Management's Discussion and Analysis of
Financial Condition and Results of OperationsIntroduction
In 1998 and early 1999, the Company announced certain key initiatives designed to enhance shareholder value, strengthen its financial position and improve its competitive position. These initiatives include a business evaluation, the divestiture of certain businesses, an extensive restructuring plan and certain changes to its equity and debt instruments.
Business Evaluation
Management of the Company is conducting, together with two investment banking firms, a comprehensive review of the Company's portfolio of businesses and assets, as well as an evaluation of strategic alternatives. The Company cannot predict the timing of completion of its evaluations or the possible outcomes or project any actions that may result. Management of the Company has received certain preliminary reports from its financial advisors, including certain analyses regarding a number and variety of strategic options concerning the Company and its businesses. The Company does not intend or undertake to publish any additional information about the status of its evaluations or the process unless and until the Company enters into a definitive agreement relating to any of the strategic options concerning the Company and its businesses or terminates the evaluations.
Divestitures
In January 1999, the Company adopted a formal plan to sell its same-day delivery business and has accounted for this business as a discontinued operation. Accordingly, the Company has recorded an estimated loss on disposal of $52,000,000, net of tax. In addition, the Company is involved in negotiations to sell all or a majority stake in Sofco, its regional cleaning and service supply business. There can be no assurance that either of these transactions will be completed on terms favorable to the Company or at all.
Restructuring Plan
In January 1999, the Company approved a global restructuring plan that is designed to create a lower cost structure by reducing the number of employees and accelerating facility consolidations and closures. Accordingly, the Company recorded a net restructuring charge of $57,935,000 which is reflected in the fiscal 1998 operating results.
Equity Tender Offer
Pursuant to a Dutch Auction tender offer in April 1998, the Company purchased 35,000,000 shares tendered at a price of $10.75 per share. In addition, pursuant to a share repurchase program, the Company purchased 4,635,681 shares in the open market at an average price of $10.36 per share. The 39,635,681 treasury shares resulting from these transactions are reflected on the balance sheet at a cost of $427,282,000, which includes applicable fees and expenses. The Company has terminated its repurchase program.
Debt Instruments
In April 1998, to facilitate the Dutch Auction, the Company executed a new $1 billion Senior Secured Credit Facility (the "Senior Secured Credit Facility") consisting of a $250,000,000 seven-year term loan and a $750,000,000 five-year revolving credit facility and terminated the existing $500,000,000 Credit Facility ("Senior Credit Facility"). In January 1999, the Company amended the Senior Secured Credit Facility to clarify that the restructuring charge is excluded from its covenant computations, and to permit the disposal of certain non-core business units including the same-day delivery business. In May 1998, the Company issued $350,000,000 principal amount of 95/8% Senior Subordinated Notes due 2008 (the "Senior Notes") to repay substantially all of the $90,000,000 91/8% Senior Subordinated Notes due 2004 and to repay outstanding indebtedness under the Senior Secured Credit Facility.
Also in fiscal 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company is organized primarily on the basis of business segments and geographic locations. The Company operates in four reportable business segments, excluding discontinued operations: North America Office Products, International Office Products, Desktop Software Distribution, and Other Products and Services; and two geographic segments: Domestic and International. Accordingly, the Company's Management Discussion and Analysis reflects the new reportable segments for all periods presented. Also refer to Note 16 of the Company's audited consolidated financial statements.
During fiscal 1998, the Company initiated its transition from an acquisition-oriented company to an operating company focused on internal growth through continued implementation of the Corporate Supplier business model. The Corporate Supplier business model reflects the Company's plan to reduce the total procurement cost of non-production goods and services for customers. The key elements of the Corporate Supplier model are the broad offering of products and services, global coverage for selected products and services, a comprehensive distribution and logistics network, information systems that integrate the product offering while linking suppliers to customers and providing procurement management and consulting for customers. The Company continues to increase sales to existing customers by cross-selling its expanded product and service offerings and developing existing customers into international, national or multi-regional accounts.
Certain products currently offered by the Company, such as computer software, have lower gross profit margins and lower operating and distribution costs than the products traditionally sold by the Company. In addition, the acquisition of companies with break-even or marginal operating results or the costs of consolidating acquired business units with the Company may impact the operating margins and profitability of the Company.
The Company's audited consolidated financial statements have been restated to reflect the same-day delivery business as discontinued operations. During fiscal 1997, the Company changed its fiscal year end from February 28 to January 31 to better align its fiscal year with its customers' and competitors' fiscal calendars and to reduce the seasonality between quarters. The 1997 fiscal period refers to the eleven months ended January 31, 1998. The 1996 fiscal year refers to the twelve months ended March 1, 1997.
Results of Operations
The following table sets forth the percentages which the items in the Company's Consolidated Statements of Operations bear to net sales for the periods indicated:
(1) Pro forma net income reflects the tax impact in fiscal 1996 for a subchapter S acquisition as if the acquired company was a C corporation.