<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 22, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________to
Commission File Number 000-25372
U.S. OFFICE PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-1906050
(State of other jurisdiction (I.R.S. Employer
incorporation or organization.) Identification No.)
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
(202) 339-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----
As of March 3, 2000, there were 36,863,549 shares of common stock
outstanding.
Page 1
<PAGE>
US OFFICE PRODUCTS COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet........................................... 3
January 22, 2000 (unaudited) and April 24, 1999
Consolidated Statement of Operations................................. 4
For the three months ended January 22, 2000 (unaudited)
and January 23, 1999 (unaudited) and the nine months ended
January 22, 2000 (unaudited) and January 23, 1999 (unaudited)
Consolidated Statement of Cash Flows................................. 5
For the nine months ended January 22, 2000 (unaudited) and
January 23, 1999 (unaudited)
Notes to Consolidated Financial Statements (unaudited)............... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 40
Item 5. Other Information.................................................... 40
Item 6. Exhibits and Reports on Form 8-K..................................... 40
Signatures...................................................................... 41
Exhibit Index................................................................... 42
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US OFFICE PRODUCTS COMPANY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 22, APRIL 24,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 23,530 $ 76,102
Accounts receivable, less allowance for doubtful
accounts of $9,116 and $11,720, respectively ....... 302,509 304,374
Inventories, net ..................................... 181,352 206,857
Prepaid expenses and other current assets ............ 95,166 106,771
----------- -----------
Total current assets ............................. 602,557 694,104
Property and equipment, net ............................. 217,208 231,152
Intangible assets, net .................................. 831,517 858,197
Other assets ............................................ 213,205 228,706
----------- -----------
Total assets ..................................... $ 1,864,487 $ 2,012,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ...................................... $ 81,524 $ 19,193
Accounts payable ..................................... 171,561 168,976
Accrued compensation ................................. 41,765 46,384
Other accrued liabilities ............................ 81,963 100,688
----------- -----------
Total current liabilities ........................ 376,813 335,241
Long-term debt .......................................... 1,041,395 1,171,429
Other long-term liabilities and minority interests ...... 28,051 25,947
----------- -----------
Total liabilities ................................ 1,446,259 1,532,617
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 500,000 shares
authorized, 73,262 shares and 73,262 shares issued
and outstanding, respectively ......................
Common stock, $.001 par value, 500,000,000 shares
authorized, 36,941,791 and 36,853,505 shares issued,
36,793,218 and 36,702,778 shares outstanding, and
148,573 and 150,727 held in treasury, respectively .. 37 37
Additional paid-in capital ........................... 728,074 727,614
Accumulated other comprehensive loss ................. (109,663) (119,941)
Accumulated deficit .................................. (200,220) (128,168)
----------- -----------
Total stockholders' equity ....................... 418,228 479,542
----------- -----------
Total liabilities and stockholders' equity ....... $ 1,864,487 $ 2,012,159
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 22, JANUARY 23, JANUARY 22, JANUARY 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .................................................. $ 624,439 $ 676,622 $ 1,892,453 $ 2,005,776
Cost of revenues .......................................... 449,657 482,549 1,363,763 1,449,000
----------- ----------- ----------- -----------
Gross profit ....................................... 174,782 194,073 528,690 556,776
Selling, general and administrative expenses .............. 157,919 154,042 477,311 453,508
Amortization expense ...................................... 5,890 6,437 18,132 18,559
Operating restructuring costs ............................. 683 5,034 7,780 17,229
Impaired asset write-offs ................................. 6,005 2,778 6,005 2,778
Strategic Restructuring Plan costs ........................ 97,503
----------- ----------- ----------- -----------
Operating income (loss) ............................ 4,285 25,782 19,462 (32,801)
Interest expense .......................................... 28,595 28,906 84,185 76,785
Interest income ........................................... (433) (299) (1,959) (1,125)
Unrealized foreign currency transaction loss .............. 139 25,893
Loss on sale of businesses ................................ 7,766 4,964 11,787 7,500
Other expense ............................................. 4,393 1,064 6,983 45
----------- ----------- ----------- -----------
Loss from continuing operations before (benefit
from) provision for income taxes and
extraordinary items .................................... (36,175) (8,853) (107,427) (116,006)
(Benefit from) provision for income taxes ................. (9,966) 3,610 (26,267) (16,018)
----------- ----------- ----------- -----------
Loss from continuing operations before
extraordinary items .................................... (26,209) (12,463) (81,160) (99,988)
Loss from discontinued operations, net
of income taxes ........................................ (1,294)
----------- ----------- ----------- -----------
Loss before extraordinary items ........................... (26,209) (12,463) (81,160) (101,282)
Extraordinary items - gain (loss) on early
termination of debt facilities, net of income taxes .... 9,108 9,108 (269)
Net loss .................................................. $ (17,101) $ (12,463) $ (72,052) $ (101,551)
=========== =========== =========== ===========
Basic and diluted per share data:
Loss from continuing operations before
extraordinary items ................................. $ (0.71) $ (0.34) $ (2.21) $ (2.77)
Loss from discontinued operations ...................... (0.03)
Extraordinary items .................................... 0.25 0.25 (0.01)
----------- ----------- ----------- -----------
Net loss ............................................... $ (0.46) $ (0.34) $ (1.96) $ (2.81)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 22, JANUARY 23,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $ (72,052) $ (101,551)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Loss from discontinued operations ......................... 1,294
Depreciation and amortization ............................. 49,912 45,837
Unrealized foreign currency transaction loss .............. 25,893
Strategic Restructuring Plan costs ........................ 70,380
Loss on sale of businesses ................................ 11,787 7,500
Impaired asset write-offs ................................. 6,005 2,778
Deferred income taxes ..................................... (5,411) (1,198)
Equity in net loss (income) of affiliate .................. 6,156 (1,054)
Extraordinary (gain) loss ................................. (9,108) 269
Loss on sale of assets .................................... 295
Changes in assets and liabilities (net of effects of
acquisitions and divestitures):
Accounts receivable ..................................... (33,024) (30,111)
Inventory ............................................... (6,683) (6,602)
Prepaid expenses and other current assets ............... (13,976) (19,467)
Accounts payable ........................................ 26,237 20,289
Accrued liabilities ..................................... (21,645) 22,813
----------- -----------
Net cash (used in) provided by operating activities .... (35,909) 11,472
----------- -----------
Cash flows from investing activities:
Proceeds from sale of businesses ............................ 103,297 1,222
Additions to property and equipment, net of disposals ....... (51,547) (31,201)
Cash paid in acquisitions, net of cash received ............. (9,329) (34,508)
Investments in affiliates ................................... (6,000)
Other ....................................................... 1,355 (179)
----------- -----------
Net cash provided by (used in) investing activities .... 37,776 (64,666)
----------- -----------
Cash flows from financing activities:
Payments of long-term debt .................................. (111,428) (221,073)
Proceeds from (payments of) short-term debt, net ............ 56,133 (347,486)
Proceeds from issuance of long-term debt .................... 520 1,152,640
Repurchase of common stock in Equity Tender ................. (1,000,000)
Proceeds from issuance of common stock, net ................. 460 322,173
Net repayments by discontinued operations ................... 123,551
----------- -----------
Net cash (used in) provided by financing activities .... (54,315) 29,805
----------- -----------
Effect of exchange rates on cash and cash equivalents .......... (124) 321
----------- -----------
Cash used in discontinued operations ........................... (12,518)
----------- -----------
Net decrease in cash and cash equivalents ...................... (52,572) (35,586)
Cash and cash equivalents at beginning of period ............... 76,102 52,021
----------- -----------
Cash and cash equivalents at end of period ..................... $ 23,530 $ 16,435
=========== ===========
</TABLE>
Page 5
<PAGE>
US OFFICE PRODUCTS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 22, JANUARY 23,
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $84,051 $75,502
Income taxes paid $ 4,497 $ 3,187
</TABLE>
The Company issued cash in connection with certain business combinations
accounted for under the purchase method for the nine month periods ended January
22, 2000 and January 23, 1999, respectively. The estimated fair values of the
assets and liabilities at the dates of the acquisitions are presented as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 22, JANUARY 23,
2000 1999
-------- --------
<S> <C> <C>
Accounts receivable $ 3,251
Inventory 3,189
Prepaid expenses and other current assets 3,929
Property and equipment $ 1,578 3,050
Intangible assets 9,785 29,691
Other assets 465
Short-term debt (192) (2,586)
Accounts payable (1,222)
Accrued liabilities (943) (842)
Long-term debt (899) (580)
Other long-term liabilities and minority interests (3,837)
-------- --------
Net assets acquired $ 9,329 $ 34,508
======== ========
</TABLE>
Non-cash transactions:
- - During the nine months ended January 23, 1999, the Company issued 2,025,185
shares of common stock in exchange for $130,989 of the 5 1/2% convertible
subordinated notes due 2001.
- - During the nine months ended January 23, 1999, the Company issued 7,911
shares of common stock upon conversion of $1,000 of the 5 1/2% convertible
subordinated notes due 2003.
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 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 U.S. Office Products
Company (the "Company" or "US Office Products"), and the companies acquired in
business combinations accounted for under the purchase method (the "Purchased
Companies") from their respective acquisition dates. As a result of the
Company's spin-off of its Technology Solutions, Print Management, Educational
Supplies, and Corporate Travel Services businesses (collectively, the "Spin-Off
Companies"), the accompanying consolidated financial statements reflect the
results of the Spin-Off Companies as discontinued operations through June 9,
1998 (the effective date of the Spin-Off). See Note 2, "Discontinued
Operations." The Company's continuing operations consist of its North American
operations (which include office supplies, office furniture, office coffee and
vending services, and a group of non-core businesses), Mail Boxes Etc. ("MBE"),
the Company's international operations in New Zealand and Australia (referred to
herein as the "Blue Star Group"), and the Company's 49% interest in Dudley
Stationery Limited ("Dudley"), a U.K. contract stationer. The North American
operations are primarily in the United States; they include two office coffee
businesses located in Canada.
In June 1998, the Company completed a comprehensive restructuring plan (the
"Strategic Restructuring Plan"). The Strategic Restructuring Plan included three
principal elements: (i) the repurchase by the Company, through a self-tender
offer, of a portion of its outstanding shares (including shares underlying
employee stock options) (the "Equity Tender"); (ii) the Company's distribution
to its stockholders of the shares of the Spin-Off Companies (the
"Distributions"); and (iii) the purchase by an affiliate ("Investor") of an
investment fund managed by Clayton, Dubilier & Rice, Inc., a private investment
fund, of 24.9% of the Company's shares, plus warrants to purchase additional
shares (the "Equity Investment").
In conjunction with the Strategic Restructuring Plan, the Company also
completed several financing transactions (the "Financing Transactions") in June
1998. The Financing Transactions consisted of the following: (i) the Company
repurchased substantially all of its 5 1/2% convertible subordinated notes due
2003; (ii) through an exchange offer, the Company exchanged substantially all of
its 5 1/2% convertible subordinated notes due 2001; (iii) the Company entered
into a new $1,225,000 senior secured bank credit facility and terminated its
former credit facility; and (iv) the Company issued and sold $400,000 of 9 3/4%
senior subordinated notes due 2008 (the "2008 Notes") in a private placement.
During fiscal 1999, the Company reached an agreement with its bank lenders to
revise the terms of the credit facility (as amended, the "Credit Facility"). The
revisions included modifications to the financial covenants and reductions in
the amounts available under the revolving credit facility from $250,000 to
$200,000 and the multi-draw term loan facility from $200,000 to $50,000.
For a complete description of the Strategic Restructuring Plan and the
Financing Transactions, see Note 3 of the Notes to the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended April 24, 1999.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended April 24, 1999, included in the Company's Annual Report on Form 10-K.
NOTE 2 - DISCONTINUED OPERATIONS
As a result of the Strategic Restructuring Plan, the Spin-Off Companies are
reflected as discontinued operations for the nine months ended January 23, 1999
in the Company's consolidated financial statements. The Spin-Off Companies began
operating as independent companies on June 10, 1998.
Page 7
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
The loss from discontinued operations included in the consolidated
statement of operations represents the sum of the results of the Spin-Off
Companies for the 45-day period they were included in the Company's fiscal 1999
results and is summarized as follows:
<TABLE>
<CAPTION>
CORPORATE TOTAL
PRINT TRAVEL EDUCATIONAL TECHNOLOGY DISCONTINUED
MANAGEMENT SERVICES SUPPLIES SOLUTIONS OPERATIONS
---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED JANUARY 23, 1999:
Revenues ............................. $ 41,132 $ 19,346 $ 40,785 $ 30,951 $ 132,214
Operating income (loss) .............. (1,601) 14 1,836 403 652
Income (loss) before provision for
(benefit from) income taxes ........ (2,043) (108) 1,069 381 (701)
Provision for (benefit from) income
taxes .............................. (732) 158 703 464 593
Income (loss) from discontinued
operations, net of income taxes .... (1,311) (266) 366 (83) (1,294)
</TABLE>
The results of the Spin-Off Companies include allocations of interest
expense, at US Office Products' weighted average interest rates, and do not
include any allocations of corporate overhead from US Office Products during the
period presented.
NOTE 3 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the nine months ended January 22,
2000 were as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 24, 1999 $ 479,542
Issuances of common stock in conjunction with:
Employee stock purchase plan 460
Comprehensive loss:
Other comprehensive income 10,278
Net loss (72,052)
---------
Stockholders' equity balance at January 22, 2000 $ 418,228
=========
</TABLE>
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 22, JANUARY 23, JANUARY 22, JANUARY 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (17,101) $ (12,463) $ (72,052) $(101,551)
Other comprehensive income (loss):
Cumulative translation adjustment 9,891 13,038 10,278 (18,107)
--------- --------- --------- ---------
Comprehensive income (loss) $ (7,210) $ 575 $ (61,774) $(119,658)
========= ========= ========= =========
</TABLE>
On June 10, 1998, the Company effected a one-for-four reverse split of its
common stock whereby each four shares of common stock were exchanged for one
share of common stock. All share and per share data appearing in these
consolidated financial statements and notes hereto have been retroactively
adjusted for this split.
Page 8
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 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 EPS from continuing operations before extraordinary items for the
periods presented in the consolidated statement of operations.
<TABLE>
<CAPTION>
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JANUARY 22, 2000:
Basic and diluted loss per share $(26,209) 36,793 $ (0.71)
========
THREE MONTHS ENDED JANUARY 23, 1999:
Basic and diluted loss per share $(12,463) 36,626 $ (0.34)
========
NINE MONTHS ENDED JANUARY 22, 2000:
Basic and diluted loss per share $(81,160) 36,771 $ (2.21)
========
NINE MONTHS ENDED JANUARY 23, 1999:
Basic and diluted loss per share $(99,988) 36,089 $ (2.77)
========
</TABLE>
As a result of the loss from continuing operations before extraordinary
items for the three and nine month periods ended January 22, 2000 and January
23, 1999, the basic and diluted loss per share amounts for such periods were
calculated using the same number of shares outstanding, since all of the
Company's employee stock options and the two series of convertible debt
securities outstanding during the periods were anti-dilutive. In addition, the
convertible preferred stock outstanding during the three and nine month periods
ended January 22, 2000 was anti-dilutive.
NOTE 5 - BUSINESS COMBINATIONS
The Company made no acquisitions and completed three business divestitures,
including the sale of 60% of the technology division of the Blue Star Group
("Business Solutions"), during the three month period ended January 22, 2000.
The Company's remaining 40% interest in Business Solutions is accounted for
under the equity method of accounting. The three business divestitures generated
total proceeds of $99,967, including $89,707 in cash, and resulted in the
recognition of a pre-tax loss of $7,766 during the three months ended January
22, 2000. In the previous six month period ended October 23, 1999, the Company
acquired one business, which was accounted for under the purchase method, for a
purchase price of $9,329 and completed five business divestitures for total
proceeds of $13,590. In fiscal 1999, the Company completed a total of 22
acquisitions, all related to continuing operations, which were accounted for
under the purchase method and had an aggregate purchase price of $34,508. The
Company also completed seven business divestitures or closures during fiscal
1999.
The following presents the unaudited pro forma results of operations of the
Company for the three and nine month periods ended January 22, 2000, and January
23, 1999. These results include the Company's consolidated financial statements
and the results of the Purchased Companies, and exclude the results of all
business divestitures as if all such purchase acquisitions and business
divestitures had been made at the beginning of fiscal 1999. The results
presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, removal of Strategic Restructuring Plan costs
and the inclusion of an appropriate income tax provision or benefit on all
earnings and losses:
Page 9
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JANUARY 22, JANUARY 23, JANUARY 22, JANUARY 23,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues .......................................... $ 596,546 $ 601,051 $ 1,748,614 $ 1,773,177
Income (loss) from continuing operations
before extraordinary items ..................... (25,626) 356 (79,096) (13,574)
Basic and diluted income (loss) per share from
continuing operations before extraordinary items . (0.70) 0.01 (2.15) (0.38)
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the purchase acquisitions and business divestitures occurred at the
beginning of fiscal 1999, or the results that may occur in the future.
NOTE 6 - SEGMENT REPORTING
BUSINESS SEGMENTS
The Company has five reportable segments, which include:
- NORTH AMERICAN OFFICE SUPPLIES - a direct-to-business contract
stationer that offers items such as desktop accessories, writing
instruments, paper products, computer consumables, business machines
and catalog furniture;
- NORTH AMERICAN OFFICE FURNITURE - a group of operating companies that
offer middle-market and contract furniture products and related
services;
- NORTH AMERICAN OTHER - the balance of the Company's North American
operations, which includes a group of operating companies that offer
office coffee and vending services, a group of non-core operating
businesses and the corporate costs associated with the North American
operations, including the Company's information technology department;
- BLUE STAR GROUP - a group of operating companies that include business
supplies, print and consumer retailing operations that operate in New
Zealand and Australia, as well as Business Solutions prior to its
divestiture in December 1999;
- MBE - a franchisor of retail business, communication and postal
service centers which offers a range of business products and services
for personal and business consumers.
Other consists of costs related to the Company's corporate headquarters and
the Company's equity interests in Dudley and Business Solutions. Eliminations
consist of the elimination of the Company's investments in subsidiaries.
During the second quarter of fiscal 2000, the Company's management began
measuring the performance of operating companies that offer office coffee
services along with the operating companies that offer vending services. Prior
to the second quarter, the operating companies offering office coffee services
were considered part of the North American Office Supplies segment. As a result
of this change, the results of the operating companies offering office coffee
services are included in North American Other for all periods presented.
Page 10
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
Management measures the performance of the business segments based on
several factors, including revenues, gross profit, operating income (loss) and
EBITDA, as defined below. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note 2
of the Notes to the Company's audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended April 24,
1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 22, 2000
----------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-----------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- -------- --------- --------- -------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $253,076 $ 90,534 $ 54,304 $ 397,914 $203,898 $ 22,627 $ 624,439
Gross profit ......... 63,917 20,114 16,174 100,205 62,651 11,926 174,782
Depreciation
and amortization ..... 3,460 933 3,379 7,772 6,227 1,987 $ 133 16,119
Operating
income (loss) ........ 5,981 2,971 (12,653) (3,701) 10,318 5,021 (7,353) 4,285
EBITDA (a) ........... 9,712 3,956 (6,242) 7,426 17,275 7,049 (4,658) 27,092
Other significant
items:
Identifiable
assets ........... 451,345 163,177 157,553 772,075 427,492 316,237 1,309,222 $ (960,539) 1,864,487
Net capital
expenditures ...... 795 601 7,514 8,910 6,512 239 254 15,915
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 23, 1999
-------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
--------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ----- -------- ----- --- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ........... $ 259,126 $ 102,353 $ 81,888 $ 443,367 $ 212,093 $ 21,162 $ 676,622
Gross profit ....... 70,365 23,507 20,902 114,774 67,938 11,361 194,073
Depreciation
and amortization ... 4,100 973 2,527 7,600 6,409 1,941 $ 118 16,068
Operating
income (loss) ..... 14,162 1,471 877 16,510 13,073 4,394 (8,195) 25,782
EBITDA (a) ......... 18,779 4,313 6,459 29,551 20,316 6,381 (6,586) 49,662
Other significant
items (b):
Identifiable
assets ........... 841,629 788,354 314,884 1,112,447 $(973,792) 2,083,522
Net capital
expenditures ..... 4,125 4,455 323 1,302 10,205
</TABLE>
Page 11
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 22, 2000
-------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
-------- --------- ------- -------- --------- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ......... $ 768,335 $ 288,913 $ 178,965 1,236,213 $ 595,386 $ 60,854 $1,892,453
Gross profit ..... 202,248 62,820 48,815 313,883 182,372 32,435 528,690
Depreciation
and amortization 11,371 3,539 9,717 24,627 19,005 5,913 $ 367 49,912
Operating
income (loss) ... 31,164 7,973 (27,145) 11,992 19,410 8,132 (20,072) 19,462
EBITDA (a) ....... 44,581 12,665 (11,948) 45,298 40,702 14,199 (17,040) 83,159
Other significant
items:
Identifiable
assets ....... 451,345 163,177 157,553 772,075 427,492 316,237 1,309,222 $ (960,539) 1,864,487
Net capital
expenditures... 3,092 1,413 24,248 28,753 21,117 928 749 51,547
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 23, 1999
--------------------------------------------------------------------------------------------------------------
NORTH AMERICAN OPERATIONS
-----------------------------------------------
OFFICE OFFICE BLUE STAR CONSOLIDATED
SUPPLIES FURNITURE OTHER SUBTOTAL GROUP MBE OTHER ELIMINATIONS TOTALS
--------- --------- --------- ----------- --------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......... $ 784,273 $ 328,916 $ 236,871 $ 1,350,060 $ 600,764 $ 54,952 $2,005,776
Gross profit ...... 209,827 72,273 58,558 340,658 186,305 29,813 556,776
Depreciation
and amortization .. 11,751 2,648 7,084 21,483 18,264 5,742 $ 348 45,837
Operating
income (loss) .... 40,279 4,864 4,519 49,662 22,543 9,870 (114,876) (32,801)
EBITDA (a) ........ 52,969 14,962 15,054 82,985 46,341 16,625 (15,405) 130,546
Other significant
items (b):
Identifiable
assets ......... 841,629 788,354 314,884 1,112,447 $(973,792) 2,083,522
Net capital
expenditures ... 15,530 15,079 1,240 (648) 31,201
</TABLE>
(a) EBITDA represents earnings from continuing operations before interest
expense, interest income, (benefit from) provision for income taxes,
depreciation expense, amortization expense, operating restructuring
costs, Strategic Restructuring Plan costs, impaired asset write-offs,
unrealized foreign currency transaction loss, loss on sale of
businesses, other expense and extraordinary items. EBITDA is not a
measurement of performance under generally accepted accounting
principles and should not be considered an alternative to net income
(loss) as a measure of performance or to cash flow as a measure of
liquidity. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
(b) The identifiable assets as of January 23, 1999 and the net capital
expenditures for the three and nine month periods ended January 23,
1999 have not been presented for the segments of the Company's North
American operations because it was not practicable to obtain such
information.
Page 12
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations
in its different geographic segments:
<TABLE>
<CAPTION>
NORTH NEW ZEALAND
AMERICA AND AUSTRALIA TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JANUARY 22, 2000:
Revenues ...................................................... 420,541 203,898 624,439
Operating income .............................................. (6,033) 10,318 4,285
Identifiable assets of continuing operations at period-end .... 1,436,995 427,492 1,864,487
THREE MONTHS ENDED JANUARY 23, 1999:
Revenues ...................................................... 464,529 212,093 676,622
Operating income .............................................. 12,709 13,073 25,782
Identifiable assets of continuing operations at period-end .... 1,295,168 788,354 2,083,522
NINE MONTHS ENDED JANUARY 22, 2000:
Revenues ...................................................... 1,297,067 595,386 1,892,453
Operating income .............................................. 52 19,410 19,462
Identifiable assets of continuing operations at period-end .... 1,436,995 427,492 1,864,487
NINE MONTHS ENDED JANUARY 23, 1999:
Revenues ...................................................... 1,405,012 600,764 2,005,776
Operating income (loss) ....................................... (55,344) 22,543 (32,801)
Identifiable assets of continuing operations at period-end .... 1,295,168 788,354 2,083,522
</TABLE>
NOTE 7 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following is summarized condensed consolidating financial information
for the Company, showing guarantor subsidiaries and non-guarantor subsidiaries
separately. The financial information shown in the "Guarantor Subsidiaries"
column represents the financial information of the domestic subsidiaries that
are guarantors of the Credit Facility and the 2008 Notes. The guarantor
subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are
full, unconditional and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that
separate financial statements would not provide additional meaningful
information to investors.
Page 13
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 22, 2000
----------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 338 17,202 5,990 23,530
Accounts receivable, less allowance for
doubtful accounts .......................... 219,776 82,733 302,509
Inventories, net ............................. 82,474 99,087 (209)(b) 181,352
Prepaid expenses and other current
assets ..................................... 33,783 31,537 29,553 293 (b) 95,166
----------- ----------- ----------- ------------- -----------
Total current assets ..................... 34,121 350,989 217,363 84 602,557
Property and equipment, net .................... 3,866 106,850 106,902 (410)(b) 217,208
Intangible assets, net ......................... 546,463 285,054 831,517
Investment in subsidiaries ..................... 960,539 (960,539)(a)
Other assets ................................... 146,908 39,826 26,471 213,205
----------- ----------- ----------- ------------- -----------
Total assets ............................. $ 1,145,434 $ 1,044,128 $ 635,790 $ (960,865) $ 1,864,487
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt .............................. $ 79,528 751 1,245 81,524
Short-term intercompany balances ............. 385,675 (387,083) 1,408
Accounts payable ............................. 3,846 103,235 64,480 171,561
Accrued compensation ......................... 3,865 23,447 14,453 41,765
Other accrued liabilities .................... 13,277 13,588 55,098 81,963
----------- ----------- ----------- ------------- -----------
Total current liabilities ................ 486,191 (246,062) 136,684 376,813
Long-term debt ................................. 1,033,247 3,491 4,657 1,041,395
Other long-term liabilities and minority
interests .................................... 22,104 5,648 299 28,051
Long-term intercompany balances ................ (891,861) 539,989 351,872
----------- ----------- ----------- ------------- -----------
Total liabilities ........................ 649,681 303,066 493,512 1,446,259
----------- ----------- ----------- ------------- -----------
Stockholders' equity:
Preferred stock
Common stock ................................ 37 37
Additional paid-in capital .................. 698,007 726,054 264,552 (960,539)(a) 728,074
Accumulated other comprehensive loss ........ (61,293) (48,370) (109,663)
Retained earnings (accumulated deficit) ..... (140,998) 15,008 (73,904) (326)(b) (200,220)
----------- ----------- ----------- ------------- -----------
Total stockholders' equity .............. 495,753 741,062 142,278 (960,865) 418,228
----------- ----------- ----------- ------------- -----------
Total liabilities and stockholders'
equity ................................ $ 1,145,434 $ 1,044,128 $ 635,790 $ (960,865) $ 1,864,487
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
</TABLE>
Page 14
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 24, 1999
--------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............. $ 48,094 $ 9,281 $ 18,727 $ 76,102
Accounts receivable, less allowance for
doubtful accounts .................... 214,826 89,548 304,374
Inventories, net ....................... 98,517 108,396 $ (56)(b) 206,857
Prepaid expenses and other current
assets ............................... 46,988 12,178 47,375 230 (b) 106,771
----------- ---------- --------- ----------- -----------
Total current assets ............... 95,082 334,802 264,046 174 694,104
Property and equipment, net ............... 11,224 104,271 116,067 (410)(b) 231,152
Intangible assets, net .................... 556,468 301,729 858,197
Investment in subsidiaries ................ 972,027 (972,027)(a)
Other assets .............................. 130,615 31,550 66,541 228,706
----------- ---------- --------- ----------- -----------
Total assets ....................... $ 1,208,948 $1,027,091 $ 748,383 $ (972,263) $ 2,012,159
=========== ========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ........................ $ 16,500 $ 1,542 $ 1,151 $ 19,193
Short-term intercompany balances ....... 251,459 (252,938) 1,479
Accounts payable ....................... 1,503 100,120 67,353 168,976
Accrued compensation ................... 4,555 22,751 19,078 46,384
Other accrued liabilities .............. 28,925 17,239 54,524 100,688
----------- ---------- --------- ----------- -----------
Total current liabilities .......... 302,942 (111,286) 143,585 335,241
Long-term debt ............................ 1,165,196 4,111 2,122 1,171,429
Other long-term liabilities and minority
interests ............................... 22,104 3,526 317 25,947
Long-term intercompany balances ........... (816,154) 398,400 417,851 $ (97)(b)
----------- ---------- --------- ----------- -----------
Total liabilities .................. 674,088 294,751 563,875 (97) 1,532,617
----------- ---------- --------- ----------- -----------
Stockholders' equity:
Preferred stock
Common stock ........................... 37 37
Additional paid-in capital ............. 800,478 627,923 271,240 (972,027)(a) 727,614
Accumulated other comprehensive loss ... (68,311) (51,630) (119,941)
Retained earnings (accumulated deficit) (197,344) 104,417 (35,102) (139)(b) (128,168)
----------- ---------- --------- ----------- -----------
Total stockholders' equity ......... 534,860 732,340 184,508 (972,166) 479,542
----------- ---------- --------- ----------- -----------
Total liabilities and stockholders'
equity ........................... $ 1,208,948 $1,027,091 $ 748,383 $ (972,263) $ 2,012,159
=========== ========== ========= =========== ===========
</TABLE>
Page 15
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JANUARY 22, 2000
--------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ..................................... $ $ 421,081 $ 207,309 $ (3,951)(c) $ 624,439
Cost of revenues ............................. (1,631) 311,688 143,455 (3,855)(c) 449,657
-------- --------- --------- --------- ---------
Gross profit .......................... 1,631 109,393 63,854 (96) 174,782
Selling, general and administrative
expenses ................................... 14,626 92,801 50,492 157,919
Amortization expense ......................... 3,867 2,023 5,890
Operating restructuring costs ................ 345 (392) 730 683
Impaired asset write-offs .................... 2,218 3,787 6,005
-------- --------- --------- --------- ---------
Operating income (loss) ............... (15,558) 9,330 10,609 (96) 4,285
Interest expense ............................. 35,565 (13,800) 6,830 28,595
Interest income .............................. (63) (226) (144) (433)
Unrealized foreign currency transaction
(gain) loss ............................... (2,322) 2,461 139
Loss (gain) on sale of businesses ............ (9,992) 15,673 2,085 7,766
Other expense ................................ 296 88 4,009 4,393
-------- --------- --------- --------- ---------
Loss before provision for (benefit from)
income taxes .............................. (39,042) 7,595 (4,632) (96) (36,175)
Provision for (benefit from) income taxes .... (14,171) (114) 4,359 (40)(c) (9,966)
-------- --------- --------- --------- ---------
Loss from continuing operations before
extraordinary item .................... (24,871) 7,709 (8,991) (56) (26,209)
Extraordinary item - gain on early termination
of debt facilities, net of income taxes ... 9,108 9,108
-------- --------- --------- --------- ---------
Net income (loss) ............................ $(15,763) $ 7,709 $ (8,991) $ (56) $ (17,101)
======== ========= ========= ========= =========
</TABLE>
Page 16
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JANUARY 23, 1999
---------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
TOTAL
Revenues....................................... $ 469,497 $ 215,322 $ (8,197)(c) $ 676,622
Cost of revenues............................... $ (2,919) 347,239 146,366 (8,137)(c) 482,549
------------- ----------- ---------- ----------- ----------
Gross profit............................ 2,919 122,258 68,956 (60) 194,073
Selling, general and administrative
expenses..................................... 9,080 92,562 52,460 (60)(c) 154,042
Amortization expense........................... 103 4,100 2,234 6,437
Operating restructuring costs.................. 1,176 2,974 884 5,034
Impaired asset write-offs...................... 2,778 2,778
------------- ----------- ---------- ----------- ----------
Operating income (loss)................. (7,440) 19,844 13,378 25,782
Interest expense............................... 31,376 (14,084) 11,614 28,906
Interest income................................ (8) (200) (91) (299)
Loss on sale of businesses..................... 4,964 4,964
Other (income) expense........................ (12) 448 628 1,064
------------- ----------- ---------- ----------- ----------
Income (loss) before provision for
(benefit from) income taxes................. (38,796) 33,680 (3,737) (8,853)
Provision for (benefit from) income taxes...... (13,559) 16,377 792 3,610
------------- ----------- ---------- ----------- ----------
Net income (loss).............................. $ (25,237) $ 17,303 $ (4,529) $ $ (12,463)
============= =========== ========== =========== ==========
</TABLE>
Page 17
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JANUARY 22, 2000
--------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ............................. $ 1,307,776 $ 605,557 $ (20,880)(c) $ 1,892,453
Cost of revenues ..................... $ (3,121) 967,939 419,661 (20,716)(c) 1,363,763
----------- --------- --------- ----------- -----------
Gross profit .................. 3,121 339,837 185,896 (164) 528,690
Selling, general and administrative
expenses .......................... 39,805 280,190 157,327 (11)(c) 477,311
Amortization expense ................. 278 11,837 6,017 18,132
Operating restructuring costs ........ 2,392 3,102 2,286 7,780
Impaired asset write-offs ............ 2,218 3,787 6,005
----------- --------- --------- ----------- -----------
Operating income (loss) ....... (41,572) 40,921 20,266 (153) 19,462
Interest expense ..................... 100,205 (42,634) 26,614 84,185
Interest income ...................... (449) (1,121) (389) (1,959)
Unrealized foreign currency
transaction loss .................. (2,322) 28,215 25,893
Loss (gain) on sale of businesses .... (14,405) 22,655 3,537 11,787
Other (income) expense ............... 1,394 (616) 6,108 97(c) 6,983
----------- --------- --------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes ....... (125,995) 62,637 (43,819) (250) (107,427)
Provision for (benefit from)
income taxes ...................... (29,846) 9,149 (5,506) (64)(c) (26,267)
----------- --------- --------- ----------- -----------
Loss from continuing operations before
extraordinary item ................ (96,149) 53,488 (38,313) (186) (81,160)
Extraordinary item - gain in early
termination of debt facilities, net
of income taxes ................... 9,108 9,108
----------- --------- --------- ----------- -----------
Net income (loss) .................... $ (87,041) $ 53,488 $ (38,313) $ (186) $ (72,052)
=========== ========= ========= =========== ===========
</TABLE>
Page 18
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
--------------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ............................. $1,420,968 $ 609,880 $ (25,072)(c) $ 2,005,776
Cost of revenues ..................... $ (5,615) 1,058,932 420,655 (24,972)(c) 1,449,000
----------- --------- --------- ----------- -----------
Gross profit .................. 5,615 362,036 189,225 (100) 556,776
Selling, general and administrative
expenses ........................... 25,063 274,714 153,828 (97)(c) 453,508
Amortization expense ................. 308 11,685 6,566 18,559
Operating restructuring costs ........ 1,176 10,469 5,584 17,229
Impaired asset write-offs ............ 2,778 2,778
Strategic Restructuring Plan costs ... 96,948 555 97,503
----------- --------- --------- ----------- -----------
Operating income (loss) ....... (117,880) 61,835 23,247 (3) (32,801)
Interest expense ..................... 83,240 (35,665) 29,210 76,785
Interest income ...................... (101) (726) (298) (1,125)
Loss on sale of businesses ........... 7,500 7,500
Other (income) expense .............. (7) 756 (704) 45
----------- --------- --------- ----------- -----------
Income (loss) from continuing
operations before provision for
(benefit from) income taxes and
extraordinary items ................ (201,012) 97,470 (12,461) (3) (116,006)
Provision for (benefit from)
income taxes........................ (62,850) 46,904 (71) (1)(c) (16,018)
----------- --------- --------- ----------- -----------
Income (loss) from continuing
operations before extraordinary
items .............................. (138,162) 50,566 (12,390) (2) (99,988)
Loss from discontinued operations,
net of income taxes ................ (1,294) (1,294)
----------- --------- --------- ----------- -----------
Income (loss) before extraordinary
items............................... (138,162) 50,566 (13,684) (2) (101,282)
Extraordinary items - loss on early
termination of debt facilities,
net of income taxes ................ (269) (269)
----------- --------- --------- ----------- -----------
Net income (loss) .................... $ (138,431) $ 50,566 $ (13,684) $ (2) $ (101,551)
=========== ========= ========= =========== ===========
</TABLE>
Page 19
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JANUARY 22, 2000
-----------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities ..... $ (52,882) $ 12,835 $ 4,138 $ $ (35,909)
Cash flows from investing activities ..... 39,724 (29,017) 27,069 37,776
Cash flows from financing activities ..... (34,598) 24,103 (43,820) (54,315)
Effect of exchange rates on cash and cash
equivalents ............................ (124) (124)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ............................. (47,756) 7,921 (12,737) (52,572)
Cash and cash equivalents at beginning
of period .............................. 48,094 9,281 18,727 76,102
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 338 $ 17,202 $ 5,990 $ $ 23,530
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JANUARY 23, 1999
-----------------------------------------------------------------------------
US OFFICE NON-
PRODUCTS COMPANY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED
(PARENT COMPANY) SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities ..... $(107,246) $ 119,237 $ (463) $ (56)(d) $ 11,472
Cash flows from investing activities ..... (26,031) (16,420) (22,271) 56 (d) (64,666)
Cash flows from financing activities .... 121,322 (111,804) 20,287 29,805
Effect of exchange rates on cash and cash
equivalents ............................ 321 321
Cash used in discontinued operations ..... (12,518) (12,518)
--------- --------- --------- --------- ---------
Net decrease in cash and cash
equivalents ............................ (11,955) (8,987) (14,644) (35,586)
Cash and cash equivalents at beginning
of period .............................. 19,684 15,743 16,594 52,021
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 7,729 $ 6,756 $ 1,950 $ $ 16,435
========= ========= ========= ========= =========
</TABLE>
The "US Office Products Company (Parent Company)" column in the foregoing
condensed consolidating financial information reflects equity method accounting
for the Company's investment in subsidiaries.
Consolidating adjustments to the condensed consolidating balance sheets
include the following:
(a) Elimination of investments in subsidiaries.
(b) Elimination of intercompany profit in inventory and property and
equipment.
Consolidating adjustments to the condensed consolidating statements of
operations include the following:
(c) Elimination of intercompany sales.
Consolidating adjustments to the condensed consolidating statements of cash
flows include the following:
(d) Elimination of intercompany profits.
Page 20
<PAGE>
US OFFICE PRODUCTS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 22, 2000
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of SOP
98-1 had no impact on the results of operations or financial position of the
Company.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to January 22, 2000, the Company entered into an agreement to
sell a paper wholesaling business in Australia for approximately $9,000 in cash.
The transaction is expected to close in March 2000.
Page 21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE FOLLOWING:
- - THE COMPANY'S ABILITY TO IMPLEMENT ITS NEW BUSINESS STRATEGY, INCLUDING:
- ITS ABILITY TO CONSOLIDATE FACILITIES AND INTEGRATE SYSTEMS ON A
TIMELY AND COST-EFFECTIVE BASIS
- THE EFFECTIVENESS OF ACCELERATED CHANGE PROGRAMS TO INCREASE REVENUES,
MARGINS, AND CASH FLOW, TO REDUCE COSTS, TO IMPROVE THE PERFORMANCE OF
UNDERPERFORMING BUSINESS UNITS, AND TO SELL TO LARGER CUSTOMERS
- THE POTENTIALLY DISRUPTIVE IMPACT OF IT SYSTEMS CONVERSIONS AND OTHER
ACCELERATED CHANGE PROGRAMS ON SALES AND CUSTOMER SERVICE ACTIVITIES
- THE DEVELOPMENT OF E-COMMERCE STRATEGIES
- - THE COMPANY'S HIGH LEVEL OF DEBT
- - THE IMPACT OF INCREASES IN INTEREST RATES
- - CHALLENGES OF COMBINING ACQUIRED BUSINESSES
- - THE IMPACT OF CHANGES IN THE EXCHANGE RATES FOR THE NEW ZEALAND AND
AUSTRALIAN DOLLARS
- - THE IMPACT OF COMPETITION FROM NATIONAL, REGIONAL AND LOCAL COMPETITORS,
COMPETITIVE PRESSURES FROM CUSTOMERS, AND THE SUCCESS OF THE COMPANY'S
LARGE ACCOUNT INITIATIVES
- - GENERAL ECONOMIC FACTORS AND THE LEVEL OF DEMAND FOR OUR PRODUCTS
- - THE IMPACT OF COMPETITION ON THE INTERNET
- - THE COMPANY'S ABILITY TO SELL NON-CORE OPERATIONS AT REASONABLE PRICES
- - RETENTION OF PERSONNEL AND THE EFFECT OF OTHER DISRUPTIONS ARISING FROM
DISPOSITIONS OF ASSETS
- - CHALLENGES OF ONGOING LITIGATION
- - UNCERTAINTY ATTENDANT TO MANAGING FOREIGN OPERATIONS
- - ABILITY TO EXPLOIT A SIGNIFICANT TECHNOLOGY UPGRADE BY MBE
- - POTENTIAL LIABILITY FOR COSTS ARISING FROM 1998 SPIN-OFFS
- - RECENT CHANGES IN MANAGEMENT
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PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED APRIL 24, 1999 FOR A DISCUSSION OF THESE AND OTHER IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED BY
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION
TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements, including the related notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's
audited consolidated financial statements for the fiscal year ended April 24,
1999, including the related notes thereto, included in the Company's Annual
Report on Form 10-K, which was filed with the Securities and Exchange Commission
on July 22, 1999.
Since the completion of the Strategic Restructuring Plan, (see Note 1 of
the Notes to the Company's consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q), the Company has focused on
operational improvements. The Company significantly reduced its acquisition
activity early in fiscal 1999 and later suspended all acquisitions for the
balance of the fiscal year. During the current fiscal year, the Company has
completed only one acquisition, which was during the second fiscal quarter.
As a result of the focus on operational improvements, the Company reorganized
the structure of its North American businesses effective at the beginning of
fiscal 2000. In prior years, these businesses were organized into a series of
geographic regions and districts, all operated within a single management
structure as part of the North American Office Products Group. Under the new
structure, the Company has separated these businesses into three lines of
business, North American office supplies (desktop accessories, writing
instruments, paper products, computer consumables, business machines, catalog
furniture and coffee services), North American office furniture
(middle-market and contract furniture), and North American vending services,
with each group having a distinct management team. Toward the end of the
second fiscal quarter, the Company moved management responsibility for the
majority of its office coffee operations from its supplies unit to its
vending unit. The Company's North American office coffee and vending
businesses are now being operated under the USRefreshTM name. The Company
also has sold a number of non-core businesses, and it separately manages
non-core businesses being held for disposition.
The Company's other businesses include Mail Boxes Etc. ("MBE"), the world's
largest franchisor of retail business, communications, and postal service
centers, and the Blue Star Group, which includes a group of operating companies
that include business supplies, technology products and services, print, and
consumer retailing businesses. During the third fiscal quarter, the Company sold
60% of the Blue Star Group's technology products and services business
("Business Solutions"). The Company also owns a 49% equity interest in Dudley
Stationery Limited ("Dudley"), a U.K. contract stationer.
The increased interest expense resulting from the increased debt levels
associated with the Strategic Restructuring Plan has significantly reduced the
Company's reported earnings in fiscal 1999 and the first nine months of fiscal
2000. Rather than net income and net income per share, management believes that
a more meaningful indication of the Company's performance is cash flow from
operations and earnings from continuing operations before interest expense,
interest income, benefit from income taxes, depreciation expense, amortization
expense, operating restructuring costs, Strategic Restructuring Plan costs,
impaired asset write-offs, unrealized foreign currency transaction loss, loss on
sale of businesses, other expense and extraordinary items ("EBITDA"). EBITDA is
provided because it is a measure commonly used by analysts and investors to
determine a company's ability to incur and service its debt. EBITDA is not a
measurement of performance under GAAP and should not be considered an
alternative to net income (loss) as a measure of performance or to cash flow as
a measure of liquidity. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
OPERATING REVENUES AND EXPENSES
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The Company derives revenues primarily from the sale of a wide variety of
office supplies and other office products, office furniture, office coffee
service and related products, and vending products and services to corporate
customers. MBE derives revenues primarily from royalties and marketing fees,
franchise fees and the sale of supplies and equipment to MBE centers.
Cost of revenues represents the purchase price for a wide variety of office
supplies and other office products, office furniture, office coffee services and
related products, and vending products and services and includes occupancy,
delivery and certain depreciation costs. Rebates and discounts on inventory
reduce these costs when such inventory is sold. MBE's cost of revenues
represents primarily franchise operation expenses and the cost of supplies and
equipment sold to MBE centers.
Selling, general and administrative expenses represent product marketing
and selling costs, customer service, furniture design costs, warehouse costs,
and other administrative expenses.
FACTORS AFFECTING COMPARABILITY
Certain factors should be considered in comparing the Company's financial
condition and results of operations in fiscal 2000 to those in fiscal 1999.
ACQUISITIONS AND DIVESTITURES
The Company completed 22 acquisitions during fiscal 1999, all of which were
accounted for under the purchase method. In addition, the Company completed
seven business divestitures or closures during fiscal 1999. In the first nine
months of fiscal 2000, the Company completed one acquisition and eight business
divestitures. The Company expects that it will continue to pursue selected
business divestitures, particularly of non-core operations, where it believes
that shareholder value is better served by a sale, than by continued
operation of a business. At any given time, the Company may be involved in
discussions with one or more parties about potential divestitures. The Company
is currently involved in discussions with various 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.
FOREIGN CURRENCY EXCHANGE RATES
Approximately one-third of the Company's revenues are generated by its
operations in New Zealand and Australia. Fluctuations in the exchange rates for
the New Zealand and Australian dollars affect the Company's results.
ACCELERATED CHANGE ACTIVITIES
During the second half of fiscal 1999, the Company organized a series of
Accelerated Change Teams ("ACTs") to realize many of its cost reduction and
revenue enhancement strategies on an accelerated basis. ACTs are teams of
employees (in some cases assisted by outside consultants) dedicated to driving
fundamental business process changes throughout the Company's business units.
The ACTs provide functional experts focused by initiative, enabling business
unit managers to focus on sales, customer service, and overall productivity
issues. Core ACT initiatives focus on the Company's supply chain, including the
consolidation of facilities and support functions and the implementation of
enhanced pricing strategies and inventory management tools. The Company also
formed an ACT focused solely on reducing working capital to improve overall
asset utilization. The ACTs began to implement many of their programs toward the
end of the fourth quarter of fiscal 1999. While the ACTs have made progress
during the first three quarters of fiscal 2000, performance improvements and
cost savings have been realized less rapidly than was originally anticipated.
The Company continues to believe it will receive significant benefits from the
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ACTs, but not in as short a time period as was originally anticipated. Also, the
level of effort and amount of time required and the expected benefits to be
gained from each of the ACT initiatives differ - both by initiative and by
operating location. As a result, the initiatives are at various stages of
completion, and performance levels remain uneven among the Company's many
operating locations. The Company has started to see the benefits from a number
of the ACT initiatives; however, many of these benefits have been offset, in
whole or in part, by the negative effects of operating disruptions caused by
these multiple accelerated initiatives.
For example, in the Company's core North American Office Supplies
business, the volume and pace of accelerated change activities led to some
significant disruptions in the normal business processes at a significant
number of operating locations. These disruptions negatively affected revenues
and gross margins and increased costs during the third quarter of fiscal
2000. The most disruptive changes occurred primarily in the third fiscal
quarter, including (1) several major information system conversions, (2)
conversion of many locations to the new wholesaler relationship, and (3)
facility consolidation activities. The compressed timeframe within which the
Company imposed these changes has resulted in widely disparate levels of
performance, depending on the number of concurrent change activities taking
place at a location, as well as the stage of completion of such activities.
As locations emerge from these periods of disruption, the managements of
these locations are better equipped to manage their businesses, whether
through use of the common operating system or through monitoring and aligning
cost-saving opportunities through the Company's new wholesaler relationship.
The Company's strategy is to get its business units through the most
disruptive aspects of the accelerated change process quickly (at a cost of
near-term negative effects on overall results), to accelerate the opportunity
for substantial performance improvement. There can be no assurance that
results to date with ACT initiatives are indicative of future results, that
subsequent ACT programs or other business or competitive events will not
affect the future performance of the Company's business units, or that
near-term benefits of ACT initiatives will be sustainable.
Because the Company is seeking to effect change at an accelerated pace, it
may recognize certain non-recurring charges more rapidly than would be likely in
the absence of the accelerated change initiatives. For example, because of the
rapid changes the Company is seeking to effect, it may write-down or write-off
assets that it previously had expected to use in continuing operations. In some
cases, charges may relate to businesses that the Company had expected to
continue to operate or to operate on a temporary basis, pending disposition, but
decides instead to close. The Company also expects to make investments that are
expected to drive change on an accelerated basis, and this is likely to cause
expenses to increase in the near term.
As predicted by the Company's public disclosures made at the end of fiscal
1999, the expenses associated with the Company's accelerated change programs
have had a negative effect on its results during the first three quarters of
fiscal 2000. These expenses consist primarily of additional selling, general,
and administrative expenses related to outside resources to refine the Company's
financial and operating change management strategies. See "- Consolidated
Results of Operations." The Company also has significantly increased spending on
information technology and e-commerce activities. In addition, the Company
expects that over the near term these initiatives will continue to produce
short-term costs that will offset all or a part of expected reductions in
overall expense levels. Accelerated implementation of the changes also may
result in additional charges including severance costs, facility closure costs,
and write-downs or write-offs of goodwill and other assets.
As part of its accelerated change process, the Company implemented a "fix,
sell, or close" strategy. This strategy includes two basic components: (1)
Non-core businesses that the Company intends to sell are identified, placed into
an active disposition process, and managed separately from the Company's core
businesses until the disposition is completed; and (2) the Company assigns
dedicated groups of employees (sometimes assisted by outside consultants) to
improve the performance of underperforming core businesses, often involving the
intensive application of various ACT initiatives. Where the Company decides that
an underperforming unit cannot be brought to an acceptable level of performance
within a reasonable time and with an efficient level of investment, that unit
may be sold or closed.
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CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 22, 2000 COMPARED TO THREE MONTHS ENDED
JANUARY 23, 1999
Revenues decreased 7.7%, from $676.6 million for the three months ended
January 23, 1999, to $624.4 million for the three months ended January 22, 2000.
The decrease in revenues was due primarily to the anticipated residual effect of
the loss of a number of large office supply accounts in North America during
fiscal 1999, sales force and customer service turnover in certain locations,
reduced attention to new business generation as locations focused on serving
existing customers during periods of operational disruption, a decline in
furniture revenue primarily from transitions in product offerings, and the
disposal or closure of fourteen businesses since the beginning of the third
quarter of fiscal 1999. See "- Introduction - Factors Affecting Comparability
Accelerated Change Activities." The decrease was partially offset by the
inclusion of revenues from four companies acquired in business combinations
accounted for under the purchase method after the beginning of the third quarter
of fiscal 1999 (the "3Q Purchased Companies"). On a pro forma basis, adjusted
for the fluctuation in the New Zealand and Australian dollars, revenues
increased 0.4%.
Since the beginning of the 1999 calendar year, the Company has devoted
substantial additional personnel and resources to the development of focused
sales and service initiatives for larger regional and national customers.
During fiscal 2000, in the large account segment (which the Company defines
as accounts purchasing at least $180,000 per year from the Company)
annualized revenue gains exceeded annualized revenue lost. Because revenue
from large accounts has dissipated more quickly than revenue from new
accounts has been added (typically because new accounts phase in business
over time), the Company's results have not yet reflected the benefits of net
large account gains. In view of the highly competitive nature of this
customer segment, there can be no assurance that the Company will continue to
be able to gain revenue in the large account segment or that such business
can be maintained on a profitable basis.
Gross profit decreased 9.9%, from $194.1 million for the three months ended
January 23, 1999, to $174.8 million for the three months ended January 22, 2000.
The decrease in gross profit is largely related to the decrease in revenues. As
a percentage of revenues, gross profit decreased from 28.7% for the three months
ended January 23, 1999, to 28.0% for the three months ended January 22, 2000.
The decrease in gross profit as a percentage of revenues is primarily the result
of declines in the North American Office Supplies business. These declines
resulted from increased costs incurred to remedy or remediate quality and
service disruptions resulting from the transition to a new wholesaler
relationship during the third fiscal quarter, as well as from increases in the
costs of paper and toner that were not passed on to customers during the third
fiscal quarter. These declines were partially offset by the disposal or closure
of certain lower margin businesses since the beginning of the third quarter of
fiscal 1999.
Selling, general and administrative expenses increased 2.5%, from $154.0
million for the three months ended January 23, 1999, to $157.9 million for the
three months ended January 22, 2000. Selling, general and administrative
expenses as a percentage of revenues increased from 22.8% for the three months
ended January 23, 1999, to 25.3% for the three months ended January 22, 2000.
The increase in selling, general and administrative expenses was due to several
factors, including (i) costs of $5.0 million, including outside consulting fees
of approximately $4.1 million, associated with the Company's ACTs (See
"Introduction - Factors Affecting Comparability - Accelerated Change Activities"
for a discussion of ACTs); (ii) information technology initiatives of
approximately $0.6 million at MBE related to the roll-out of a national
point-of-sale system, a customer data warehouse and a satellite communication
system; (iii) approximately $1.7 million related to the Company's e-commerce
initiatives in North America; and (iv) other costs related to the internal
information technology group and strengthening of the Company's management team.
The ACT related costs of $5.0 million and information technology initiatives at
MBE of $0.6 million qualify as non-recurring charges under the terms of the
Company's bank credit agreement and are added back to EBITDA for the purpose of
calculating compliance with financial
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covenants. The Company's bank credit agreement permits similar non-recurring
charges in fiscal 2001. However, the Company cannot yet predict either the
nature or amount of such non-recurring charges in fiscal 2001.
The Company recorded operating restructuring costs of $5.0 million and $0.7
million during the three months ended January 23, 1999, and January 22, 2000,
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, and include the costs of exiting
such facilities and severance to employees who have been notified that their
jobs will be eliminated. The Company is continuing to develop and review
additional plans and expects to record additional operating
restructuring-related costs in the future.
Interest expense, net of interest income, decreased 1.4%, from $28.6
million for the three months ended January 23, 1999, to $28.2 million for the
three months ended January 22, 2000. This decrease is due primarily to the lower
average level of outstanding borrowings during this year's third fiscal quarter
as compared to last year's third fiscal quarter.
The Company recorded an unrealized foreign currency transaction loss of
$0.1 million during the three months ended January 22, 2000. This loss
represents the impact of the devaluation of the New Zealand dollar (NZD) on
approximately $200 million of NZD denominated intercompany loans and $170
million of USD denominated intercompany loans to, and the related accrued
interest due from, the Blue Star Group. The New Zealand dollar declined from
approximately USD $.515 at October 23, 1999 to approximately USD $.514 at
January 22, 2000. The recognition of the loss in the statement of operations is
the result of a change in accounting policy related to such loans effective the
beginning of fiscal 2000. During fiscal 1999, the Company considered its
intercompany loans to the Blue Star Group to be permanent in nature and,
therefore, the unrealized currency transaction gains and losses related to the
intercompany loans were recorded as a component of stockholders' equity on the
balance sheet. Effective April 25, 1999, the Company changed its perspective on
the Blue Star Group operations and no longer considers the intercompany loans to
be permanent in nature. Accordingly, the Company has recorded the unrealized
foreign currency transaction loss related to its intercompany loans with the
Blue Star Group as a component of the loss from continuing operations in the
statement of operations for fiscal 2000.
The Company recorded a loss on sale of businesses of $7.8 million for
the three months ended January 22, 2000. This loss represents a $19.1 million
loss on the sale of 60% of Business Solutions, partially offset by an
aggregate gain of $11.3 million on the sale of two businesses in North
America. The $19.1 million loss on the sale of 60% of Business Solutions
included the realization of $13.7 million in currency translation losses
related to the decline in the New Zealand dollar since the dates Business
Solutions' businesses were acquired. Such amounts were previously recorded as
a reduction to stockholders' equity. The Company recognized a $5.0 million
loss on the sale of an under-performing technology business in New Zealand
during the three months ended January 23, 1999.
Other expense increased from $1.1 million for the three months ended
January 23, 1999, to $4.4 million for the three months ended January 22,
2000. Other expense includes the Company's 49% equity interest in the net
loss of Dudley and miscellaneous other income and expense items. The increase
of $3.3 million is due primarily to the Company's share of Dudley's reported
net loss of approximately $3.9 million for the three months ended January 22,
2000, compared to the Company's share of Dudley's reported net loss of
approximately $0.6 million for the three months ended January 23, 1999. The
Company's share of the loss reported by Dudley during the three months ended
January 22, 2000 includes a charge of approximately $1.8 million related to
the write-down of Dudley's investment in an office supplies related joint
venture in Poland. The balance of the Company's share of Dudley's loss
relates to the continued negative effects on Dudley's results of the start-up
of its new national distribution facility in London and the implementation of
a new enterprise wide computer system. These activities resulted in reduced
sales due to reduced customer service levels and increased costs. Dudley has
taken steps to improve customer service, and has launched a new sales growth
program. There can be no assurance that the new sales efforts will be
successful, and the Company expects the losses at Dudley to continue for at
least another two quarters.
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Income taxes changed from a provision of $3.6 million for the three months
ended January 23, 1999, to a benefit of $10.0 million for the three months ended
January 22, 2000, reflecting an effective income tax provision rate of 40.8% and
an effective income tax benefit rate of 27.5%, respectively. The increase in the
income tax benefit is primarily the result of the increase in the loss from
continuing operations before (benefit from) provision for income taxes and
extraordinary items of $8.9 million for the three months ended January 23, 1999,
to $36.2 million for the three months ended January 22, 2000. The benefit from
income taxes for the three months ended January 22, 2000, reflects the recording
of a tax benefit at the federal statutory rate of 35%, plus appropriate
adjustments for state, local and foreign taxes. In addition, the effective
income tax benefit rate was reduced to reflect the incurrence of non-deductible
expenses, which consisted primarily of goodwill amortization expense.
The provision for income taxes for the three months ended January 23, 1999
reflects the net impact of (i) an income tax provision of 180.0% on the
results from continuing operations, excluding the operating restructuring
costs and loss on the sale of the business in New Zealand; and (ii) an income
tax benefit on the operating restructuring costs ($5.0 million) and the loss
on the sale of a businesses in New Zealand ($5.0 million), as the Company
believes that such costs will be deductible for income tax purposes. The
180.0% effective tax rate discussed above reflects the recording of an income
tax provision at the federal statutory rate of 35.0%, plus appropriate state,
local and foreign taxes. The effective tax rate was increased to reflect the
incurrence of non-deductible goodwill amortization expense.
The extraordinary gain, net of income taxes, of $9.1 million for the
three months ended January 22, 2000, represents the gain on the repurchase of
$37 million of 2008 Notes, for approximately $20 million, which represented
54.75% of par value. See "Liquidity and Capital Resources - Long-Term Debt."
NINE MONTHS ENDED JANUARY 22, 2000 COMPARED TO NINE MONTHS ENDED
JANUARY 23, 1999
Revenues decreased 5.6% from $2,005.8 million for the nine months ended
January 23, 1999 to $1,892.5 million for the nine months ended January 22, 2000.
The decrease in revenues was primarily due to the residual effect of the loss of
a number of large office supply accounts in North America during fiscal 1999,
sales force and customer service turnover in certain locations, a decline in
furniture revenue primarily from transitions in our product offerings, and the
disposal or closure of fourteen businesses since the beginning of the third
quarter of fiscal 1999. The decrease was partially offset by the inclusion of
revenues from 23 companies acquired in business combinations accounted for under
the purchase method after the beginning of the first quarter of fiscal 1999 (the
"Purchased Companies"). On a pro forma basis, adjusted for the fluctuation in
the New Zealand and Australian dollars, revenues decreased 1.4%.
Gross profit decreased 5.0% from $556.8 million for the nine months ended
January 23, 1999 to $528.7 million for the three months ended January 22, 2000.
The decrease in gross profit is directly related to the decrease in revenues. As
a percentage of revenues, gross profit increased from 27.8% for the nine months
ended January 23, 1999 to 27.9% for the nine months ended January 22, 2000.
Selling, general and administrative expenses increased 5.2% from $453.5
million for the nine months ended January 23, 1999 to $477.3 million for the
nine months ended January 22, 2000. Selling, general and administrative expenses
as a percentage of revenues increased from 22.6% for the nine months ended
January 23, 1999 to 25.2% for the nine months ended January 22, 2000. The
increase in selling, general and administrative expenses was due to several
factors, including (i) costs of $11.8 million, including outside consulting fees
of approximately $10.5 million, associated with the Company's ACTs (See
"-Introduction" for a discussion of ACTs); (ii) information technology
initiatives of approximately $4.8 million at MBE related to the roll-out of a
national point of sale system, a customer data warehouse and a satellite
communication system; (iii) approximately $3.8 million related to the Company's
e-commerce initiatives in North America; and (iv) other costs related to the
internal information technology group and strengthening of the Company's
management team. The ACT related costs of $11.8 million and information
technology initiatives at MBE of $4.8 million qualify as non-recurring charges
under the terms of the Company's
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bank credit agreement and are added back to EBITDA for the purpose of
calculating compliance with financial covenants.
The Company recorded operating restructuring costs of $17.2 million and
$7.8 million during the nine months ended January 23, 1999, and January 22,
2000, respectively related to the approval and commencement of restructuring
plans at a limited number of operating locations.
In conjunction with the completion of the Strategic Restructuring Plan, the
Company incurred non-recurring costs from continuing operations of approximately
$97.5 million during the nine months ended January 23, 1999, $70.4 million of
which were non-cash. In addition, approximately $11.7 million in such costs were
incurred by the Spin-Off Companies and were included in the results of
discontinued operations. The Strategic Restructuring Plan costs related to
continuing operations consisted of: (i) compensation expense of approximately
$50.8 million ($49.9 million of which was non-cash) related to the difference
between the exercise prices of employee stock options underlying shares that
were accepted in the Company's equity tender offer and the purchase price of
such shares in the equity tender offer; (ii) professional fees (including
accounting, legal, investment banking and printing fees) of approximately $26.2
million; and (iii) a non-cash expense of approximately $20.5 million resulting
from the issuance of incremental shares of common stock related to the
temporary, effective reduction in the conversion price of the Company's 5 1/2%
convertible subordinated notes due 2001 (the "2001 Notes"), which the Company
made as part of an exchange offer for the 2001 Notes.
Interest expense, net of interest income, increased 8.6% from $75.7 million
for the nine months ended January 23, 1999, to $82.2 million for the nine months
ended January 22, 2000. This increase is due primarily to the timing of the
completion of the Strategic Restructuring Plan and the related financing
transactions (see Note 1 of the Notes to the Company's consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q), which
resulted in a significant increase in both the amount of debt outstanding and
the average interest rate related to such debt. Because these transactions
occurred in June 1998, interest expense related to the increased debt and higher
interest rates was reflected for only approximately seven and one-half months of
the nine month period ended January 23, 1999 and was reflected for the entire
nine-month period ended January 22, 2000.
The Company recorded an unrealized foreign currency transaction loss of
$25.9 million during the nine months ended January 22, 2000. This loss
represents the impact of the devaluation of the New Zealand dollar on
approximately $200 million of NZD denominated and $170 million of USD
denominated intercompany loans to, and the related accrued interest due from,
the Blue Star Group. The New Zealand dollar declined from approximately USD
$.551 at April 24, 1999 to approximately USD $.514 at January 22, 2000.
The loss on sale of businesses of $11.8 million for the nine months ended
January 22, 2000 represents the net impact of gains and losses on the sale of
six businesses in North America and two businesses in New Zealand and Australia
and includes losses on the disposal of various real estate properties in New
Zealand. In the nine months ended January 23, 1999, the Company recognized a
$7.5 million loss on the sale of businesses in New Zealand.
Other expense increased from $45,000 for the nine months ended January 23,
1999, to $7.0 million for the nine months ended January 22, 2000. The increase
of $7.0 million is due primarily to the Company's share of Dudley's reported net
loss of approximately $5.7 million for the nine months ended January 22, 2000,
compared to the Company's share of Dudley's reported net income of approximately
$1.1 million for the nine months ended January 23, 1999.
Benefit from income taxes increased from $16.0 million for the nine months
ended January 23, 1999, to $26.3 million for the nine months ended January 22,
2000, reflecting effective income tax benefit rates of 13.8% and 24.5%,
respectively. The increase in the benefit from income taxes for the nine months
ended January 22, 2000 is primarily the result of an increase in the Company's
taxable loss (defined as the loss from continuing operations before benefit from
income taxes and extraordinary items less non-deductible expenses). Taxable loss
increased even though the loss from continuing operations before benefit from
income taxes and extraordinary items of $107.4
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million for the nine month period ended January 22, 2000 is less than the loss
for continuing operations before benefit from income taxes and extraordinary
items of $116.0 million for the nine month period ended January 23, 1999. This
is because the results for the nine month period ended January 23, 1999 included
a significant amount of non-deductible expenses, including approximately half of
the Strategic Restructuring Plan costs and operating restructuring costs.
Loss from discontinued operations totaled $1.3 million for the nine months
ended January 23, 1999. See Note 2 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
The extraordinary gain, net of income taxes, of $9.1 million for the nine
months ended January 22, 2000, represents the gain on the repurchase of $37
million of 2008 Notes, for approximately $20 million, which represented 54.75%
of par value.
The extraordinary loss, net of income taxes, of $269,000 during the nine
months ended January 23, 1999, represents the aggregate of several extraordinary
items, all of which involve indebtedness that the Company either repaid or
converted into equity in connection with the Strategic Restructuring Plan and
the related financing transactions. The primary components of this extraordinary
loss are: (i) the pre-tax non-cash write-offs of $5.2 million, $4.7 million and
$2.9 million of debt issue costs incurred in conjunction with the issuance of
the Company's 5 1/2% convertible subordinated notes due 2003 (the "2003 Notes"),
the former credit facility and the issuance of the 2001 Notes, respectively; and
(ii) a pre-tax gain of $12.2 million related to the early extinguishment of
$222.2 million of 2003 Notes at a purchase price of 94.5% of the principal
amount.
BUSINESS SEGMENT RESULTS OF OPERATIONS
The following compares revenues and EBITDA (as defined in "- Introduction")
for each of the Company's reportable business segments. For a definition of each
of the reportable business segments, see Note 6 of the Notes to the Company's
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
THREE MONTHS ENDED JANUARY 22, 2000 COMPARED TO THREE MONTHS ENDED
JANUARY 23, 1999
NORTH AMERICAN OFFICE SUPPLIES - Revenues for the three months ended
January 22, 2000 decreased 2.3% on a historical basis and 2.7% on a pro forma
basis versus the three months ended January 23, 1999. The decreases in revenues
are due primarily to the impact of the anticipated residual effect of the loss
of a number of large office supply accounts during fiscal 1999, sales force and
customer service turnover in certain locations, as well as reduced attention to
new business generation as locations focused on serving existing customers
during periods of operational disruption. EBITDA for the three months ended
January 22, 2000 decreased 48.3%, on a historical basis, versus the three months
ended January 23, 1999. The decrease in EBITDA is primarily the result of
various operating disruptions to the office supply businesses during the three
months ended January 22, 2000. These disruptions, which negatively affected
revenues and gross margins and increased costs, included system conversions,
warehouse and customer service center consolidations, and the conversion of
several locations to a new wholesaler relationship. In addition, increases in
the cost of certain office products, such as paper and toner, were not passed on
to customers in a timely manner and resulted in reduced gross margins.
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NORTH AMERICAN OFFICE FURNITURE - Revenues for the three months ended
January 22, 2000 decreased 11.5% on a historical basis and 4.3% on a pro forma
basis versus the three months ended January 23, 1999. The decreases in revenues
are due primarily to the impact on sales efforts of the transition of certain
furniture locations to new product lines or new organizational or managerial
structures. EBITDA for the three months ended January 22, 2000 decreased 8.3% on
a historical basis versus the three months ended January 23, 1999. This decrease
in EBITDA was a direct result of the decrease in revenues, offset by
improvements in general and administrative expenses.
OTHER NORTH AMERICAN OPERATIONS - Revenues for the three months ended
January 22, 2000 decreased 33.7% on a historical basis versus the three months
ended January 23, 1999. The decrease in historical revenues is primarily the
result of the sale of four non-core businesses with aggregate annual revenues of
approximately $129.7 million during the quarter. On a pro forma basis, revenues
for the three months ended January 22, 2000 increased 1.9%. EBITDA for the three
months ended January 22, 2000 decreased $12.7 million on a historical basis
versus the three months ended January 23, 1999. The decline in EBITDA is due
primarily to the sale of non-core businesses and to increases in costs
associated with (i) the addition of internal and external resources to assist
the Company's ACTs implement initiatives, which have not been allocated to the
office supplies and furniture groups, and (ii) the development and
implementation of an e-commerce strategy for the Company.
MBE - Revenues for the three months ended January 22, 2000 increased 6.9%
on both a historical and pro forma basis versus the three months ended January
23, 1999. The increase in revenues is primarily due to growth in royalties
received from franchisees and the sale of products and equipment to franchisees,
as MBE continues to grow the number of MBE franchised centers open around the
world. EBITDA for the three months ended January 22, 2000 increased
approximately $0.7 million, or 10.5%, on a historical basis versus the three
months ended January 23, 1999. This increase in EBITDA is partially offset by
the incurrence of costs associated with the roll-out of MBE's information
technology initiatives, which totaled $0.6 million during the three months ended
January 22, 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.
BLUE STAR GROUP - Revenues for the three months ended January 22, 2000
decreased 3.9% on a historical basis and increased 6.3% on a pro forma,
currency-adjusted basis versus the three months ended January 23, 1999. The
increase in revenues on a pro forma, currency-adjusted basis was the result of a
strong holiday season for the retail division, as well as revenue growth in both
the office supplies and print divisions. EBITDA for the three months ended
January 22, 2000 decreased 15.0% on a historical basis and declined 9.3% on a
pro forma currency adjusted basis versus the three months ended January 23,
1999, due primarily to underperforming Australian and certain New Zealand office
supply operations and to increased operating expenses in the New Zealand retail
operations.
CORPORATE - EBITDA for the three months ended January 22, 2000 increased
approximately $1.9 million versus the three months ended January 23, 1999.
NINE MONTHS ENDED JANUARY 22, 2000 COMPARED TO NINE MONTHS ENDED
JANUARY 23, 1999
NORTH AMERICAN OFFICE SUPPLIES - Revenues for the nine months ended January
22, 2000 decreased 2.0% on a historical basis and 3.0% on a pro forma basis
versus the nine months ended January 23, 1999. The decreases in revenues are due
primarily to the impact of the anticipated residual effect of the loss of a
number of large office supply accounts during fiscal 1999, sales force and
customer service turnover in certain locations, as well as reduced attention to
new business generation as locations focused on serving existing customers
during periods of operational disruption. EBITDA for the nine months ended
January 22, 2000 decreased 15.8% on a historical basis versus the nine months
ended January 23, 1999. The decrease in EBITDA is primarily the result of
various operating disruptions to the office supply businesses during the three
months ended January 22, 2000. These disruptions, which negatively affected
revenues and gross margins and increased costs, included system conversions,
warehouse
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and customer service center consolidations, and the conversion of several
locations to a new wholesaler relationship. In addition, increases in the cost
of certain office products, such as paper and toner, were not passed on to
customers in a timely manner and resulted in reduced gross margins.
NORTH AMERICAN OFFICE FURNITURE - Revenues for the nine months ended
January 22, 2000 decreased 12.2% on a historical basis and 9.6% on a pro forma
basis versus the nine months ended January 23, 1999. The decreases in revenues
are due primarily to the uneven timing of contract furniture projects and to the
impact on sales efforts of the transition of certain furniture locations to new
product lines or new organizational or managerial structures. EBITDA for the
nine months ended January 22, 2000 decreased $2.3 million, or 15.4%, on a
historical basis, versus the nine months ended January 23, 1999. The significant
decrease in EBITDA was driven primarily by the decline in revenues, offset by a
decrease in selling, general and administrative costs and improved performance
of previously underperforming locations.
OTHER NORTH AMERICAN OPERATIONS - Revenues for the nine months ended
January 22, 2000 decreased 24.4% on a historical basis and increased 2.9% on a
pro forma basis versus the nine months ended January 23, 1999. The decrease in
historical revenues is primarily the result of the sale of four non-core
businesses with aggregate annual revenues of approximately $129.7 million during
the nine months ended January 22, 2000. On a historical basis, EBITDA for the
nine months ended January 22, 2000 decreased $27.0 million versus the nine
months ended January 23, 1999. The decline in EBITDA is due primarily to the
sale of the four non-core businesses and to increases in costs associated with
(i) the addition of internal and external resources to assist the Company's ACTs
implement initiatives, which have not been allocated to the office supplies and
furniture groups, and (ii) the development and implementation of an e-commerce
strategy for the Company.
MBE - Revenues for the nine months ended January 22, 2000 increased 10.7%
on both a historical and pro forma basis versus the nine months ended January
23, 1999. The increase in revenues is primarily due to growth in royalties
received from franchisees and the sale of products and equipment to franchisees,
as MBE continues to grow the number of MBE franchised centers open around the
world. EBITDA for the nine months ended January 22, 2000 decreased approximately
$2.4 million, or 14.6%, on a historical basis, versus the nine months ended
January 23, 1999. This decline is the result of the incurrence of costs
associated with the roll-out of MBE's information technology initiatives, which
totaled $4.8 million during the nine months ended January 22, 2000, partially
offset by the impact of increased revenues.
BLUE STAR GROUP - Revenues for the nine months ended January 22, 2000
decreased 0.9% on a historical basis and increased 4.0% on a pro forma currency
adjusted basis versus the nine months ended January 23, 1999. The increase in
pro forma currency adjusted revenues is due primarily to sales growth in the
print and consumer retailing divisions, partially offset by a decline in the
Australian and New Zealand office supplies division. EBITDA for the nine months
ended January 22, 2000 decreased 12.2% on a historical basis and declined 14.4%
on a pro forma currency adjusted basis versus the nine months ended January 23,
1999, due primarily to underperforming Australian and certain New Zealand office
supply operations and to increased operating expenses in the New Zealand retail
operations.
CORPORATE - EBITDA for the nine months ended January 22, 2000 decreased
approximately $1.6 million, on a historical basis, versus the nine months ended
January 23, 1999. The decrease is primarily the result of an overall higher
level of general and administrative costs, as the Company has expanded and
strengthened its corporate management team.
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LIQUIDITY AND CAPITAL RESOURCES
CASH AND WORKING CAPITAL
At January 22, 2000, the Company had cash of $23.5 million. Cash decreased
$52.6 million from $76.1 million at April 24, 1999, due primarily to the payment
of $84.1 million in interest, $51.5 million of net capital expenditures, $9.3
million to acquire a business, and the repayment of $111.4 million of debt,
partially offset by $56.6 million in borrowings, a $17.4 million income tax
refund, and $103.3 million in proceeds from sales of businesses and real estate.
At January 22, 2000, the Company had working capital of $225.7 million.
Working capital decreased $133.2 million from $358.9 million at April 24, 1999.
The decrease in working capital was primarily the result of the sale of eight
businesses during the nine months ended January 22, 2000, additional short-term
borrowings, accounts payable management, and the receipt of an income tax refund
in the second quarter of fiscal 2000.
LONG-TERM DEBT
The Company's credit facility (the "Credit Facility") provides for an
aggregate principal amount of $1,025.0 million, consisting of (i) a seven-year
multi-draw term loan facility totaling $50.0 million, (ii) a seven-year
revolving credit facility totaling $200.0 million, (iii) a seven-year term loan
facility totaling $100.0 million, and (iv) an eight-year term loan facility
totaling $675.0 million. See Note 1 of the Notes to the Company's consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
In connection with the completion of the Strategic Restructuring Plan and the
related financing transactions, the Company borrowed the full amount of the two
single-draw term loan facilities. Interest rates on borrowings bear interest, at
the Company's option, at the lending bank's base rate plus an applicable margin
of up to 1.50%, or a eurodollar rate plus an applicable margin of up to 2.50%.
The Company's obligations under the Credit Facility are guaranteed by its
present domestic subsidiaries; future material domestic subsidiaries will also
be required to guarantee these obligations. The Credit Facility is
collateralized by substantially all of the assets of the Company and its
domestic subsidiaries; future material domestic subsidiaries also will be
required to pledge their assets as collateral. The Company is required to enter
into arrangements to ensure that the effective interest rate paid by the Company
on at least 50% of the aggregate amount outstanding under the Credit Facility
and the Company's 9 3/4% senior subordinated notes due 2008 (the "2008 Notes")
was at a fixed rate of interest. As a result, the Company has entered into
interest rate swap arrangements to limit the LIBOR-based interest rate exposure
on $500.0 million of the outstanding balance under the Credit Facility to rates
ranging from 5.7% to 6.0%. The interest rate swap agreements expire over a
period ranging from 2001 to 2003. As a result of these swap agreements (and
including the fixed-rate 2008 Notes), the Company has fixed the interest rates
on $878.2 million (78.2%) of the total debt outstanding at January 22, 2000. At
the Company's current debt levels, a hypothetical 10% increase in the weighted
average interest rate would result in approximately $1.3 million, net of taxes,
of additional interest expense on an annual basis.
During the three month period ended January 22, 2000, the Company completed
three business dispositions for total cash proceeds of $89.7 million. In
accordance with the terms of the Credit Facility, the Company used these
proceeds, net of certain disposition-related expenses of $1.1 million, to repay
$9.8 million of the balance outstanding under the seven-year term loan facility
and to repay $78.8 million of the balance outstanding under the eight-year term
loan facility.
At January 22, 2000, the Company had total debt outstanding of $1,122.9
million and had undrawn borrowings of $134.6 million under the revolving credit
facility and of $50.0 million under the multi-draw term loan facility. The
Company's capitalization, defined as the sum of long-term debt and stockholders'
equity, at January 22, 2000, was approximately $1.5 billion.
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The Credit Facility includes, among others, restrictions on the Company's
ability to incur additional indebtedness, sell assets, pay dividends, or engage
in certain other transactions, and requirements that the Company maintain
certain financial ratios, and other provisions customary for loans to highly
leveraged companies, including representations by the Company, conditions to
funding, cost and yield protections, restricted payment provisions, amendment
provisions and indemnification provisions. The Credit Facility is subject to
mandatory prepayment in a variety of circumstances, including upon certain asset
sales and financing transactions, and also from excess cash flow (as defined in
the Credit Facility).
The 2008 Notes are unsecured but are guaranteed by the Company's present
domestic subsidiaries; future material domestic subsidiaries will be required to
guarantee the 2008 Notes. The indenture governing the 2008 Notes places
restrictions on the Company's ability to incur indebtedness, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of its assets to, or merge or consolidate with, another
entity. The eight-year term loan facility contains negative covenants and
default provisions substantially similar to those contained in the indenture
governing the 2008 Notes.
In January 2000, the Company repurchased $37.0 million of the 2008 Notes
for approximately $20 million, which represents 54.75% of par value, and
recorded a $9.1 million extraordinary gain, net of taxes, on the transaction. In
November 1999, the Company's Board of Directors authorized the repurchase of up
to $50.0 million principal amount of the 2008 Notes from time to time in
privately-negotiated transactions. The Company may from time to time make such
additional repurchases in its discretion, but there can be no assurances as to
whether, when or to what extent such additional repurchases will be made. The
Credit Facility allows the Company to use up to approximately $50.0 million in
aggregate to fund one or more of the following: the repurchase of a portion of
the 2008 Notes or capital expenditures in excess of annual covenant limits.
STOCKHOLDERS' EQUITY
In May 1999, MBE invested $4.0 million to acquire a 17% interest in
iShip.com, a provider of web-based shipping solutions. In October 1999,
Stamps.com announced an agreement to purchase iShip.com for 8.0 million shares
of Stamps.com stock. The transaction is expected to close during the first
calendar quarter of 2000. The equity value of MBE's investment in iShip.com,
based on the number of Stamps.com shares it would receive in the merger
transaction, was approximately $34.9 million as of March 3, 2000. MBE also has
the right to earn performance-based warrants for additional shares of Stamps.com
stock. Since the Company does not consider its investment in iShip.com to be a
trading security, the gain on the transaction will be recorded as other
comprehensive income, a component of stockholders' equity. If the Company does
liquidate its investment, any resulting gain would be recognized in the
consolidated statement of operations.
FOREIGN CURRENCY
The New Zealand and Australian dollars weakened against the USD during
the three and nine month periods ended January 22, 2000. This resulted in
unrealized foreign currency transaction losses of $0.1 million and $25.9
million for the three and nine month periods ended January 22, 2000,
respectively. See "- Consolidated Results of Operations." If exchange rates
continue to decline, the Company will continue to record unrealized foreign
currency transaction losses resulting from the further devaluation of the
Company's intercompany loans with the Blue Star Group. Subsequent to
January 22, 2000, the New Zealand dollar continued to weaken against the USD.
As of March 3, 2000 the New Zealand dollar equaled USD $0.488 (down from USD
$0.514 at January 22, 2000).
As a result of the Company's indebtedness, a portion of the cash flows from
the Company's international operations will be required to service debt and
interest payments. The Company expects that it may incur additional costs with
respect to accessing cash flows from international operations including such
items as New Zealand and Australian withholding and other taxes and foreign
currency hedging costs.
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CASH FLOWS
The Company anticipates its cash on hand, cash flows from operations and
borrowings available from the Company's Credit Facility will be sufficient to
meet its liquidity requirements for its operations, capital expenditures and
additional debt service obligations for the remainder of the fiscal year. The
Company does not currently anticipate that any future restructuring costs
related to the Company's planned cost reduction measures, coupled with the
expected effects of such cost reduction measures, would have a material adverse
effect on the Company's liquidity or cash flows. See "- Introduction." The
Company had net capital expenditures of $51.5 million during the nine months
ended January 22, 2000, and anticipates additional capital expenditures of
approximately $8-$10 million in the fourth quarter of fiscal 2000. The
anticipated capital expenditures will primarily support the Company's
information systems development, e-commerce initiatives, and the consolidation
of certain administrative functions.
During the nine months ended January 22, 2000, net cash used in operating
activities was $35.9 million. This use of cash included the payment of $84.1
million in interest expenses that became payable during the nine months ended
January 22, 2000. Net cash provided by investing activities was $37.8 million,
primarily related to proceeds from the sale of businesses and real estate of
$103.3 million, partially offset by $51.5 million used for net additions to
property and equipment and $9.3 million used to acquire a business. Net
borrowings decreased $54.8 million during the nine months ended January 22,
2000, primarily due to the use of $88.6 million of the proceeds from the sale of
businesses in the third fiscal quarter to repay a portion of the balances
outstanding under the seven-year and eight-year term loan facilities.
During the nine months ended January 23, 1999, net cash provided by
operating activities was $11.5 million. This included the payment of
approximately $21.7 million of costs related to the Strategic Restructuring
Plan, the payment of approximately $10.4 million of operating restructuring
costs and increases in accounts receivable and inventory. Net cash used in
investing activities for the nine months ended January 23, 1999, was $64.7
million, including $34.5 million used for acquisitions and $31.2 million used
for additions to property and equipment. Net borrowings increased approximately
$467.5 million during the nine months ended January 23, 1999, primarily to fund
the Strategic Restructuring Plan and Financing Transactions, and also to fund
the purchase prices of acquisitions and additions to property and equipment
during the period. In addition, the Company received approximately $254.2
million from Investor related to the Equity Investment, net of expenses, and
$123.6 million from discontinued operations in repayment of intercompany loan
balances outstanding at the date of the Distributions. Discontinued operations
used $12.5 million of cash during the nine months ended January 23, 1999.
YEAR 2000 COMPLIANCE
The Company carried out a process to assess Year 2000 compliance of its
systems and the systems of major vendors and third-party service providers, and
remediated any non-compliance of its systems. The Company did not experience any
disruptions in service or its ability to conduct business as the result of any
system non-compliance with the Year 2000.
Prior to the Year 2000 readiness project, the Company initiated a common
system project for hardware and software systems. As a result of this project,
the Company replaced several systems.
As described below, each of the Company's North American, MBE, Blue Star
Group and Dudley operations performed its own Year 2000 readiness review.
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NORTH AMERICAN OPERATIONS
The Year 2000 compliance process in the Company's North American operations
(excluding MBE) involved three phases, as described below.
PHASE ONE--INVENTORY AND PLANNING
The Company completed this phase in May 1998. In this phase, the Company
inventoried all hardware and software that potentially was susceptible to Year
2000 problems, prepared plans for assessing compliance and for completing
remediation, and prepared vendor and supplier compliance surveys.
PHASE TWO--ASSESSMENT
In this phase, the Company assessed which of its systems are Year 2000
compliant, obtained compliance statements from hardware and software vendors,
supply manufacturers and service trading partners, and planning for remediation
of non-compliant systems. The Company completed this phase in December 1998.
The Company's assessment plan included assessment of Year 2000 compliance
of non-information technology (non-IT) components, including the Company's
bindery machinery, coffee roasting facilities, office furniture manufacturing
facilities, security systems, credit card processing devices and freight
elevators. The Company believes there are no significant uses of
micro-processing oriented equipment within its manufacturing systems and
completed assessment of these systems in December 1998.
PHASE THREE--REMEDIATION AND TESTING
In this phase, the Company deployed plans for elimination, upgrade,
replacement or modification of non-compliant systems, and testing compliance.
Verification and testing were completed in December 1999.
The Company's Trinity system, which is the core information management and
processing system for its North American office supplies operations, is Year
2000 compliant. The Company is installing this system throughout its office
supplies operations, and completed its Trinity installation plans for
substantially all of its office supplies businesses by December 1999. Some North
American locations (including those in the furniture, vending, and office coffee
businesses) will continue to use operating systems other than Trinity after the
end of 1999. Therefore, the Company has assessed the compliance of other systems
used by its North American operating subsidiaries. The Company determined that
some of the systems used by its North American subsidiaries were not Year 2000
compliant, but the Company believes these systems were made compliant without
material expense.
The Company received compliance statements from approximately 90% of its
primary supply vendors. Based on these statements, the Company believes that
most supply vendors who responded are Year 2000 compliant. The Company
identified some vendors as fitting a "concerned" profile due to late
compliance dates or because responses indicated some possibility of poor
planning. The Company communicated with each of these vendors to remediate
these concerns. Failure of these vendors to reach Year 2000 compliance or
remediate prior to the century change did not have a material adverse effect
on the Company's performance. With regard to products, the Company cannot
warrant Year 2000 compliance for products sold and distributed by the Company
and its subsidiaries. Products are procured from vendors and manufacturers
for sale and distribution to our customers. The Company does not believe it
faces material liability from non-compliance with respect to these products.
The Company did not experience any system failures as a result of Year 2000
non-compliance and the Company does not expect that any disruptions will arise
in the future. However, there can be no assurances that Year 2000 related
disruptions will not arise in the future. If any such disruption occurs, the
Company may be forced to rely on contingency plans it developed prior to January
1, 2000, though it has not and does not intend to update these plans.
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The Company did not lose the ability to process or fulfill its customers'
orders and conducted its ordinary course of the business without disruption.
The Company did not have to utilize its contingency plans, which were
completed in mid-December 1999. The Company's contingency plans included the
use of alternative product suppliers, reliance on alternative warehouse and
delivery locations and methods within the Company (in the case of a local or
regional Year 2000 problem), and the use of back-up or alternative
communication methods.
For North America, the Company's assessment and remediation of Year 2000
compliance issues had a budget of less than $1.0 million, and expenses were less
than expected. The Company does not currently expect that future expenses for
assessment or remediation will be material.
MBE, BLUE STAR GROUP AND DUDLEY
MBE addressed the Year 2000 readiness of software and hardware provided by
MBE and used by MBE franchisees, as well as that used by MBE's corporate
operations. MBE assessed and tested mission critical systems, and performed
additional activities as summarized below. These efforts fell within three
categories. First, MBE reviewed Year 2000 compliance as it relates to the
software that MBE writes and provides to its franchisees. Second, MBE reviewed
Year 2000 compliance as it relates to its internal hardware and software that it
uses for the daily operations of its corporate business. Third, MBE reviewed
Year 2000 compliance statements of major vendors of MBE and its franchisees,
including statements of vendors that supply hardware to MBE that MBE re-sells to
its franchisees.
MBE creates proprietary software ("MBE Software") for its franchisees that
are used for a variety of functions to operate an MBE center. Based on MBE's
testing, the majority of this software is currently Year 2000 compliant. For the
remaining MBE Software, MBE either (i) reprogrammed or upgraded such software,
or (ii) no longer supports, and no longer requires franchisees to purchase and
use, such software. MBE completed reprogramming in mid-December 1999. MBE did
not experience a material adverse effect on its franchisees' or MBE's results of
operations as a result of any Year 2000 non-compliance.
MBE's franchisees may also use other software, not provided or recommended
by MBE, and this software and/or its combinations with MBE Software may not be
Year 2000 compliant. The franchisees are responsible for ensuring that software
not provided by MBE is Year 2000 compliant both standing alone and in
combination with MBE Software. MBE does not believe that the failure of
franchisees to obtain Year 2000 compliance had a material adverse effect on MBE
because franchisees have manual alternatives available. MBE's franchisees
purchase or lease some hardware from MBE, which is provided to MBE by various
manufacturers. MBE reviewed statements from the vendors of hardware currently
being sold or leased to franchisees by MBE, and such statements indicated that
such hardware is Year 2000 compliant.
With respect to software and hardware used by MBE's corporate operations,
MBE reported to the Company that some software products used by MBE for certain
accounting and database functions, as well as some desktop computers, were not
Year 2000 compliant. MBE and the providers of this software and hardware
reprogrammed such software and upgraded such hardware. This process was
completed in early December 1999. MBE brought its software and hardware that
were not Year 2000 compliant into compliance within budgeted limits and without
material expense. MBE did not experience any systems failures with respect to
the software and hardware used by MBE in its corporate operations as a result of
any Year 2000 non-compliance and does not expect any future disruptions. There
can be no assurance, however, that Year 2000 related disruptions will not arise
in the future.
Much of MBE's hardware and software depends upon the proper interaction of
various hardware, software and services furnished by third parties. While MBE
performed Year 2000 readiness tests on its systems and obtained statements from
its primary vendors, the vast array of combinations of MBE and third-party
components (including those provided by franchisees), functions and entry and
exit points made it impractical to test every aspect of the systems. MBE
evaluated statements from its mission critical vendors to develop contingency
plans in the event one
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or more of such vendors experienced a failure due to Year 2000 non-readiness.
MBE completed such contingency plans during December 1999. However, the
contingency plans were limited by the fact that there are only a small number of
vendors providing shipping and delivery services on a national and worldwide
scale; accordingly, alternative means of delivery were limited in the event one
or more of MBE's major vendors experienced a failure due to Year 2000
non-compliance. None of MBE's major vendors experienced a failure due to Year
2000 non-compliance.
The majority of systems used in New Zealand and Australia are Year 2000
compliant, and the majority of non-compliant systems were Year 2000 compliant by
December 31, 1999. Blue Star surveyed its major vendors to determine such
vendor's Year 2000 readiness. Some vendors failed to reply, but key vendors were
identified and Blue Star obtained assurances from these vendors where potential
exposure was deemed critical. These assurances appear to have been reliable, as
none of Blue Star's vendors experienced a failure due to Year 2000
non-compliance.
There were not any significant Year 2000 issues at Dudley.
There can be no assurance that Year 2000 related disruptions will not arise
in the future in the operations of Blue Star or Dudley.
MBE, Blue Star, and Dudley did not segregate their expenses for Year 2000
compliance from other information technology costs, but these expenses did not
exceed $4.0 million. MBE, Blue Star and the Company's interest in Dudley
represent approximately one-third of the Company's consolidated revenues.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability in its core office products business have
been lower in the first two quarters of its fiscal year, primarily due to the
lower level of business activity in North America during the summer months. The
revenues and profitability of the Company's operations in New Zealand and
Australia and at MBE have generally been higher in the Company's third quarter.
As the Company's mix of businesses evolves through future business combinations,
these seasonal fluctuations may continue to change. Therefore, results for any
quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent fiscal quarter or for a full fiscal year.
Quarterly results also may be affected by the timing and magnitude of
business combinations and divestitures, the timing and magnitude of costs
related to such business combinations and divestitures, variations in the prices
paid by the Company for the products it sells, the mix of products sold, and
general economic conditions. Moreover, the operating margins of companies
acquired by the Company may differ substantially from those of the Company,
which could contribute to the further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on
its results of operations during fiscal 1999 or the first three quarters of
fiscal 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance for accounting for the costs of
computer software developed or obtained for internal use. The adoption of SOP
98-1 had no impact on the results of operations or financial position of the
Company.
Page 38
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures arise from changes in interest
rates and fluctuations in the exchange rates related primarily to the New
Zealand, Australian and Canadian dollars. The Company utilizes interest rate
swaps and foreign currency forward contracts to reduce its exposure to adverse
fluctuations in interest rates and exchange rates. The Company does not hold or
issue derivative instruments for trading purposes.
INTEREST RATE RISK
See the disclosure included in the Company's 1999 Annual Report on Form
10-K. The Company does not believe that the interest rate risk it faces is
materially different than at the date of the 1999 Annual Report on Form 10-K.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts business activities in New Zealand and Australia
(related to the Blue Star Group) and Canada (two coffee businesses) and has a
49% equity interest in a business in the United Kingdom. As a result, the
Company is exposed to foreign currency exchange rate risk primarily due to its
transactions and net assets denominated in New Zealand (NZD), Australian (AUD),
and Canadian (CDN) dollars and the Pound Sterling. The Blue Star Group uses
foreign currency forward contracts to hedge the impact of adverse fluctuations
in the exchange rate on the purchases of goods from overseas markets, as well as
on the interest paid related to intercompany debt obligations denominated in
U.S. dollars. The Company has not entered into any derivative instruments with
respect to the CDN dollar or the Pound Sterling.
The U.S. dollar is the functional currency for the Company's
consolidated results of operations and financial position. For the Company's
subsidiaries in New Zealand, Australia and Canada, the functional currency is
the NZD, AUD and CDN dollar, respectively. The functional currency of the
Company's equity investment in the United Kingdom is the Pound Sterling. The
cumulative transaction effects for the subsidiaries using functional
currencies other than the U.S. dollar are included in accumulated other
comprehensive loss in consolidated stockholders' equity, with the exception
of the Company's $170 million U.S. dollar denominated and $200 million NZD
denominated 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 $.01 change in
the NZD exchange rate would result in the recording of an unrealized foreign
currency transaction gain or loss of approximately $8.5 million. In addition,
as of January 22, 2000, the stockholders' equity of the Blue Star Group
totaled $142.1 million.
Page 39
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material litigation involving the Company is described in Item 3 of the
Company's Annual Report on Form 10-K for the fiscal year ended April 24, 1999,
and the Company's quarterly reports for the three month periods ending July 24,
1999 and October 23, 1999. During the three months ended January 22, 2000, the
following material developments occurred in the action described in the
foregoing reports.
An additional individual purporting to represent a class of stockholders
who obtained shares of US Office Products common stock between June 5, 1997 and
September 2, 1998 filed a complaint in the United States District Court for the
District of Columbia on January 3, 2000, which has not been served on the
Company. The factual allegations are essentially the same as those in the
consolidated amended complaint filed on July 29, 1999, with respect to the ten
putative class actions originally filed in late 1998 and early 1999. The action
claims a violation by the Company of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. The case has been consolidated with the
other previously-filed lawsuits that had been transferred to and consolidated in
the United States District Court for the District of Columbia and it (like the
others) has been "administratively closed" pending the completion of mediation
in those cases, which is ongoing.
The Company is, from time to time, a party to other legal proceedings
arising in the normal course of its business. Management believes that none
of these legal proceedings will have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
ITEM 5. OTHER INFORMATION
In December 1999, Nasdaq informed the Company that because its common stock
had traded below $5.00 per share for more than 30 consecutive trading days, the
Company was not maintaining the minimum bid price requirement for continued
quotation on the Nasdaq National Market System. Nasdaq also stated that if,
prior to December 8, 1999, the Company was not in compliance with this
requirement for 10 consecutive trading days, the Company's stock would be
delisted at the opening of business on December 10, 1999. The Company was not in
compliance with the minimum bid requirement prior to December 8, 1999. In an
effort to maintain its listing, the Company appealed the decision to remove the
Company from the Nasdaq National Market before the Nasdaq Listing U.S.
Qualifications Panel (the "Panel"). In February 2000, the Panel granted the
Company a 90-day exemption from the minimum bid requirement, through the
beginning of May 2000. Management continues to explore its options during the
exemption period in the event that the Company does not regain compliance with
the National Market System listing requirements. These options include seeking
further exemptive relief from Nasdaq, transferring to a different exchange (such
as the Nasdaq Small Cap Market), or completing a reverse stock split in an
effort to increase the minimum bid price for the Company's common stock to more
than $5.00 per share. The Company has not made a final decision on what action
it will take, and there can be no assurance as to whether any such action will
be successful. If the Company's common stock were ultimately to be delisted, the
delisting would likely adversely affect the stock's market price and liquidity
of trading.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement by and between US Office Products Company
and Robert J. Herbolich.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
Page 40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
March 6, 2000 By: /s/ Warren D. Feldberg
- ----------------------- --------------------------
Date Warren D. Feldberg
President and Chief Executive Officer
March 6, 2000 By: /s/ Joseph T. Doyle
- ----------------------- --------------------------
Date Joseph T. Doyle
Chief Financial Officer
Page 41
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. EXHIBIT
<S> <C>
10.1 Employment Agreement by and between US Office Products Company and
Robert J. Herbolich
27 Financial Data Schedule
</TABLE>
Page 42
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 22nd day of October, 1999
(the "Effective Date"), is by and between US Office Products Company (the
"Company"), a Delaware corporation, and Robert J. Herbolich, an individual
residing at 2287 Kate Circle, Hudson, OH 44236 ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the
benefit of his skills and services, and Employee desires to continue employment
with the Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein, and the performance of each, the
parties hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM. The Company hereby employs Employee to perform the
duties described herein, and Employee hereby accepts employment with the
Company, for a term beginning on Effective Date and continuing for a period of
two (2) years (the "Term"). This Agreement may be terminated prior to the end of
the Term in the manner provided for in Section 6 below.
2. POSITION AND DUTIES. The Company hereby employs Employee as
President of the North American Office Supplies Division. As such, Employee
shall have such responsibilities, duties and authority as are delegated to him
from time to time by the Company's Chief Executive Officer and the Company's
Board of Directors (the "Board"). Employee shall report to the Chief Executive
Officer. Employee hereby accepts this employment upon the terms and conditions
herein contained and agrees to devote all of his professional time, attention
and efforts to promote and further the business of the Company. Employee shall
faithfully adhere to, execute, and fulfill all policies established by the
Company. Employee agrees that at all times during the term thereof, he will
devote all of his undivided time during customary business hours to the business
and interest of the Company.
3. COMPENSATION. For all services rendered by Employee, the Company
shall compensate Employee as follows:
(A) BASE SALARY. Effective on the date hereof, the base salary payable
to Employee shall be $300,000 per year, payable on a regular basis in accordance
with the Company's standard payroll procedures, but not less than monthly.
(b) INCENTIVE BONUS. During the Term, Employee shall be eligible to
participate in appropriate executive compensation programs, as determined by the
Company. During the Company's 2000 fiscal year, Employee shall be eligible to
participate in both the Company's Short-Term Management Incentive Compensation
Plan (the "Short-Term Plan") and the Company's Two-Year Special Bonus Plan
(which also will continue into the Company's 2001
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fiscal year). His participation in such programs shall be specified in the terms
of such programs, consistent with his level of responsibility and position. The
Company shall retain complete and absolute discretion at all times to determine
the terms and conditions of such programs, eligibility for participation, and
the criteria, timing, and forms of payment of any incentive or bonus
compensation. In the event that the Short-Term Plan is not continued or is
terminated, the Company shall develop a suitable alternative incentive program
for Employee that is comparable to incentive programs developed for other senior
executives of the Company
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the Term,
Employee shall be entitled to receive all perquisites and benefits as are
customarily provided by the Company to its employees, subject to such changes,
additions, or deletions as the Company may make generally from time to time, as
well as such other perquisites or benefits as may be specified from time to time
by the Board or the President of the Company. In addition, during each year of
the Term, Employee shall be entitled to receive four (4) weeks of vacation,
which shall accrue in accordance with the Company's policies. Payment in lieu of
accrued but unused vacation shall be subject to and determined by the Company's
policies.
4. EXPENSE REIMBURSEMENT. The Company shall reimburse Employee for (or,
at the Company's option, pay) all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of his services
hereunder during the Term. The Company shall pay, prior to Employee's relocation
to the Washington, D.C. metropolitan area, the reasonable costs of an apartment,
and related expenses, until March 1, 2001. In addition, during this period the
Company shall reimburse Employee's travel and out-of-pocket expense related to
one weekly round trip commute between Employee's home in Cleveland, Ohio and the
Company's corporate headquarters in Washington, D.C. All reimbursable expenses
shall be appropriately documented in reasonable detail by Employee upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy, as well as applicable
federal and state tax record keeping requirements. To the extent reimbursements
related to Employee's lodging in the Washington, D.C metropolitan area or
commuting between Washington, D.C. and Cleveland, OH are deemed by the Company
to be taxable to Employee, the Company shall "gross up" such taxable amounts, in
accordance with prevailing Company policy at the time, in respect of taxes
payable by Employee (in all cases net of any tax benefits to Employee).
5. PLACE OF PERFORMANCE. Unless the Employee otherwise consents, the
principal place of the Employee's employment shall be within a 30-mile radius of
the Washington, D.C. metropolitan area. Employee understands that he may be
requested by the Company to relocate from his present residence to another
geographic location in order to more efficiently carry out his duties and
responsibilities under this Agreement or as part of a promotion or a change in
duties and responsibilities. In such event, if Employee agrees to relocate, the
Company will provide Employee with a relocation allowance, in an amount
determined by the Company, to assist Employee in covering the costs of moving
himself, his immediate family, and their personal property and effects. The
total amount and type of costs to be covered shall be determined by the Company,
in light of prevailing Company policy at the time.
6. TERMINATION; RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the followings ways, prior to the expiration of the
Term:
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<PAGE>
(a) DEATH. The death of Employee shall immediately terminate the Term,
and no severance compensation shall be owed to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been unable to perform the material
duties of his position on a full-time basis for a period of four consecutive
months, or for a total of four months in any six-month period, then 30 days
after written notice to the Employee (which notice may be given before or after
the end of the aforementioned periods, but which shall not be effective earlier
than the last day of the applicable period), the Company may terminate
Employee's employment hereunder if Employee is unable to resume his full-time
duties at the conclusion of such notice period. Subject to Section 6(f) below,
if Employee's employment is terminated as a result of Employee's disability, the
Company shall continue to pay Employee his base salary at the then-current rate
for the lesser of (i) six (6) months from the effective date of termination, or
(ii) whatever time period is remaining under the then-current period of the Term
(without regard to renewals thereof). Such payments shall be made in accordance
with the Company's regular payroll cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE." The Company may terminate
the Term 10 days after written notice to Employee "for cause," which shall be:
(i) Employees' material breach of this Agreement that either cannot be cured or,
if curable, is not cured within 10 days of Employee receiving written notice of
such breach from the Company or from USOP; (ii) Employee's gross negligence in
the performance of his duties hereunder, intentional nonperformance or
mis-performance of such duties, or refusal to abide by or comply with the
directives of the Board, his superior officers, or the Company's policies and
procedures, which actions continue for a period of at least 10 business days
after receipt by Employee of written notice of the need to cure or cease; (iii)
Employee's willful dishonesty, fraud, or misconduct with respect to the business
or affairs of the Company, and that in the judgment of the Company materially
and adversely affects the operations or reputation of the Company; (iv)
Employee's conviction of a felony or other crime involving moral turpitude; (v)
Employee's abuse of alcohol or drugs (legal or illegal) that, in the Company's
judgment, materially impairs Employee's ability to perform his duties hereunder.
In the event of a termination "for cause," as enumerated above, Employee shall
have no right to any severance compensation.
(D) WITHOUT CAUSE. At any time after the commencement of employment,
the Company may, without cause, terminate the Term and Employee's employment,
effective 30 days after written notice is provided to the Employee. Should
Employee be terminated by the Company without cause, subject to Section 6(g)
below, Employee shall receive from the Company his base salary at the rate then
in effect for the longer of (i) one (1) year from the date of termination or
(ii) whatever time period is remaining under the Term. Such payments shall be
made in accordance with the Company's regular payroll cycle. If Employee resigns
or otherwise terminates his employment for any reason or for no reason, Employee
shall receive no severance compensation.
(E) NON-CONTINUANCE. If, within (60) days after the last day of the
Term, the Company terminates Employee's employment "without cause," Employee
shall receive from the Company, as severance, his base salary for a period
ending on the first anniversary of the last day of the Term. Such payments shall
be made in accordance with the Company's regular payroll cycle
3
<PAGE>
(f) PAYMENT THROUGH TERMINATION. Upon termination of Employee's
employment for any reason provided above, Employee shall be entitled to receive
all compensation earned and all benefits and reimbursements (including payments
for accrued vacation and sick leave, in each case in accordance with applicable
policies of the Company) due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Employee only to the extent and in the manner expressly provided
above in this Section 6. All other rights and obligations the Company, and
Employee under this Agreement shall cease as of the effective date of
termination, except that the Employee's obligations under Sections 7, 8, 9 and
10 below shall survive such termination in accordance with their terms.
(g) RIGHT TO OFFSET. In the event of any termination of Employee's
employment under this Agreement, the Employee shall have no obligation to seek
other employment; PROVIDED, that in the event that Employee secures employment
or any consulting or other similar arrangement during the period that any
payment is continuing pursuant to the provisions of this Section 6, the Company
shall have the right to reduce the amounts to be paid hereunder by the amount of
Employee's earnings from such other employment.
7. RESTRICTION ON COMPETITION.
(a) During the Term, and thereafter, if Employee continues to be
employed by the Company and/or any other entity owned by or affiliated with the
Company on an "at will" basis, for the duration of such period, and thereafter
for a period equal to the longer of (x) one year, or (y) the period during which
Employee is receiving any severance pay from the Company, Employee shall not,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, company, partnership, corporation, business, group, or other
entity (each, a "Person"):
(i) engage as an employee, officer, director, shareholder,
owner, partner, joint venturer, or in a managerial capacity, or as an
independent contractor, consultant, advisor, or sales representative or in any
other similar capacity in any business selling office supplies, office
furniture, or office coffee or vending products or services that competes
directly with the Company and has an office within 50 miles of any location
where the Company has an office;
(ii) hire or solicit any Person who is, at that time, an
employee of the Company for the purpose or with the intent of enticing such
employee away from or out of the employ of the Company; or
(iii) solicit any Person who is, at that time, or has been,
within one year prior to that time, a customer of the Company for the purpose of
soliciting from, or selling to, such Person office products, office furniture,
or office coffee or vending products or services in competition with the
Company.
(b) In view of the Company's extensive involvement in offering products
and services to customers and prospective customers through the Internet (as an
enhancement to its traditional business activities), the restriction in clause
(a)(i) also shall apply to any Person that does not otherwise fall within the
scope of clause (a)(i) but that offers office supplies, office furniture, or
office coffee or vending products or services to customers through the Internet,
if such Person holds itself out as being able to distribute (directly or through
a third party) such
4
<PAGE>
products or services to any customer location within 50 miles of any location
where the Company has an office.
(c) The foregoing covenants shall not be deemed to prohibit Employee
from acquiring as an investment not more than one percent of the capital stock
of a competing business.
(d) The covenants in this Section 7 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any provision of this Section 7 relating to the time period
or geographic area of the restrictive covenants shall be declared by a court of
competent jurisdiction to exceed the maximum time period or geographic area, as
applicable, that such court deems reasonable and enforceable, said time period
or geographic area shall be deemed to be, and thereafter shall become, the
maximum time period or largest geographic area that such court deems reasonable
and enforceable and this Agreement shall automatically be considered to have
been amended and revised to reflect such determination.
(e) All of the covenants in this Section 7 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants. It is specifically
agreed that the period of one year stated at the beginning of this Section 7,
during which the agreements and covenants of Employee made in this Section 7
shall be effective, shall be computed by excluding from such computation any
time during which Employee is in violation of any provision of this Section 7.
(f) If the time period specified by this Section 7 shall be reduced by
law or court decision, then, notwithstanding the provisions of Section 6 above,
Employee shall be entitled to receive from the Company his base salary at the
rate then in effect solely for the longer of (i) the time period during which
the provisions of this Section 7 shall be enforceable under the provisions of
such applicable law, or (ii) the time period during which Employee is not
engaging in any competitive activity, but in no event longer than the applicable
period provided in Section 6 above.
(g) For purposes of this Section 7, it is agreed that the term
"Company" shall include US Office Products Company and all of its subsidiaries.
(h) Employee has carefully read and considered the provisions of this
Section 7 and, having done so, agrees that the restrictive covenants in this
Section 7 impose a fair and reasonable restraint on Employee and are reasonably
required to protect the valuable and legitimate business interests of the
Company and its subsidiaries. Employee also expressly acknowledges and agrees
that because he is a senior executive officer of the Company with access to a
broad range of valuable, confidential, and proprietary strategic and operational
information about the Company's and its subsidaries operations throughout North
America, the geographic scope of this Section 7 is fair, reasonable, and
necessary to protect the valuable and legitimate business interests of the
Company and its subsidiaries.
8. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business,
5
<PAGE>
financial, technical, economic, sales, and/or other types of proprietary
business information relating to the Company (including all trade secrets), in
whatever form, whether oral, written, or electronic (collectively, the
"Confidential Information"), to which Employee has, or is given (or has had or
been given), access as a result of his employment by the Company. It is agreed
that the Confidential Information is confidential and proprietary to the Company
because such Confidential Information encompasses technical know-how, trade
secrets, or technical, financial, organizational, sales, or other valuable
aspects of the Company's business and trade, including, without limitation,
technologies, products, processes, plans, clients, personnel, operations, and
business activities. This restriction shall not apply to any Confidential
Information that (a) becomes known generally to the public through no fault of
the Employee; (b) is required by applicable law, legal process, or any order or
mandate of a court or other governmental authority to be disclosed; or (c) is
reasonably believed by Employee, based upon the advice of legal counsel, to be
required to be disclosed in defense of a lawsuit or other legal or
administrative action brought against Employee; PROVIDED, that in the case of
clauses (b) or (c), Employee shall give the Company reasonable advance written
notice of the Confidential Information intended to be disclosed and the reasons
and circumstances surrounding such disclosure, in order to permit the Company to
seek a protective order or other appropriate request for confidential treatment
of the applicable Confidential Information. For purposes of this Section 8, it
is agreed that the term "Company" shall include US Office Products Company and
all of its subsidiaries
9. INVENTIONS. Employee shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements, and valuable
discoveries, whether patentable or not, that are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
year thereafter, and that are directly related to the business or activities of
the Company and that Employee conceives as a result of his employment by the
Company, regardless of whether or not such ideas, inventions, or improvements
qualify as "works for hire." Employee hereby assigns and agrees to assign all
his interests therein to the Company or its nominee. Whenever requested to do so
by the Company, Employee shall execute any and all applications, assignments, or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
10. RETURN OF COMPANY PROPERTY. Promptly upon termination of Employee's
employment by the Company for any reason or no reason, Employee or Employee's
personal representative shall return to the Company (a) all Confidential
Information; (b) all other records, designs, patents, business plans, financial
statements, manuals, memoranda, lists, correspondence, reports, records, charts,
advertising materials, and other data or property delivered to or compiled by
Employee by or on behalf of the Company or it's respective representatives,
vendors, or customers that pertain to the business of the Company, whether in
paper, electronic, or other form; and (c) all keys, credit cards, vehicles, and
other property of the Company. Employee shall not retain or cause to be retained
any copies of the foregoing. Employee hereby agrees that all of the foregoing
shall be and remain the property of the Company and be subject at all times to
it's discretion and control.
11. INDEMNIFICATION. In the event Employee is made a party to any
threatened or pending action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by the Company against
Employee, and excluding any action by Employee against the Company), by reason
of the fact that he is or was performing services under this Agreement or as an
officer or director of the Company, then, to the fullest extent permitted by
6
<PAGE>
applicable law, the Company shall indemnify Employee against all expenses
(including reasonable attorneys' fees), judgments, fines, and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith. Such indemnification shall continue as to Employee even if he has
ceased to be an employee, officer, or director of the Company and shall inure to
the benefit of his heirs and estate. The Company shall advance to Employee all
reasonable costs and expenses directly related to the defense of such action,
suit, or proceeding within twenty (20) days after written request therefore by
Employee to the Company; PROVIDED, that such request shall include a written
undertaking by Employee, in a form acceptable to the Company, to repay such
advances if it shall ultimately be determined that Employee is or was not
entitled to be indemnified by the Company against such costs and expenses. In
the event that both Employee and the Company are made a party to the same
third-party action, complaint, suit, or proceeding, the Company will engage
competent legal representation, and Employee agrees to use the same
representation; PROVIDED, that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all reasonable
attorneys' fees of such separate counsel. The provisions of this Section 11 are
in addition to, and not in derogation of, the indemnification provisions of the
Company's By-laws. The foregoing indemnification also shall be applicable to
Employee in his capacity as an officer, director, or representative of any
subsidiary of the Company, or any other entity, but in each case only to the
extent that Employee is serving at the request of the Board or the Board of
Directors of the Company.
12. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee, his employment by the
Company, and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client, or any other Person.
Further, Employee agrees to indemnify and hold harmless the Company and its
officers, directors, and representatives for any claim, including, but not
limited to, reasonable attorneys' fees and expenses of investigation, of any
such third party that such third party may now have or may hereafter come to
have against the Company or such other persons, based upon or arising out of any
non-competition agreement, invention, secrecy, or other agreement between
Employee and such third party that was in existence as of the date of this
Agreement. To the extent that Employee had any oral or written employment
agreement or understanding with the Company, this Agreement shall automatically
supersede such agreement or understanding, and upon execution of this Agreement
by Employee and the Company, such prior agreement or understanding automatically
shall be deemed to have been terminated and shall be null and void.
13. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience, and skills. Employee agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement. This
Agreement may not be assigned or transferred by the Company without the prior
written consent of Employee. Subject to the preceding two sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors, and assigns. Notwithstanding the foregoing, if Employee accepts
employment with a subsidiary or affiliate of the Company, unless Employee and
his new employer agree otherwise in writing, this Agreement shall automatically
be deemed to have been assigned to such new employer (which shall thereafter be
an additional or substitute beneficiary of the covenants contained herein, as
appropriate), with the consent of Employee, such assignment shall be considered
a condition of employment by such new employer, and references to the "Company"
in this Agreement shall be deemed to refer to such new employer.
7
<PAGE>
14. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not a
promise of future employment. Employee has no oral representations,
understandings, or agreements with the Company or any of its officers,
directors, or representatives covering the same subject matter as this
Agreement. This Agreement is the final, complete, and exclusive statement and
expression of the agreement between the Company and Employee with respect to the
subject matter hereof and cannot be varied, contradicted, or supplemented by
evidence of any prior or contemporaneous oral or written agreements. This
written Agreement may not be later modified except by a further writing signed
by a duly authorized officer of the Company and Employee, and no term of this
Agreement may be waived except by a writing signed by the party waiving the
benefit of such term.
15. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: US Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: General Counsel
To Employee: Robert J. Herbolich
2287 Kate Circle
Hudson, OH 44236
Notice shall be deemed given and effective three days after the deposit in the
U.S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or, if sent by express delivery, hand delivery, or
facsimile, when actually received. Either party may change the address for
notice by notifying the other party of such change in accordance with this
Section 15.
16. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. This
severability provision shall be in addition to, and not in place of, the
provisions of Section 7(d) above. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
17. EQUITABLE REMEDY. Because of the difficulty of measuring economic
losses to the Company as a result of a breach of the restrictive covenants set
forth in Sections 7, 8, 9 and 10, and because of the immediate and irreparable
damage that would be caused to the Company for which monetary damages would not
be a sufficient remedy, it is hereby agreed that in addition to all other
remedies that may be available to the Company at law or in equity, the Company
shall be entitled to specific performance and any injunctive or other equitable
relief as a remedy for any breach or threatened breach of the aforementioned
restrictive covenants.
8
<PAGE>
18. ARBITRATION. Any unresolved dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. The direct expense of any arbitration proceeding shall be
borne by the Company. Each party shall bear its own counsel fees. The
arbitration proceeding shall be held in Washington, D.C. Notwithstanding the
foregoing, the Company shall be entitled to seek injunctive or other equitable
relief, as contemplated by Section 17 above, from any court of competent
jurisdiction, without the need to resort to arbitration.
19. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the District of Columbia, without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
duly executed as of the date first written above.
US OFFICE PRODUCTS COMPANY
By: \s\ MARK D. DIRECTOR
Name: Mark D. Director
Title: Executive Vice President
EMPLOYEE:
\s\ ROBERT J. HERBOLICH
Robert J. Herbolich
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN
THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> APR-25-1999
<PERIOD-END> JAN-22-2000
<CASH> 23,530
<SECURITIES> 0
<RECEIVABLES> 311,625
<ALLOWANCES> (9,116)
<INVENTORY> 181,352
<CURRENT-ASSETS> 602,557
<PP&E> 367,615
<DEPRECIATION> (150,407)
<TOTAL-ASSETS> 1,864,487
<CURRENT-LIABILITIES> 376,813
<BONDS> 1,041,395
0
0
<COMMON> 37
<OTHER-SE> 418,191
<TOTAL-LIABILITY-AND-EQUITY> 1,864,487
<SALES> 624,439
<TOTAL-REVENUES> 624,439
<CGS> 449,657
<TOTAL-COSTS> 168,673<F1>
<OTHER-EXPENSES> 11,865<F2>
<LOSS-PROVISION> 1,824
<INTEREST-EXPENSE> 28,595
<INCOME-PRETAX> (36,175)
<INCOME-TAX> (9,966)
<INCOME-CONTINUING> (26,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 9,108
<CHANGES> 0
<NET-INCOME> (17,101)
<EPS-BASIC> (0.46)
<EPS-DILUTED> (0.46)
<FN>
<F1>INCLUDES $683 OF OPERATING RESTRUCTURING COSTS AND $6,005 OF IMPAIRED ASSET
WRITE-OFFS.
<F2>INCLUDES $7,766 OF LOSS ON SALE OF BUSINESSES.
</FN>
</TABLE>
