Management's Discussion and Analysis of
Financial Condition and Results of Operations

Liquidity and Capital Resources

Historically, the Company has financed its operations through internally generated funds and borrowings from commercial banks and has financed its acquisitions through the use of such funds and the issuance of equity and debt securities.

In January 1999, the Company approved a global restructuring plan that includes a reduction of approximately 1,000 employees across all business functions, or approximately 7% of the total continuing operations' workforce, and the closure or consolidation of approximately 70 facilities. The Company recorded $54,805,000 in restructuring and other nonrecurring charges and $3,130,000 in net restructuring related inventory provisions. The total net charge of $57,935,000 includes $36,370,000 of cash charges and $21,565,000 of non-cash charges. Additionally, the Company announced the discontinuance of its same-day delivery business and has engaged an investment banking firm to assist in the sale this business. In conjunction with these activities, the Company amended its Senior Secured Credit Facility to clarify that the aforementioned 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.

On April 22, 1998, the Company's previous Senior Credit Facility was replaced and paid in full with proceeds from the new Senior Secured Credit Facility. Approximately $1,810,000 of deferred financing costs related to the previous Senior Credit Facility were expensed in the first quarter of fiscal 1998 and are shown as an extraordinary item of $1,104,000, net of tax of $706,000.

On April 10, 1998, the Company concluded the Dutch Auction tender offer it commenced on February 5, 1998, pursuant to which it purchased 35,000,000 shares tendered at a price of $10.75 per share. Subsequently, pursuant to a stock repurchase program, the Company acquired an additional 4,635,681 shares in fiscal 1998. The Company has terminated the previously announced discussions with a potential financial sponsor for a significant share repurchase or tender offer and has also terminated its stock repurchase program. The Company funded the purchase of such shares and the payment of related fees and expenses through its new $1.0 billion Senior Secured Credit Facility. This Senior Secured Credit Facility consists of a $250,000,000 seven-year term loan and a $750,000,000 five-year revolving credit facility. The Senior Secured Credit Facility is guaranteed by substantially all domestic subsidiaries of the Company and is collateralized by all tangible and intangible property of the guarantors including inventory and receivables. At the borrower's option, interest rates are at a base rate or a Eurodollar rate plus an applicable margin determined by a leverage ratio as defined in the loan agreements. The term loan's interest rate ranges from 0.25% to 0.75% above the revolving loan interest rate. The Company is subject to usual covenants customary for this type of facility including financial covenants. The Company amended the credit agreement to clarify that the restructuring charge is excluded from the computations and to permit the disposal of certain non-core assets. The available funds may be used for general corporate purposes, including permitted acquisitions and permitted share repurchases. As of April 15, 1999, the Company had $482,425,000 outstanding under the Senior Secured Credit Facility and an unused borrowing capacity of $489,713,000 (reflecting the quarterly principal payments on the term loan totaling $1,875,000, which is a permanent reduction to the facility). The Company is in compliance with all debt covenants under the Senior Secured Credit Facility and, although there can be no assurance, the Company expects to remain in compliance with such covenants for fiscal 1999 under its annual business plan for the year.

On May 29, 1998, CEX Holdings, Inc., a wholly-owned subsidiary of the Company, issued at par $350,000,000 principal amount of unsecured 95/8% Senior Subordinated Notes due 2008 (the "95/8% Notes"). The 95/8% Notes are guaranteed by all material domestic subsidiaries of the Company and are subordinated in right of payment to all senior debt which totaled approximately $511,000,000 at January 30, 1999. On or after June 1, 2003 through maturity, the 95/8% Notes may be redeemed at the option of the Company, in whole or in part, at redemption rates ranging from 104.813% to 100%. At any time on or before June 1, 2001, the Company may redeem up to 35% of the 95/8% Notes with the net cash proceeds of one or more public equity offerings at a redemption price equal to 109.625% of the principal amount thereof, subject to certain restrictions. Semi-annual interest payments are due on June 1 and December 1 and began on December 1, 1998. A portion of the proceeds from the sale of the 95/8% Notes was used to repay prior to maturity substantially all of the $90,000,000 91/8% Notes and to repay $245,000,000 on the Senior Secured Credit Facility. As a result of the early extinguishment of the 91/8% Notes, the Company recorded an extraordinary loss of $4,477,000, net of tax of $2,862,000, in the second quarter of fiscal 1998. In May 1998, the Company settled an interest rate hedging contract based on $300,000,000 of U.S. Treasury notes related to the completed offering of the 95/8% Notes. The cost of the settlement of the contract was $7,271,000 and will be amortized over the ten-year term of the 95/8% Notes, bringing the effective interest rate of the debt instrument to 9.96%. In December 1998, CEX Holding, Inc. completed a registered exchange offer pursuant to which the 95/8% Notes were exchanged for substantially similar notes.

During the year ended January 30, 1999, the Company invested $28,770,000 net cash in its acquisition program. Total liabilities assumed in connection with these acquisitions were $47,583,000. In addition, the Company made payments of approximately $12,103,000 for liabilities related to prior period acquisitions.

During the year ended January 30, 1999, the Company had net capital expenditures of $81,535,000 for computer systems and software, warehouse reconfigurations, telecommunications equipment, delivery vehicles, leasehold improvements and investments in facilities. The Company continues to invest in advanced facilities, the development of its proprietary computer software, and the upgrade of its computer systems. The Company expects net capital expenditures for fiscal 1999 of approximately $50,000,000 comprised of approximately $39,000,000 to be used for upgrading and enhancing its information systems and telecommunications equipment and approximately $11,000,000 for warehouse reconfiguration and equipment. Actual capital expenditures for fiscal 1999 may be greater or less than budgeted amounts.

The Company continues to make substantial investments in the development and enhancement of its proprietary computer software applications. During fiscal 1997, the Company completed the development and implementation of its ISIS computer software for its national account customers and successfully launched the internet version of E-Way, its electronic commerce, ordering and fulfillment system. The Company began amortizing its ISIS national account software and E-Way in fiscal 1997 over a seven-year and five-year life, respectively, on a straight-line basis. All costs associated with the maintenance and production of its ISIS national account software are being expensed as incurred. The integrated divisional version of the ISIS software continues to be developed and is currently in beta test mode at three operating divisions. The Company estimates that the costs to complete and implement ISIS divisional software will be approximately $35.0 million and the software is scheduled to be implemented at substantially all existing domestic office products distribution centers by the end of fiscal 2002.

Significant uses of cash in fiscal 1998 were as follows: repurchase of common stock of $427,282,000, cash paid to retire bonds of $93,792,000, net capital expenditures of $81,535,000, cash paid for acquisitions of $40,873,000, net payments under lines of credit of $16,979,000 and net cash used in discontinued operations of $12,542,000, partially offset by net proceeds of long-term borrowings of $536,974,000, cash provided by operations of $102,711,000, net proceeds from sale of securities of $14,414,000 and other net proceeds of $923,000.

During the eleven months ended January 31, 1998, the Company invested $24,572,000 net cash and approximately 14,895,000 shares of common stock in its acquisition program. Total liabilities assumed in connection with these acquisitions were $171,928,000. In addition, the Company made payments of approximately $8,797,000 and issued approximately 252,000 shares of common stock related to acquisitions completed in prior fiscal years. Significant uses of cash in the eleven months ended January 31, 1998 were as follows: net capital expenditures of $52,445,000, cash paid for acquisitions of $32,729,000, net debt repayments of $6,124,000, retirement of DDI bonds of $62,178,000, and net other uses of $3,418,000, partially offset by cash provided by net borrowings on lines of credit of $117,748,000, operating activities of $5,593,000, issuance of common stock of $8,104,000, issuance of subsidiary common stock of $2,434,000 and discontinued operations of $7,705,000.

On June 24, 1996, the Company issued $325,000,000 aggregate principal amount of 41/2% Convertible Notes. The notes are convertible into the Company's common stock at a conversion price of $33.33 per share, subject to adjustments under certain conditions. A portion of the proceeds from the sale of the Convertible Notes was used to repay the Company's then existing credit facility and an acquisition note payable with the remaining proceeds being used to fund acquisitions and for other general corporate purposes. The Convertible Notes mature on July 1, 2000, which will require the Company to either repay or refinance the indebtedness on or before that date. The Company believes that anticipated borrowing capacity under the Senior Secured Credit Facility, together with cash flow from operations, proceeds of potential asset sales or issuance of additional securities, will be adequate for this purpose, although there can be no assurance that such funds will be available or sufficient to either repay or refinance the Convertible Notes.

During fiscal 1996, the Company acquired, for a net cash purchase price of $241,846,000 and 5,542,000 shares of common stock, 77 office products distributors and 23 same-day delivery companies. Included in the net cash purchase price is $17,970,000 that was paid by the discontinued same-day delivery business and is included in the consolidated Statement of Cash Flows in net cash provided from discontinued operations. Of these 100 acquisitions, 86 were accounted for as purchases and 14 were accounted for as immaterial poolings of interest. In addition, the Company acquired UT and NIMSA, which were accounted for as poolings of interests transactions for 6,332,000 and 1,125,000 shares of common stock, respectively. Total liabilities assumed in connection with these acquisitions were $282,777,000 (including accounts payable and assumed debt). In addition, the Company made payments of approximately $13,984,000 related to prior acquisitions. Included in the net cash purchase price of $241,846,000 is the purchase of ASAP, a computer software distribution company, in May 1996 for approximately $98,000,000 in cash offset by cash acquired of approximately $14,000,000.

The Company does not enter into financial instrument contracts for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding.

The Company believes that the borrowing capacity under the Senior Secured Credit Facility, together with proceeds from future debt and equity financings, in addition to the Company's cash on hand, capital resources and cash flows, will be sufficient to fund the Company's ongoing operations, anticipated capital expenditures and acquisition activities for the next twelve months. However, actual capital needs may change, particularly in connection with acquisitions which the Company may complete in the future.