financial covenant

26
<PAGE>
levels that existed prior to the fiscal 2000 amendments. These 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 it likely
will be required to seek further amendments of the financial covenants under the
credit facility applicable to the first quarter of fiscal 2002 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.

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 July 29, 2000, was approximately $1.3 billion.

STOCKHOLDERS' EQUITY

In fiscal 2000, MBE, as part of a strategic business relationship invested
$4.0 million in Stamps.com (for approximately 1.3 million shares of Stamps.com
common stock). During the three months ended July 29, 2000, the price of
Stamps.com stock declined from a high of $15.63 per share to a low of $4.94 per
share. During this period, the Company sold 945,000 shares of Stamps.com common
stock, at an average price of $6.83 per share for total proceeds of
$6.5 million, of which $4.5 million was received during the three months ended
July 29, 2000. As of July 29, 2000, the Company's remaining investment in
Stamps.com common stock totaled 372,973 shares. Subsequent to July 29, 2000, the
Company sold an additional 207,505 shares, at an average price of $5.02 per
share for total proceeds of $1.0 million.

Since the Company considers its investment in Stamps.com to be an
available-for-sale security, the unrealized gain or loss on its investment in
Stamps.com is recorded as other comprehensive income, which is 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 $3.6 million gain on the sale of Stamps.com common stock is
recorded as other (income) expense in the consolidated statement of operations.
As of July 29, 2000, the fair market value of MBE's investment in Stamps.com
common stock was approximately $1.8 million ($4.94 per share). The decline in
the fair market value of MBE's investment in Stamps.com of $12.8 million during
the three months ended July 29, 2000 is recorded as other comprehensive loss. As
of September 8, 2000, the quoted market price of Stamps.com common stock was
$7.00 per share.

FOREIGN CURRENCY

During the three months ended July 29, 2000, there was a net reduction in
stockholders' equity, through a cumulative translation adjustment of
approximately $0.4 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." 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 July 29,
2000, the New Zealand dollar continued to weaken against the USD. As of
September 8, 2000, the New Zealand dollar equaled USD $0.42 (down from USD $0.46
at July 29, 2000).

The Company does not consider its intercompany loans to Blue Star to be a
long-term investment. Accordingly, during the three months ended July 29, 2000
and July 24, 1999, the Company recorded

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unrealized foreign currency transaction losses of $19.7 million and
$13.6 million, respectively related to its intercompany loans with Blue Star as
a component of net income.

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
July 29, 2000, the Company had remaining outstanding foreign currency forward
contracts with an aggregate notional amount of approximately $3.5 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 quarter 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 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposures arise from changes in interest
rates and fluctuations in the exchange rates related primarily to the New
Zealand, Australian and Canadian dollars. The Company utilizes interest rate
swaps and foreign currency forward contracts to reduce its exposure to adverse
fluctuations in interest rates and exchange rates. The Company does not hold or
issue derivative instruments for trading purposes.

INTEREST RATE RISK

See the disclosure included in the Company's 2000 Annual Report on
Form 10-K, as amended. The Company does not believe that the risk it faces
related to interest rate risk is materially different than at the date of the
2000 Annual Report.

FOREIGN CURRENCY EXCHANGE RATE RISK

The Company conducts business activities in New Zealand and Australia
(related to the Blue Star Group) and Canada (two coffee businesses) and has a
49% equity interest in a business in the United Kingdom. As a result, the
Company is exposed to foreign currency exchange rate risk primarily due to its
transactions and net assets denominated in New Zealand (NZD), Australian (AUD),
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. In addition, as of July 29, 2000, the stockholders'
equity of the Blue Star Group totaled $102.2 million.

As of July 29, 2000, Blue Star held foreign currency forward contracts for a
notional amount of approximately $3.5 million at a rate of $0.50. These
contracts expire September 15, 2001. The potential unrealized loss that would
result from a hypothetical 10% change in exchange rates would be approximately
$0.3 million.

29
<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. The Company does not believe that the status of legal
proceedings is materially different than at the date of the 2000 Annual Report.
For a summary of legal proceedings, refer to Note 9 of the Notes to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

27 Financial Data Schedule.

(b) REPORTS ON FORM 8-K

During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:

i. None.

30
<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>
<C> <S> <C>
US OFFICE PRODUCTS COMPANY

September 12, 2000 By: /s/ Warren D. Feldberg
---------------------------- --------------------------------------------
Date Warren D. Feldberg
President and Chief Executive Officer

September 12, 2000 By: /s/ Joseph T. Doyle
---------------------------- --------------------------------------------
Date Joseph T. Doyle
Chief Financial Officer
</TABLE>

31
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
27 Financial Data Schedule
</TABLE>