<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION NO. 333-46537
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 5112 39-0971239
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DANIEL P. SPALDING
CHIEF EXECUTIVE OFFICER
SCHOOL SPECIALTY, INC.
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
TELEPHONE NO: (202) 663-6000
FACSIMILE NO: (202) 663-6363
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED
MAXIMUM PROPOSED AMOUNT OF
AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION FEE
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE (2)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share, to be distributed to
holders of U.S. Office Products
Company common stock.............. 100,000,000(1) $.331 $33,109,000 $9,768
</TABLE>
(1) Approximate number of shares of School Specialty, Inc. common stock expected
to be distributed based upon an assumed distribution ratio of one share of
School Specialty, Inc. common stock for every one share of U.S. Office
Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of School
Specialty, Inc. common stock for every one share of U.S. Office Products
Company common stock.
(2) The Company has previously paid the Securities and Exchange Commission the
registration fee.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 4, 1998
INFORMATION STATEMENT/PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
SCHOOL SPECIALTY, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
SCHOOL SPECIALTY, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of School Specialty, Inc. ("School Specialty").
School Specialty is a Delaware corporation formed by U.S. Office Products that
will own substantially all the assets of, and will be responsible for
substantially all the liabilities associated with, U.S. Office Products'
Educational Supplies and Products Division. Pursuant to this distribution (the
"School Specialty Distribution"), all of the issued and outstanding shares of
the common stock, $.001 par value per share, of School Specialty (the "School
Specialty Common Stock") will be distributed to holders of record as of 5:00
p.m. EDT on June 9, 1998 (the "Record Date") of the common stock, par value
$.001 per share, of U.S. Office Products ("U.S. Office Products Common Stock").
Each such holder will receive one share of School Specialty Common Stock for
every nine shares of U.S. Office Products Common Stock held on the Record Date
(the "Distribution Ratio"). Fractional shares will be aggregated into whole
shares of School Specialty Common Stock and sold on the open market by the
Distribution Agent (as defined herein). The proceeds of such sales will be
distributed to holders who otherwise would be entitled to receive fractional
shares. See "The School Specialty Distribution--General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of School Specialty Common Stock they receive in
the Distribution. There is no current public trading market for School Specialty
Common Stock. School Specialty has applied for quotation of the shares of School
Specialty Common Stock on the Nasdaq National Market under the symbol "ABCZ".
The School Specialty Distribution is an element of a comprehensive
restructuring plan adopted by the Board of Directors of U.S. Office Products,
including modifications made since first adopting this plan (as so modified, the
"Strategic Restructuring Plan"). The principal elements of the Strategic
Restructuring Plan are (1) a self-tender offer by U.S. Office Products (the
"Tender Offer") to purchase 37,037,037 shares of U.S. Office Products Common
Stock (including shares that may be issued on exercise of vested and unvested
options for U.S. Office Products Common Stock) at $27.00 per share (or, in the
case of stock options, at $27.00 minus the exercise price of the options) and
the incurrence of debt to pay a portion of the purchase price in the Tender
Offer; (2) after acceptance of shares in the Tender Offer, the pro rata
distribution to U.S. Office Products' stockholders of shares of four companies
that will conduct U.S. Office Products' current print management, technology
solutions, educational supplies and corporate travel services businesses (the
"Distributions"); and (3) the sale to an affiliate ("CD&R") of an investment
fund managed by Clayton, Dubilier & Rice, Inc. ("CD&R, Inc.") of equity
interests in U.S. Office Products (the "Equity Investment") following acceptance
of shares in the Tender Offer and the Record Date for the Distributions.
All holders of U.S. Office Products Common Stock, including the executive
officers and directors of the Company, had the right to participate in the
Tender Offer. The Company was advised that all of the executive officers and
directors who hold shares (or options to purchase shares) of U.S. Office
Products Common Stock, except for Donald Ray Pate, Jr., intended to tender
shares and options in the Tender Offer. See "Management of School Specialty."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 12.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/ PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 12.
--------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
--------------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS JUNE , 1998
<PAGE>
ADDITIONAL INFORMATION
School Specialty has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (including exhibits, schedules, and
amendments thereto, the "School Specialty Form S-1") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), with respect to School Specialty
Common Stock. This Information Statement/Prospectus, while forming a part of the
School Specialty Form S-1, does not contain all of the information set forth in
the School Specialty Form S-1. Reference is hereby made to the School Specialty
Form S-1 for further information with respect to School Specialty and the
securities to be distributed to U.S. Office Products stockholders in the School
Specialty Distribution. Statements contained herein concerning the provisions of
documents filed as exhibits to the School Specialty Form S-1 are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the SEC.
The School Specialty Form S-1 is available for inspection and copying at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the SEC
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates or on the Internet at http://www.sec.gov.
Following the School Specialty Distribution, School Specialty will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the SEC that will be
available for inspection and copying at the SEC's public reference facilities
referred to above. Copies of such material can be obtained by mail at prescribed
rates by writing to the Public Reference Branch of the SEC at the address
referred to above.
Additional information regarding the Strategic Restructuring Plan and School
Specialty may be found in reports, proxy statements and other information filed
by U.S. Office Products with the SEC, including U.S. Office Products Tender
Offer Statement on Schedule 13E-4 filed on May 4, 1998 and U.S. Office Products
Proxy Statement filed on April 30, 1998.
School Specialty intends to furnish to its stockholders annual reports
containing audited consolidated financial statements examined by its independent
public accountants and quarterly reports containing unaudited consolidated
financial statements for each of the first three quarters of each fiscal year.
Questions concerning the School Specialty Distribution should be directed to
Mark D. Director, Executive Vice-President--Administration, General Counsel and
Secretary of U.S. Office Products, or Donald H. Platt, Executive Vice President,
Chief Financial Officer and Treasurer of U.S. Office Products, at 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, telephone (202)
339-6700. After the School Specialty Distribution, holders of School Specialty
Common Stock having inquiries related to their investment in School Specialty
should contact Daniel P. Spalding, Chief Executive Officer, at 1000 North
Bluemound Drive, P.O. Box 1579, Appleton, Wisconsin 54914, telephone (920)
734-2756.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998, the expiration of the twenty-fifth calendar day
following the School Specialty Distribution, all dealers effecting transactions
in registered securities, whether or not participating in this distribution, may
be required to deliver an Information Statement/Prospectus.
------------------------
Childcraft Education Corp.-Registered Trademark- is a trademark of
Childcraft Education Corp. School Specialty-Registered Trademark- and Education
Access-Registered Trademark- are trademarks of School Specialty. Gresswell is a
common law trademark of School Specialty.
2
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TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 4
RISK FACTORS............................................................................................... 12
THE SCHOOL SPECIALTY DISTRIBUTION.......................................................................... 20
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS.................................................................... 32
DIVIDEND POLICY............................................................................................ 34
CAPITALIZATION............................................................................................. 35
SELECTED FINANCIAL DATA.................................................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SCHOOL SPECIALTY... 39
INDUSTRY OVERVIEW.......................................................................................... 48
BUSINESS................................................................................................... 49
MANAGEMENT OF SCHOOL SPECIALTY............................................................................. 56
CERTAIN TRANSACTIONS....................................................................................... 65
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY................................................................. 66
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK.............................................................. 68
EXPERTS.................................................................................................... 72
LEGAL MATTERS.............................................................................................. 72
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD READ THE INFORMATION
STATEMENT/PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT INDICATES OTHERWISE,
THE INFORMATION HEREIN DOES NOT REFLECT THE PUBLIC OFFERING OF SHARES OF SCHOOL
SPECIALTY COMMON STOCK (INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IN FULL) BY SCHOOL SPECIALTY (THE "OFFERING"). WHERE THE CONTEXT REQUIRES
AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION HEREIN HAS BEEN
ADJUSTED FOR THE DISTRIBUTION RATIO. UNLESS THE CONTEXT REQUIRES OTHERWISE,
REFERENCES TO (I) U.S. OFFICE PRODUCTS AND THE COMPANY (OR SCHOOL SPECIALTY)
SHALL INCLUDE THEIR RESPECTIVE SUBSIDIARIES, AND (II) THE COMPANY (OR SCHOOL
SPECIALTY) PRIOR TO THE DISTRIBUTION DATE SHALL REFER TO THE EDUCATIONAL
SUPPLIES AND PRODUCTS DIVISION OF U.S. OFFICE PRODUCTS.
THE COMPANY
School Specialty, Inc. (the "Company" or "School Specialty") believes that
it is the largest U.S. distributor focusing on non-textbook educational supplies
and furniture for grades pre-kindergarten through 12 ("pre-K-12"). The Company
provides a comprehensive offering of high quality educational supplies and
furniture to school districts, school administrators and teachers through the
broad distribution of its catalogs. School Specialty distributes general school
supplies, including classroom and art supplies, instruction materials, furniture
and equipment. The Company also distributes supplies and furniture for certain
educational disciplines, including early childhood education under the
Childcraft name, art supplies under the Sax Arts & Crafts name and
library-related products under the Gresswell name. In order to broaden its
geographic presence and product offering, the Company has acquired 15 companies
since May 1996. For the twelve months ended January 24, 1998, the Company's
revenues aggregated $279.6 million and operating income aggregated $19.7
million, which represented compound annual increases of 32% and 62%,
respectively, over revenues and operating income for the year ended December 31,
1994. For the twelve months ended January 24, 1998, the Company's pro forma
revenues (giving effect to all acquisitions made since the beginning of such
period) aggregated $377.2 million and pro forma operating income aggregated
$23.7 million, which represented compound annual increases of 45% and 71%,
respectively, over revenues and operating income for the year ended December 31,
1994.
With over 32,000 stock keeping units ("SKUs"), School Specialty offers
customers one source for virtually all of their non-textbook school supply and
furniture needs. School Specialty markets its products through an innovative
two-pronged approach, targeting both administrators and teachers to cover the
full spectrum of decision makers. The Company's "top down" approach, utilizing
its 290 sales representatives and its School Specialty general supply and
furniture catalog (the "School Specialty Catalog"), focuses on procurement
officials at the state, regional and local levels, while its "bottom up"
approach focuses on curriculum specialists and teachers. Sales to curriculum
specialists and over 2.1 million teachers are made primarily through the 6.3
million general supply catalogs of The Re-Print Corp. ("Re-Print") and specialty
catalogs that are mailed each year.
The Company believes that annual sales of non-textbook educational supplies
and equipment to the school supply market aggregate approximately $6.1 billion,
with over $3.6 billion sold to institutions and $2.5 billion sold to consumers.
The Company also believes that there are over 3,400 distributors of school
supplies, the majority of which are family- or employee-owned companies with
revenues under $20 million that operate in a single region. The Company believes
the demand for timely order fulfillment at competitive prices, combined with the
need to invest in automated inventory and electronic ordering systems, is
accelerating the trend toward consolidation in the industry. School Specialty
also believes that it is well positioned to capitalize on this consolidation as
the largest distributor in its industry with annual revenues which it believes
exceed those of its next two largest competitors combined. Although the Company
is the largest distributor in the industry, its share of the $6.1 billion school
supply market is less than 6%, giving the Company substantial growth
opportunities.
4
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The volume of school supplies is directly influenced by the size of the
student population. Kindergarten through 12th grade ("K-12") student enrollment
reached an all-time peak in 1996 with 51.5 million students and the U.S.
Department of Education projects that student enrollment will continue to grow
to 54.3 million by the year 2006. As a result of these trends, the U.S.
Department of Education projects that expenditures in public elementary and
secondary schools will continue to rise through the year 2007. These rising
expenditures include a projected increase in total per pupil spending in current
dollars from $5,961 per pupil in 1997 to $7,179 by the year 2001. The Company
believes that as the largest U.S. distributor of non-textbook educational
supplies it will be a major beneficiary of this growth in expenditures.
KEY STRENGTHS
School Specialty attributes its strong competitive position to the following
key strengths:
LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment, exceptional customer service and brand name recognition. The
Company believes its annual revenues exceed those of its next two largest
competitors combined and that its large size and brand recognition have resulted
in significant buying power, economies of scale and customer loyalty.
BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and as a result currently offers over 32,000 SKUs ranging from classroom
supplies to playground equipment. School Specialty offers customers one source
for virtually all of their school supply needs.
INNOVATIVE TWO-PRONGED DISTRIBUTION. The Company targets administrative
decision makers with a "top down" approach through its 290 person sales force
and School Specialty Catalog, and teachers and curriculum specialists with a
"bottom up" approach primarily through the 6.3 million Re-Print general supply,
and specialty catalogs mailed each year.
ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. The Company believes that it can generate significant
economies of scale and rapidly improve the margins of acquired entities, as well
as increase sales, by channeling acquired entities products through its broad
distribution network. See "Business--Company Strengths".
USE OF TECHNOLOGY. The Company believes that through the utilization of
technology in areas such as (i) purchasing and inventory management, (ii)
customer order fulfillment, and (iii) database management, School Specialty is
able to turn inventory more quickly than competitors, offer customers more
convenient and cost effective product ordering methods and conduct more
precisely targeted sales and marketing campaigns.
EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its stockholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.
GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the
5
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Company has a limited presence, and (ii) specialty companies focusing on
disciplines such as physical education, science, technology and music.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 6.3% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase revenues by adding sales representatives
in geographic markets in which the Company does not have a significant presence.
In addition, the Company believes that it can further increase revenues by cross
merchandising its specialty product lines to its general supplies customers.
RECENT DEVELOPMENTS
On March 20, 1998, the Company acquired the catalog business of Education
Access, a catalog reseller of technology solutions for the K-12 education
market. This new product line will offer curriculum software, productivity
software, peripherals, networking products and other related products through
catalogs mailed twice a year.
BACKGROUND OF THE SCHOOL SPECIALTY DISTRIBUTION
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THE DISTRIBUTION.................. Shares of common stock, par value $.001 per share, of
School Specialty (the "Company Common Stock" or the
"School Specialty Common Stock") will, subject to
certain conditions, be distributed to the stockholders
of record of U.S. Office Products (the "School Specialty
Distribution" or the "Distribution") as of 5:00 p.m.
E.D.T. on June 9, 1998 (the "Record Date"). The School
Specialty Distribution is part of a comprehensive
restructuring plan adopted by the U.S. Office Products'
Board of Directors on January 12, 1998. The principal
elements of the plan (including modifications the Board
of Directors has made since first adopting this plan, as
so modified, the "Strategic Restructuring Plan") are:
- Pursuant to a self-tender offer, U.S. Office Products
offered to purchase 37,037,037 shares of its common
stock $.001 par value ("U.S. Office Products Common
Stock") including shares that may be issued on
exercise of vested and unvested options for U.S.
Office Products Common Stock at $27.00 per share (or
in the case of stock options, at $27.00 minus the
exercise price of the options) (the "Tender Offer").
- After acceptance of the shares in the Tender Offer,
U.S. Office Products will distribute to U.S. Office
Products' stockholders the shares of four separate
companies: Aztec Technology Partners, Inc., Workflow
Management, Inc., School Specialty, and Navigant
International, Inc. (collectively the "Spin-Off
Companies"). The distributions of the shares of the
Spin-Off Companies are referred to in this Information
Statement/Prospectus as the "Distributions." The
Spin-Off Companies will hold U.S. Office Products'
current technology solutions, print management,
educational supplies, and corporate travel services
businesses, respectively.
</TABLE>
6
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<TABLE>
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- Following the Record Date, an affiliate ("CD&R") of an
investment fund managed by Clayton, Dubilier & Rice,
Inc., ("CD&R, Inc.") a private investment firm, will
acquire for $270.0 million, shares of U.S. Office
Products Common Stock representing 24.9% of the
outstanding equity of U.S. Office Products (after
giving effect to the Tender Offer and issuance of
shares to CD&R) and warrants to purchase additional
U.S. Office Products Common Stock (the "Equity
Investment"). CD&R will not acquire any interests in
the Spin-Off Companies.
U.S. Office Products will retain its North American
Office Products Group (which includes the office supply,
office furniture, and office coffee and beverage
services businesses), Mail Boxes, Etc., its New Zealand
and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan,
U.S. Office Products has undertaken or plans to
undertake the following transactions (the "Financing
Transactions"):
- Pursuant to a tender offer, U.S. Office Products will
purchase any or all of its 5 1/2% convertible
subordinated notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and
accrued interest of such notes (the "2003 Note
Tender").
- Pursuant to an exchange offer, U.S. Office Products
has exchanged approximately $131 million principal
amount of its 5 1/2% convertible subordinated notes
due 2001 (the "2001 Notes") for 8,100,741 shares of
U.S. Office Products Common Stock (the "2001 Note
Offer") at an exchange rate of 61.483 shares of U.S.
Office Products Common Stock per $1,000 principal
amount of 2001 Notes, which effectively reduced the
conversion price on the 2001 Notes from $19.00 to
$16.17 while the 2001 Note Offer was open.
- Pursuant to a commitment letter from a group of
lenders, U.S. Office Products will enter into a new
$1.225 billion senior credit facility.
- U.S. Office Products will issue and sell at least
$400.0 million in Senior Subordinated Notes in a
private placement.
REASONS FOR THE DISTRIBUTIONS..... The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
- adopt strategies and pursue objectives that are
appropriate to its respective industry, geographic
territories and stage of growth;
- pursue an independent acquisition program that allows
for a more focused use of resources and, where stock
is used as consideration, provide stock of a public
company that is in the same industry as the businesses
being acquired;
- be recognized by the financial community as a distinct
business that can be evaluated more readily and
compared more easily to industry peers; and
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7
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- implement more focused incentive compensation packages
that respond to specific industry and market
conditions and enhance employee retention objectives.
The Distributions are also integral to the objectives of
the Equity Investment, which is conditioned on
completion of all of the Distributions. See "The School
Specialty Distribution-- Reasons for the Distributions."
SHARES TO BE DISTRIBUTED.......... Approximately 12,299,593 shares of School Specialty
Common Stock will be distributed to stockholders of U.S.
Office Products in the School Specialty Distribution.
This amount is equal to (a) approximately 110,700,000
shares of U.S. Office Products Common Stock expected to
be outstanding on the date of the School Specialty
Distribution (which is equal to (i) approximately
133,800,000 shares of U.S. Office Products Common Stock
outstanding on April 25, 1998, plus (ii) approximately
8,900,000 shares of U.S. Office Products Common Stock
assumed to be issued on conversion of the 2001 Notes,
plus (iii) approximately 5,000,000 shares of U.S. Office
Products Common Stock assumed to be issued upon exercise
of stock options accepted in the Tender Offer, less (iv)
37,037,037 shares (including shares that may be issued
on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be repurchased in the
Tender Offer, divided by (b) the Distribution Ratio. The
number of shares to be distributed could be greater if
additional shares of U.S. Office Products Common Stock
are issued prior to the Record Date pursuant to
outstanding convertible debt securities or stock options
of U.S. Office Products.
DISTRIBUTION RATIO................ Each U.S. Office Products stockholder will receive one
share of School Specialty Common Stock for every nine
shares of U.S. Office Products common stock held on the
Record Date.
FRACTIONAL SHARE INTERESTS........ Fractional share interests will be aggregated and sold
by the Distribution Agent and the cash proceeds will be
distributed to those U.S. Office Products stockholders
entitled to a fractional interest. See "The School
Specialty Distribution--General."
RECORD DATE....................... 5:00 p.m. E.D.T. on June 9, 1998.
DISTRIBUTION DATE................. The effective time of the Distributions is expected to
be 11:59 p.m. E.D.T. on June 9, 1998 (the "Distribution
Date").
MAILING DATE...................... Certificates representing shares of School Specialty
Common Stock are expected to be mailed to U.S. Office
Products stockholders as soon as practicable after the
Distribution Date.
DISTRIBUTION AGENT................ American Stock Transfer & Trust Company
TAX CONSEQUENCES.................. Wilmer, Cutler & Pickering expects to deliver an opinion
at the time of the Distributions stating that, subject
to the matters discussed therein, for U.S. federal
income tax purposes the receipt of School Specialty
Common Stock by U.S. Office Products stockholders will
be tax-free to U.S. Office Products and the U.S. Office
Products stockholders (except with respect to cash
received in lieu of fractional shares). See "The School
Specialty Distribution--U.S. Federal Income Tax
Consequences of the School Specialty Distribution."
THE SPIN-OFFS FROM U.S. OFFICE
PRODUCTS........................ School Specialty, U.S. Office Products and the other
Spin-Off Companies will enter into an agreement (the
"Distribution
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Agreement") in connection with the Distribution pursuant
to which, among other things, (i) equity interests in
the domestic U.S. Office Products subsidiaries that
engage in the business of the distribution of school
supplies will be transferred to School Specialty, (ii)
liabilities will be allocated among School Specialty,
U.S. Office Products and the other Spin-Off Companies
and (iii) School Specialty, U.S. Office Products and the
other Spin-Off Companies will indemnify one another for
liabilities allocated to them under the Distribution
Agreement and a share of certain other liabilities.
School Specialty, U.S. Office Products and the Other
Spin-Off Companies will also enter into an agreement
(the "Tax Allocation Agreement") (i) allocating to each
Spin-Off Company responsibility for its share of U.S.
Office Products' consolidated tax liability for the
years that it was included in U.S. Office Products'
consolidated federal income tax returns, (ii) sharing
certain state, local and foreign taxes, and (iii)
providing for (a) indemnification by School Specialty
for certain taxes if they are assessed against U.S.
Office Products as a result of the Distribution and (b)
joint and several indemnification by School Specialty
and the other Spin-Off Companies for such taxes
resulting from certain acts taken by School Specialty or
any of the other Spin-Off Companies. The liability to
U.S. Office Products for taxes resulting from such acts
will be allocated among the Spin-Off Companies pursuant
to a separate agreement (the "Tax Indemnification
Agreement"). As a consequence, School Specialty will be
primarily liable for taxes resulting from acts taken by
School Specialty and liable (subject to indemnification
by the other Spin-Off Companies) for any taxes resulting
from acts taken by the other Spin-Off Companies.
School Specialty, U.S. Office Products and the other
Spin-Off Companies will also enter into an agreement
(the "Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "The Spin-Offs from U.S.
Office Products."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 12, including, among others, (i) the potential volatility of
the trading price and risk associated with the absence of a prior trading market
for shares of School Specialty Common Stock, (ii) dependence upon acquisitions
for further growth, (iii) limitations on the use of School Specialty Common
Stock in acquisitions, (iv) risks related to integration of acquisitions and
acquisition financing, (v) risks associated with seasonal influences related to
largest school supply orders occurring in the May to October period, (vi) risks
related to management of School Supply's rapid growth, (vii) the risks inherent
in the school supplies distribution business, (viii) conflicts of interest
resulting from the fact that (a) the Distribution Agreement is not the result of
arms-length negotiation and (b) the fact that stock options are being issued to
certain officers and directors of the Spin-Off Companies in connection with the
Distributions, and (ix) the tax consequences of the School Specialty
Distribution.
9
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL(1)
-------------------------------------------------------
FISCAL
YEAR
FOUR MONTHS ENDED NINE MONTHS
FISCAL YEAR ENDED ENDED -------- ENDED
DECEMBER 31, ----------- APRIL -----------
------------------ APRIL 30, 26, JANUARY 25,
1994 1995 1996 1997 1997
-------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $119,510 $150,482 $28,616 $191,746 $159,977
Cost of revenues...... 87,750 105,757 20,201 136,577 114,380
-------- -------- ----------- -------- -----------
Gross profit.......... 31,760 44,725 8,415 55,169 45,597
Selling, general and
administrative
expenses............ 27,281 39,869 10,307 43,462 33,396
Non-recurring
acquisition costs... 1,122 1,792 1,792
Restructuring costs... 2,532 194
-------- -------- ----------- -------- -----------
Operating income
(loss).............. 4,479 2,324 (3,014) 9,721 10,409
Interest expense...... 3,007 5,536 1,461 4,197 3,358
Interest income....... (6) (101)
Other (income)
expense............. (86) (18) 67 (196) (204)
-------- -------- ----------- -------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 1,558 (3,194) (4,536) 5,720 7,356
Provision for (benefit
from) income
taxes(4)............ 218 173 139 (2,412) 3,750
-------- -------- ----------- -------- -----------
Net income (loss)..... $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 3,606
-------- -------- ----------- -------- -----------
-------- -------- ----------- -------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38
Diluted........... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37
Weighted average
shares
outstanding(5):
Basic............. 5,062 6,562 8,611 10,003 9,553
Diluted........... 5,078 6,669 8,789 10,196 9,758
<CAPTION>
PRO FORMA(2)
---------------------------------------------------------
TWELVE TWELVE
MONTHS MONTHS
ENDED FISCAL YEAR NINE MONTHS ENDED ENDED
----------- ENDED APRIL 26, ------------------------- -----------
JANUARY 24, JANUARY 24, --------------- JANUARY 25, JANUARY 24, JANUARY 24,
1998 1998(3) 1997 1997 1998 1998(3)
----------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $247,880 $279,649 $350,760 $292,244 $318,667 $377,183
Cost of revenues...... 176,501 198,698 244,396 203,705 227,485 268,176
----------- ----------- --------------- ----------- ----------- -----------
Gross profit.......... 71,379 80,951 106,364 88,539 91,182 109,007
Selling, general and
administrative
expenses............ 50,999 61,065 85,430 66,926 66,623 85,127
Non-recurring
acquisition costs... 1,792 1,792
Restructuring costs... 194 194 194
----------- ----------- --------------- ----------- ----------- -----------
Operating income
(loss).............. 20,380 19,692 18,948 19,821 24,559 23,686
Interest expense...... 4,100 4,939 7,300 5,535 5,535 7,300
Interest income....... (109) (8)
Other (income)
expense............. 441 449 (158) (174) 522 538
----------- ----------- --------------- ----------- ----------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 15,948 14,312 11,806 14,460 18,502 15,848
Provision for (benefit
from) income
taxes(4)............ 7,113 951 92 6,651 8,511 1,952
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss)..... $ 8,835 $ 13,361 $ 11,714 $ 7,809 $ 9,991 $ 13,896
----------- ----------- --------------- ----------- ----------- -----------
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.69 $ 1.08 $ 0.95 $ 0.63 $ 0.81 $ 1.13
Diluted........... $ 0.68 $ 1.06 $ 0.95 $ 0.63 $ 0.81 $ 1.13
Weighted average
shares
outstanding(5):
Basic............. 12,751 12,401 12,300 12,300 12,300 12,300
Diluted........... 13,020 12,642 12,300 12,300 12,300 12,300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ 3,512 $ (1,052)
Total assets................................................................................................ 44,267 54,040
Long-term debt, less current portion........................................................................ 11,675 15,294
Long-term payable to U.S. Office Products...................................................................
Stockholder's (deficit) equity.............................................................................. 1,827 (620)
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ (3,663) $ 14,460
Total assets................................................................................................ 54,573 87,685
Long-term debt, less current portion........................................................................ 15,031 566
Long-term payable to U.S. Office Products................................................................... 33,226
Stockholder's (deficit) equity.............................................................................. (4,267) 16,329
<CAPTION>
JANUARY 24, 1998
----------------------
PRO
ACTUAL FORMA(6)
---------- ----------
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ 43,613 $ 60,586
Total assets................................................................................................ 201,207 204,457
Long-term debt, less current portion........................................................................ 385 82,978
Long-term payable to U.S. Office Products................................................................... 62,470
Stockholder's (deficit) equity.............................................................................. 98,492 98,492
</TABLE>
10
<PAGE>
- ------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method is included from the dates of their respective acquisitions.
(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
the Company since May 1, 1996 as if all such transactions had occurred on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(3) The results for the historical and pro forma 12 months ended January 24,
1998 have been calculated based upon the historical and pro forma results
for the fiscal year ended April 26, 1997 less the historical and pro forma
results for the nine months ended January 25, 1997 plus the historical and
pro forma results for the nine months ended January 24, 1998 respectively.
(4) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) include a benefit from income
taxes of $2.4 million primarily arising from the reversal of a $5.3 million
valuation allowance in the quarter ended April 26, 1997. The valuation
allowance had been established in fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's deferred tax
assets, because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to the Company's
being acquired by U.S. Office Products, because it was deemed "more likely
than not", based on improved results, that such tax benefit would be
realized.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate, and in the
Offering, would have been $14.7 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of proceeds from such sales to reduce
debt, would have been:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
-------------
FISCAL YEAR ENDED JANUARY 25,
APRIL 26, 1997 1997
----------------- -------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic..................................................................................... $ 0.90 $ 0.61
Diluted................................................................................... $ 0.90 $ 0.61
<CAPTION>
TWELVE MONTHS ENDED
JANUARY 24, JANUARY 24,
1998 1998
------------- ---------------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic..................................................................................... $ 0.76 $ 1.05
Diluted................................................................................... $ 0.76 $ 1.05
</TABLE>
(6) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by the Company subsequent
to January 24, 1998, and (iii) the Distribution as if such transactions had
occurred on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
11
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
POTENTIAL VOLATILITY OF STOCK PRICE; RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE
As a result of the School Specialty Distribution, stockholders of U.S.
Office Products will acquire 12,299,593 shares of School Specialty Common Stock
that will be freely tradeable without restrictions or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by "affiliates" of School Specialty within the meaning of the
Securities Act will be subject to the resale limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). Because the School Specialty Distribution
is being made to existing shareholders of U.S. Office Products, who have not
made an affirmative decision to invest in School Specialty Common Stock, there
can be no assurance that some or all of these shareholders will not sell the
shares of School Specialty Common Stock into the market shortly after the School
Specialty Distribution. In addition, U.S. Office Products is included in certain
broad-based indices tracked by a number of investment companies and other
institutional investors, and such investors can be expected to sell the shares
of School Specialty Common Stock they receive in the School Specialty
Distribution shortly thereafter.
In addition, upon completion of the Offering and the School Specialty
Distribution, School Specialty will have outstanding (i) 2,125,000 shares of
School Specialty Common Stock issued in the Offering and (ii) 250,000 shares of
School Specialty Common Stock issued to Messrs. Spalding, Vander Zanden and
Pate. Following the Offering and the School Specialty Distribution, in view of
the large number of shares freely-tradeable and available for immediate sale,
the market for School Specialty's Common Stock could be highly volatile and
could adversely affect the trading price of School Specialty Common Stock. See
"Management of School Specialty--Director Compensation and Other Arrangements".
Officers and directors of School Specialty who together will hold an aggregate
of 114,355 shares of School Specialty Common Stock have agreed not to sell or
otherwise dispose of any School Specialty Common Stock after the Distribution
without the prior written consent of the Underwriters for a period of 180 days
from the date of this Information Statement/Prospectus (the "Lock-Up
Agreements"). The Company intends to register the shares of School Specialty
Common Stock reserved for issuance pursuant to its stock option plan as soon as
practicable after the closing of the Offering.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into a
tax allocation agreement with School Specialty and the other Spin-Off Companies
(the "Tax Allocation Agreement") which will provide that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any losses
associated with taxes related to the Distributions ("Distribution Taxes") if an
action or omission (an "Adverse Tax Act") of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty will also enter into a tax
indemnification agreement with the other Spin-Off Companies (the "Tax
Indemnification Agreement") under which the Spin-Off Company that is responsible
for the Adverse Tax Act will indemnify the other Spin-Off Companies for any
liability to indemnify U.S. Office Products under the Tax Allocation Agreement.
As a consequence, School Specialty will be liable for any Distribution Taxes
resulting from any Adverse Tax Act by School Specialty and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of the Distribution
Taxes based on the value of each company's common stock after the Distributions.
As a result, School Specialty could become liable for a pro rata portion of
Distribution Taxes with respect not only to the School Specialty
12
<PAGE>
Distribution, but also any of the other Distributions. See "The Spin-Offs from
U.S. Office Products--Tax Allocation Agreement and Tax Indemnification
Agreement" for a detailed discussion of the Tax Allocation Agreement and the Tax
Indemnification Agreement.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES
Under the Distribution Agreement, School Specialty will be liable for (i)
any liabilities arising out of or in connection with the business conducted by
it or its subsidiaries, (ii) its liabilities under the Employee Benefits
Agreement, Tax Allocation Agreement and related agreements described under "The
Spin-Offs From U.S. Office Products", (iii) the U.S. Office Products debt that
has been allocated to the Company (see "The Spin-Offs From U.S. Office
Products--Distribution Agreement--Debt"), (iv) liabilities under the securities
laws relating to the Prospectus in respect of the Offering and portions of this
Information Statement/Prospectus distributed to stockholders of U.S. Office
Products in connection with the School Specialty Distribution, as well as other
securities law liabilities related to the School Specialty business that arise
from information supplied to U.S. Office Products (or that should have been
supplied, but was not) by School Specialty, (v) U.S. Office Products'
liabilities for earn-outs from acquisitions in respect of School Specialty and
its subsidiaries, (vi) School Specialty's costs and expenses related to the
Offering and its bank financing, and (vii) $1.0 million of the transaction costs
(including legal, accounting, investment banking and financial advisory) and
other fees incurred by U.S. Office Products in connection with its Strategic
Restructuring Plan. Each of the other Spin-Off Companies will be similarly
obligated to U.S. Office Products. School Specialty and the other Spin-Off
Companies have also agreed to bear a pro rata portion of U.S. Office Products'
liabilities under the securities laws (other than claims relating solely to a
specific Spin-Off Company or relating specifically to the continuing businesses
of U.S. Office Products) and U.S. Office Products' general corporate liabilities
(other than debt, except for that specifically allocated to the Spin-Off
Companies) incurred prior to the Distributions (i.e., liabilities not related to
the conduct of a particular distributed or retained subsidiary's business) (the
"Shared Liabilities"). If one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, the non-defaulting Spin-Off Companies
will be obligated on a pro rata basis to pay such obligation ("Default
Liability"). As a result of the Shared Liabilities and Default Liability, School
Specialty could be obligated to U.S. Office Products in respect of obligations
and liabilities not related to its business or operations and over which neither
it nor its management has or has had any control or responsibility. The
aggregate of the Shared Liabilities and Default Liability for which any Spin-Off
Company may be liable is, however, limited to $1.75 million. The Company's pro
rata share of Shared Liabilities and Default Liability is described below under
"The Spin-Offs from U.S. Office Products--The Distribution
Agreement--Liabilities." Also see "--Potential Liability for Taxes Related to
the Distributions."
RISKS RELATED TO INTEGRATION OF OPERATIONS AND ACQUISITIONS
An important element of School Specialty's business strategy for its
distribution divisions is to integrate its acquisitions into its existing
operations. There can be no assurance that School Specialty will be able to
integrate future acquisitions in a timely manner without substantial costs,
delays, or other problems. Once integrated, acquisitions may not achieve sales,
profitability, and asset productivity commensurate with School Specialty's
existing divisions. In addition to integration risks for distribution divisions,
acquisitions of both distribution divisions and specialty brand companies
involve a number of special risks, including adverse short-term effects on
School Specialty's reported operating results (including those adverse
short-term effects caused by severance payments to employees of acquired
companies, restructuring charges associated with the acquisitions and other
expenses associated with a change of control, as well as non-recurring
acquisition costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations, and various other
acquisition-related costs), the diversion of management's time and attention,
the dependence on retaining, hiring, and training key personnel, the
amortization of acquired intangible assets, and risks associated with
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on School Specialty's operations and
13
<PAGE>
financial condition. Furthermore, although School Specialty conducts due
diligence and generally requires representations, warranties, and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of School
Specialty. See "Business--Company Growth Strategy--Pursue Acquisitions
Aggressively Strategy".
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
One of School Specialty's strategies is to increase its revenues and the
markets it serves through the acquisition of additional school supply
distribution businesses. There can be no assurance that suitable candidates for
acquisitions can be identified or, if suitable candidates are identified, that
acquisitions can be completed on acceptable terms, if at all. There can be no
assurance that future acquisitions will prove profitable at the time of their
acquisition or will achieve sales and profitability that justify the investment
therein. The failure to complete acquisitions and continue its expansion could
have a material adverse effect on School Specialty's financial condition. In
addition, prior to the School Specialty Distribution, School Specialty's
acquisitions were completed with substantial business, legal, and accounting
assistance from U.S. Office Products, and some of the acquisitions were paid for
with U.S. Office Products Common Stock. The pace of School Specialty's
acquisition program may be adversely affected by the absence of U.S. Office
Products' support for the acquisitions. Also, School Specialty intends to use
School Specialty Common Stock to pay for a portion of the consideration for its
acquisitions, and therefore, if the owners of potential acquisition candidates
are not willing to receive, or School Specialty is not able to issue, shares of
School Specialty Common Stock in exchange for their business, School Specialty's
acquisition program could be adversely affected. In addition, School Specialty
is subject to limitations on the number of shares it can issue without
jeopardizing the tax-free treatment of the School Specialty Distribution.
Limitations on School Specialty's ability to issue shares of School Specialty
Common Stock could also adversely affect School Specialty's acquisition
strategy. See "--Possible Limitations on Issuances of Common Stock," "--
Material Amount of Goodwill," and "--Tax Matters" below.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
Section 355(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), which was added in 1997, generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free will
incur U.S. federal income tax liability if 50% or more, by vote or value, of the
capital stock of either the company making the distribution or the spun-off
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that includes the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition occurring two years before or
after the spin-off is pursuant to a plan that includes the spin-off. However,
the presumption may be rebutted by establishing that the spin-off and such
acquisition are not part of a plan or series of related transactions. As a
result of the provisions of Section 355(e), there can be no assurance that
issuances of stock by the Company, including issuances in connection with an
acquisition of another business by the Company, will not create a tax liability
for U.S. Office Products. This limitation could adversely affect the pace of the
Company's acquisitions and its ability to issue Company Common Stock for other
purposes, including equity offerings.
The Company has entered into a Tax Allocation Agreement and a Tax
Indemnification Agreement pursuant to which the Company will be liable to U.S.
Office Products and the other Spin-Off Companies if its actions or omissions
materially contribute to a final determination that the School Specialty
Distribution is taxable. See "--Potential Liability for Taxes Related to the
Distributions" and "The Spin-Offs From U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement."
14
<PAGE>
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations under the pooling-of-interests method. As a result of School
Specialty being a wholly-owned subsidiary of U.S. Office Products prior to the
Distribution, School Specialty will be unable to satisfy this criterion for a
period of two years following the Distribution. Therefore, School Specialty will
be precluded from completing business combinations under the
pooling-of-interests method for a period of two years and any business
combinations completed by School Specialty during such period will be accounted
for under the purchase method resulting in the recording of goodwill. See
"--Material Amount of Goodwill."
RISKS RELATED TO ACQUISITION FINANCING
School Specialty currently intends to finance some of its future
acquisitions by using shares of School Specialty Common Stock, cash, borrowed
funds or a combination thereof. If School Specialty Common Stock does not
maintain a sufficient market value, the price of School Specialty Common Stock
is highly volatile, or potential acquisition candidates are otherwise unwilling
to accept School Specialty Common Stock as part of the consideration for the
sale of their businesses, School Specialty may be required to use more of its
cash resources or more borrowed funds in order to initiate and maintain its
acquisition program. Such limitations also may cause School Specialty to rely
more heavily on cash or borrowed funds to support its acquisition program. If
School Specialty does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt or equity
offerings. The use of equity offerings in connection with the School Specialty
Distribution will also be subject to certain limitations on the number of shares
that School Specialty can issue without jeopardizing the tax-free treatment of
the School Specialty Distribution. See "--Possible Limitations on Issuances of
Common Stock" and "--Tax Matters." Prior to the School Specialty Distribution,
School Specialty was not responsible for obtaining external sources of funding.
The Company intends to enter into credit facilities with one or more lenders to
obtain financing to be used in connection with future acquisitions. There can be
no assurance that School Specialty, as a stand-alone company, will be able to
obtain such financing if and when it is needed or that any such financing will
be available on terms it deems acceptable.
ADDITIONAL DILUTION
School Specialty will have 150 million authorized shares of School Specialty
Common Stock, a portion of which could be available (subject to the rules and
regulations of federal and state securities laws, limitations under U.S. federal
income tax laws and rules, and rules of the Nasdaq Stock Market), to finance
acquisitions without obtaining stockholder approval for such issuances. Existing
stockholders may suffer dilution if School Specialty uses School Specialty
Common Stock as consideration for future acquisitions. Moreover, the issuance of
additional shares of School Specialty Common Stock may have a negative impact on
earnings per share and may negatively impact the market price of School
Specialty Common Stock.
SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
School Specialty's business is subject to seasonal influences, with sales
and profitability substantially higher from May to October due to increased
school orders during these months. As a result of this seasonality,
historically, School Specialty has earned more than 100% of its annual net
income in the first six months of its fiscal year and has historically operated
at a loss in its third fiscal quarter. Also, quarterly results may be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs. Therefore, operating results for any quarter are
not necessarily indicative of the results that may be achieved for any
subsequent fiscal quarter or full fiscal year. Fluctuations caused by variations
in quarterly results may adversely affect the market price of the School
Specialty Common
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Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of School Specialty" and "Business."
RELIANCE ON KEY PERSONNEL
School Specialty's operations depend on the continued efforts of Daniel P.
Spalding, its Chief Executive Officer, its other executive officers, and the
senior management of certain of its subsidiaries. Furthermore, School
Specialty's operations will likely depend on the senior management of certain of
the companies that may be acquired in the future. If any of these people become
unable to continue in his or her present role, or if School Specialty is unable
to attract and retain other skilled employees, its business could be adversely
affected. School Specialty does have employment contracts with some Named
Officers, as defined herein, but most of the Companies' executive officers and
senior management do not have employment contracts with School Specialty. See
"Management of School Specialty--Director Compensation and Other Arrangements."
School Specialty does not have and does not intend to obtain key man life
insurance covering any of its executive officers or other members of senior
management of its subsidiaries. In addition, Jonathan J. Ledecky will serve as a
director and an employee of School Specialty and is expected to provide services
to School Specialty after the School Specialty Distribution pursuant to an
agreement entered into between Mr. Ledecky and U.S. Office Products which
provides that the Company and the other Spin-Off Companies will succeed to
certain rights of, and obligations under, such agreement following the
Distribution and an expected employment agreement with School Specialty. See
"Management of School Specialty--Director Compensation and Other Arrangements."
Mr. Ledecky will also serve as a director of each of the other Spin-Off
Companies, and is the director or an officer of other public companies. Mr.
Ledecky may be unable to devote substantial time to the activities of School
Specialty.
DEPENDENCE ON SYSTEMS
School Specialty believes that one of the competitive advantages of its
distribution divisions is its information systems, including its proprietary
PC-based customer Order Management System ("OMS"). School Specialty's operations
in each of its converted divisions under School Specialty are generally
dependent on these systems, which are run on a host system located at School
Specialty's headquarters in Appleton, Wisconsin. Each division of School
Specialty is linked to School Specialty's host system and disruption or
unavailability of these links could have a material adverse effect on School
Specialty's business and results of operations.
None of School Specialty's subsidiaries has a redundant computer system or a
redundant dedicated communication line. School Specialty has taken precautions
to protect itself from events that could interrupt its operations.
Notwithstanding these precautions, there can be no assurance that a fire, flood,
or other natural disaster affecting School Specialty's system or its
communication lines would not disable the system or prevent the system from
communicating with School Specialty's divisions or the specialty brand
subsidiaries. The occurrence of any of these events would have a material
adverse effect on School Specialty's operations and financial condition.
School Specialty does not expect that it will incur any material costs and
expenses to meet information standards for Year 2000 compliance; however, there
is no assurance that School Specialty's customers or vendors meet information
standards for Year 2000 compliance, and their failure to meet such standards
could adversely affect School Specialty's revenues and product costs.
RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Since 1991, School Specialty and U.S. Office Products have significantly
expanded the scope of School Specialty's operations by acquiring sixteen
regional distributors of educational supplies in different regions of the United
States and four specialty brand school supply companies. All of School
Specialty's specialty brand acquisitions and eleven of its regional distribution
acquisitions have occurred since June 1996. There
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can be no assurance that School Specialty's management and financial controls,
personnel, computer systems, and other corporate support systems will be
adequate to manage the increased size and scope of School Specialty's operations
as a result of School Specialty's recently completed acquisitions.
Prior to the School Specialty Distribution, certain general and
administrative functions relating to School Specialty's business (including
legal, accounting, purchasing and management information services) were handled
by U.S. Office Products. School Specialty's future performance will depend on
its ability to function as a stand-alone entity, to finance and manage its
expanding operations and to adapt its information systems to changes in its
business. As a result, School Specialty's expenses are likely to be higher than
when it was a part of U.S. Office Products, and School Specialty may experience
disruptions of general and administrative functions that it would not have
encountered as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the results of
operations and financial condition would have been had School Specialty been a
separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of School Specialty.
DEPENDENCE ON KEY SUPPLIERS AND SERVICE PROVIDERS
School Specialty is dependent on (i) a limited number of suppliers for
certain of its product lines, particularly its franchise furniture lines and
(ii) a limited number of service providers, such as delivery service from United
Parcel Service. Any interruption of supply from current vendors or any material
increased costs, particularly in the peak season of June through September,
could cause significant delays in the shipment of such products and could have a
material adverse effect on School Specialty's business, financial condition, and
results of operations. Increases in freight costs charged to School Specialty or
inability to ship products, whether real or perceived, could have a material
adverse effect on School Specialty's business, financial condition, and results
of operations. In addition, as part of its business strategy, School Specialty
strives to reduce its number of suppliers and minimize duplicative lines, which
may have the effect of increasing its dependence on remaining vendors. The
United Parcel Service strike during August 1997 had an adverse effect on School
Specialty due to the perceived inability of School Specialty to ship products.
COMPETITION
The market for school supplies is highly competitive and fragmented. School
Specialty estimates that over 3,400 companies distribute educational materials
to grade pre-K-12 schools as a primary focus of their business. In addition,
School Specialty competes with alternate channel distributors such as office
product contract stationers and superstores, which may continue to broaden their
product lines in school supplies. Some of these competitors have greater
financial resources and buying power than School Specialty. School Specialty
believes that the educational supplies market will consolidate over the next
several years, which may make School Specialty's general and specialty supply
businesses more competitive. In addition, there may be increasing competition
for acquisition candidates and there can be no assurance that acquisitions will
continue to be available to School Specialty on favorable terms, if at all. See
"Business-- Competition."
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
School Specialty currently operates as a wholly-owned subsidiary of U.S.
Office Products. On or before the Distribution Date, School Specialty, the other
Spin-Off Companies and U.S. Office Products will enter into the Distribution
Agreement, the Tax Allocation Agreement and the Employee Benefits Agreement, and
the Spin-Off Companies will enter into a Tax Indemnification Agreement. See "The
Spin-Offs from U.S. Office Products." These agreements are expected to provide,
among other things, for U.S. Office Products and School Specialty to indemnify
each other from tax and other liabilities relating to their respective
businesses prior to and following the School Specialty Distribution.
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Certain indemnification obligations of School Specialty and the other
Spin-Off Companies to U.S. Office Products are joint and several. Therefore, if
one of the other Spin-Off Companies fails to indemnify U.S. Office Products when
such a loss occurs, School Specialty may be required to reimburse U.S. Office
Products for all or a portion of the losses that otherwise would have been
allocated to such other Spin-Off Company. In addition, the agreements will
allocate certain liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically related to the specific
businesses to be conducted by the Spin-Off Companies and post-Distribution U.S.
Office Products, among U.S. Office Products and each of the Spin-Off Companies.
Adverse developments or material disputes with U.S. Office Products following
the School Specialty Distribution could have a material adverse effect on School
Specialty.
The terms of the agreements that will govern the relationship among School
Specialty, U.S. Office Products, and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the management of
School Specialty and the other Spin-Off Companies prior to the Distributions and
while School Specialty and the other Spin-Off Companies are wholly-owned
subsidiaries of U.S. Office Products. The terms of these agreements, including
the allocation of general corporate and securities liabilities among U.S. Office
Products, School Specialty, and the other Spin-Off Companies may not be the same
as they would be if the agreements were the result of arm's length negotiations.
In addition, the agreements must contain certain terms specified in U.S. Office
Products' agreement with CD&R relating to the Equity Investment and must
otherwise be reasonably acceptable to CD&R. CD&R will not be a stockholder in
any of the Spin-Off Companies and its interests may be adverse to those of the
Spin-Off Companies. See "The Spin-Offs from U.S. Office Products." Accordingly,
there can be no assurance that the terms and conditions of the agreements will
not be more or less favorable to School Specialty than those that might have
been obtained from unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, will receive options for shares of each of the
Spin-Off Companies exercisable for up to 7.5% of the common stock of each
Spin-Off Company. See "Management of School Specialty--Director Compensation and
Other Arrangements". As a result, Mr. Ledecky has interests in the Distributions
that differ in certain respects from, and may conflict with, the interests of
other stockholders of U.S. Office Products and School Specialty.
TAX MATTERS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes, the Distributions (including the School Specialty Distribution) will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e). U.S. Office Products will not complete the School
Specialty Distribution unless it receives the Tax Opinion. The Tax Opinion will
be based on the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Spin-Off Companies and CD&R,
and certain other information, data, documentation and other materials as
Wilmer, Cutler & Pickering has deemed necessary. See "The School Specialty
Distribution--U.S. Federal Income Tax Consequences of the School Specialty
Distribution."
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling has not been, and
will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the School Specialty Distribution. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Tax
Opinion.
If the School Specialty Distribution fails to qualify under Section 355 as a
tax-free spin-off, each holder of U.S. Office Products Common Stock on the
Record Date will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the Distribution Date) of
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the Company Common Stock distributed to such holder of U.S. Office Products
Common Stock including fractional shares. In addition, U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
Company Common Stock (on the Distribution Date) and U.S. Office Products'
adjusted tax basis in the Company Common Stock (on the Distribution Date). If
U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
If the School Specialty Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements for a tax-free spin-off, U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Company Common Stock (on the Distribution Date) and U.S. Office
Products' adjusted tax basis in the Company Common Stock (on the Distribution
Date). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial. However, no gain or loss
will be recognized by holders of U.S. Office Products Common Stock (except with
respect to cash received in lieu of fractional shares).
MATERIAL AMOUNT OF GOODWILL
Approximately $97.5 million, or 47.7%, of School Specialty's pro forma total
assets as of January 24, 1998 represents intangible assets, the significant
majority of which is goodwill. Goodwill represents the excess of cost over the
fair market value of net assets acquired in business combinations accounted for
under the purchase method. School Specialty generally amortizes goodwill on a
straight line method over a period of 40 years with the amount amortized in a
particular period constituting a non-cash expense that reduces School
Specialty's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain acquisitions may not
be deductible for tax purposes. In addition, School Specialty will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, School Specialty would be required to
write down the carrying value of the goodwill and incur a related charge to its
income. A reduction in net income resulting from the amortization or write down
of goodwill could have a material and adverse impact upon the market price of
School Specialty Common Stock.
ABSENCE OF PUBLIC MARKET
Prior to the School Specialty Distribution and the Offering there will be no
public market for the Company Common Stock. The initial public offering price of
the Company Common Stock in the Offering will be determined through negotiations
among the Company and the underwriters of the Offering and may not be indicative
of the market price for the Company Common Stock after the Offering and the
School Specialty Distribution. The trading price of the Company Common Stock
also could be subject to wide fluctuations in response to variations in the
Company's quarterly operating results, changes in earnings estimates by
analysts, conditions in the Company's businesses, general market or economic
conditions or other factors. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many companies, often unrelated to
the operating performance of the specific companies. Such market fluctuations
could have a material adverse effect on the market price of the Company Common
Stock. See "-- Potential Volatility of Stock Price; Risks Associated With Shares
Eligible for Immediate Sale."
NO DIVIDENDS
School Specialty does not expect to pay cash dividends on School Specialty
Common Stock in the foreseeable future. In addition, School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements. See "Dividend Policy".
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THE SCHOOL SPECIALTY DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
5:00 p.m. E.D.T. on June 9, 1998 (the "Record Date"), will receive one share of
School Specialty Common Stock for every nine shares of U.S. Office Products
Common Stock held on the Record Date. School Specialty Common Stock will be
distributed on behalf of U.S. Office Products by American Stock Transfer & Trust
Company as the Distribution Agent. No certificates or scrip representing
fractional shares of School Specialty Common Stock will be issued. Following the
announcement of the proration results of the Tender Offer, fractional share
interests will be aggregated and sold by the Distribution Agent at such time or
times as it shall determine in open market transactions effected through
broker-dealers selected by it. The cash proceeds will be distributed to those
stockholders entitled to a fractional interest with the distribution of payment
for the tendered shares or as soon thereafter as practicable. Certificates
representing shares of School Specialty Common Stock are expected to be
distributed as soon as practicable after the Distribution Date.
School Specialty is a newly formed subsidiary of U.S. Office Products that
will, as of the Distribution Date, hold substantially all of the businesses and
assets of, and will be responsible for substantially all of the liabilities
associated with, U.S. Office Products Educational Supplies and Products
Division. See "The Spin-Offs from U.S. Office Products--Distribution Agreement."
School Specialty will include the businesses of the following wholly-owned
subsidiaries of U.S. Office Products: School Specialty, Inc., a Wisconsin
corporation and predecessor to School Specialty, The Re-Print Corporation,
American Academic Suppliers, Inc., Childcraft Education Corp., Sax Arts &
Crafts, Inc. and Don Gresswell, Ltd. Immediately prior to the School Specialty
Distribution, U.S. Office Products will hold all the issued and outstanding
shares of School Specialty Common Stock. Approximately 12,299,593 shares of
School Specialty Common Stock will be distributed to stockholders of U.S. Office
Products in the School Specialty Distribution. This amount is calculated as
follows: (a) approximately 110,700,000 shares of U.S. Office Products Common
Stock expected to be outstanding at the date of the School Specialty
Distribution (which is equal to (i) approximately 133,800,000 shares of U.S.
Office Products Common Stock outstanding on April 25, 1998, plus (ii)
approximately 8,900,000 Shares of U.S. Office Products Common Stock to be issued
on conversion of the 2001 Notes, plus (iii) approximately 5,000,000 Shares of
U.S. Office Products Common Stock assumed to be issued on exercise of stock
options accepted in the Tender Offer less (iv) 37,037,037 shares (including
shares that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be repurchased in the Tender Offer) divided by
(b) the Distribution Ratio of one share of Company Common Stock distributed for
every nine shares of U.S. Office Products Common Stock. The number of shares to
be distributed could be greater if additional shares of U.S. Office Products
Common Stock are issued prior to the School Specialty Distribution pursuant to
outstanding convertible debt securities or stock options of U.S. Office
Products.
THE STRATEGIC RESTRUCTURING PLAN
The School Specialty Distribution is part of the Strategic Restructuring
Plan. The principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products has offered to purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares
that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) at $27.00 per share (or in the case of stock
options, at $27.00 minus the exercise price of the options) and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office
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Products stockholder will receive such stockholder's pro rata share of the
stock of each Spin-Off Company.
- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group, (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
has undertaken or plans to undertake the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products will purchase any
or all of its 2003 Notes for a purchase price of 94.5% of the principal
amount and accrued interest.
- Pursuant to the 2001 Note Offer, U.S. Office Products exchanged
approximately $131 million principal amount of its 2001 Notes for
8,100,741 shares of U.S. Office Products Common Stock at an exchange rate
of 61.483 shares per $1,000 principal amount, which effectively reduced
the conversion price on the 2001 Notes from $19.00 to $16.71 while the
offer was open.
- Pursuant to a commitment letter from a group of lenders, U.S. Office
Products will enter into a new $1.225 billion senior credit facility.
- U.S. Office Products will issue and sell at least $400.0 million in Senior
Subordinated Notes in a private placement.
REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products has approved the Strategic
Restructuring Plan, including the Distributions. The U.S. Office Products Board
of Directors determined that separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would have advantages for the Spin-Off Companies
and U.S. Office Products. The Distributions will allow U.S. Office Products and
the Spin-Off Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries and geographic territories. After the
Distributions, U.S. Office Products will be focused on a more narrow group of
businesses that involve primarily the distribution of office products and
business services. School Specialty and each of the other Spin-Off Companies
will be focused primarily on their individual businesses.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the school supplies business using
U.S. Office Products Common Stock. Sellers were thus required to accept stock in
a business that included office products, corporate travel services, technology
solutions and print management businesses, as well as other businesses.
Following the School Specialty Distribution, School Specialty will be able to
offer stock in its own business, which will be substantially the same as the
businesses School Specialty expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
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The Distributions will also allow U.S. Office Products and the Spin-Off
Companies to offer their employees more focused incentive compensation packages.
The incentive compensation packages (which are expected to consist primarily of
stock options) will offer the officers and other key employees of each Spin-Off
Company equity interests in a company whose performance is tied directly to the
business for which they work. The Company's ability to issue stock options (as
well as other equity) will be subject to certain limitations in order to avoid
triggering certain adverse federal income tax consequences. See "U.S. Federal
Income Tax Consequences of the School Specialty Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as completion of the Tender Offer). U.S. Office Products'
Board of Directors recognized that U.S. Office Products was making a transition
from an acquisition-oriented company to a business more focused on growth
through improvement and expansion of existing operations. U.S. Office Products'
Board of Directors concluded that the investment by CD&R in U.S. Office
Products, and support of the management of U.S. Office Products by CD&R, Inc.,
would contribute to U.S. Office Products development. CD&R, Inc. has substantial
experience in providing companies in which its affiliates invest with financial
and managerial advisory services aimed at building value and improving
operational, marketing, and financial performance. CD&R Inc. is also experienced
in advising and assisting companies in managing high levels of debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products offered to
repurchase 37,037,037 shares (including shares that may be issued on exercise of
vested and unvested stock options of U.S. Office Products Common Stock) at a
price of $27.00 per share (or, in the case of stock options, at $27.00 minus the
exercise price of the options). Acceptance of and payment for shares of U.S.
Office Products Common Stock under the Tender Offer is subject to a number of
conditions. These conditions include: (i) U.S. Office Products having obtained
financing sufficient to fund the Tender Offer; (ii) all conditions to the
completion of the Equity Investment having been satisfied or waived, except for
completion of the Tender Offer and the Distributions; (iii) registration
statements relating to the Distributions having become effective; and (iv) all
other conditions to the completion of the Distributions, including U.S. Office
Products having received an opinion of Wilmer, Cutler & Pickering regarding the
tax treatment of the Distributions, having been satisfied.
The Tender Offer expired on June 1, 1998, and preliminary results indicated
that approximately 167.3 million shares of U.S. Office Products Common Stock and
shares of U.S. Office Products Common Stock underlying stock options were
tendered in accordance with the terms of the tender offer (including
approximately 42.6 million shares tendered through guaranteed delivery
procedures). According to the preliminary count, the number of shares tendered,
together with the number of shares subject to guaranteed delivery, exceeds the
total number of shares of U.S. Office Products Common Stock available for tender
(including shares underlying stock options). Based upon the number of shares
that may be issued upon exercise of options, U.S. Office Products has determined
that the proration factor should not be less than 22.5%. The preliminary count
is subject to verification, and U.S. Office Products expects to announce the
final results of the equity self-tender offer on June 8, 1998.
U.S. Office Products expects to finance the aggregate tender price through a
combination of a new senior credit facility for $1.225 billion (the "USOP Credit
Facility"), the net proceeds of the Equity Investment and issuance of $400.0
million of senior subordinated debt securities in a private placement. U.S.
Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $441.0 million. Approximately $362.0 million
was outstanding under U.S. Office Products' existing bank credit facility as of
March 20, 1998. U.S. Office Products has entered into a commitment for the USOP
Credit Facility.
The Record Date for the Distributions will occur after acceptance of shares
in the Tender Offer. Accordingly, U.S. Office Products stockholders who tender
their shares of U.S. Office Products Common
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Stock in the Tender Offer will not receive the Distributions to the extent their
U.S. Office Products shares are accepted in the Tender Offer. Because the Tender
Offer was for only 37,037,037 shares (including shares that may be issued on
exercise of vested and unvested stock options of U.S. Office Products Common
Stock) and the number of shares tendered exceeds that amount, only a portion of
the shares tendered by any U.S. Office Products stockholder will be accepted.
U.S. Office Products stockholders who tender their shares and do not otherwise
dispose of shares that are not accepted before the Distribution will receive
shares of the spin-off Companies in the Distributions with respect to a portion
of their shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible debentures of
U.S. Office Products and of shares of U.S. Office Products Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements; and (c) warrants ("Common Stock Warrants") representing the right to
purchase one share of U.S. Office Products Common Stock for each share of U.S.
Office Products Common Stock purchased by CD&R at the date of the closing under
the Investment Agreement (the "Closing Date") and for each share of U.S. Office
Products Common Stock into which the Special Warrants become exercisable. The
Special Warrants are exercisable from and after the Closing Date until the 12th
anniversary thereof, subject to certain limitations, and the Common Stock
Warrants are exercisable from and after the second anniversary of the Closing
Date until such 12th anniversary. The aggregate exercise price of the Common
Stock Warrants is $405.0 million.
CD&R has contracted to purchase a 24.9% equity interest in U.S. Office
Products, including the shares issued to CD&R (the "Initial CD&R Acquisition").
CD&R's percentage ownership of U.S. Office Products will not increase or
decrease depending on the actual number of shares of U.S. Office Products Common
Stock outstanding on the closing date of the Initial CD&R Acquisition. The
Special Warrants will be issued to allow CD&R to maintain its 24.9% ownership
interest if (i) any 2001 Notes that remained outstanding after the 2001 Note
Offer were converted into U.S. Office Products Common Stock at the conversion
price in effect after adjusting for the Tender Offer and the Distributions, or
(ii) additional shares are issued under certain contracts for acquisitions
completed by U.S. Office Products.
Assuming (i) exercise of all currently exercisable outstanding options, and
(ii) no 2003 Notes were repurchased in the 2003 Note Tender and all such 2003
Notes were converted in accordance with their existing terms, in each case,
without any adjustment for the restructuring transactions, and (a) exercise of
the Special Warrants in full, and (b) exercise of the Common Stock Warrants in
full, CD&R could own approximately 34.7% of outstanding U.S. Office Products
Common Stock on a fully-diluted basis. U.S. Office Products expects to make
adjustments to the number and exercise price of outstanding options, and the
conversion price of the 2001 Notes and 2003 Notes remaining after the 2001 Note
Offer and the 2003 Note Tender, on account of the restructuring transactions,
and these adjustments will result in a greater number of shares of U.S. Office
Products Common Stock that may be issued upon exercise of the options and
conversion of such notes. Although the amount of these adjustments will not be
known until after the completion of the Strategic Restructuring Plan, the effect
of these adjustments will be to reduce CD&R's fully diluted ownership interest
in U.S. Office Products from the amounts set forth above. If no currently
exercisable outstanding options are exercised, exercise of the Special Warrants
and Common Stock Warrants could give CD&R approximately 39.9% of outstanding
U.S. Office Products Common Stock
23
<PAGE>
after implementation of the Strategic Restructuring Plan (assuming all of the
2001 Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender).
Because the Record Date for the Distributions will be immediately before the
closing of the Equity Investment, CD&R will not receive any shares of the
Spin-Off Companies in the Distributions.
Prior to the closing of the Initial CD&R Acquisition, the Board of Directors
of U.S. Office Products will consist of nine persons, including the chief
executive officer of U.S. Office Products, three designees of CD&R, three
designees the U.S. Office Products' Board and two persons who are satisfactory
to both CD&R and the U.S. Office Products' Board. After the closing of the
Initial CD&R Acquisition, the existing members of the U.S. Office Products Board
will have the right to nominate six directors, which will include the chief
executive officer. CD&R will have the right to nominate three directors. So long
as CD&R has the right to nominate two or more directors, one of CD&R's nominees
will serve as Chairman of the Board. CD&R can nominate one additional person to
the U.S. Office Products' Board, if the directors of U.S. Office Products do not
nominate its chief executive officer to the Board.
In addition, three-fourths of the directors of U.S. Office Products must
approve the following transactions: (i) the sale by U.S. Office Products of
equity securities, other than (A) a specified amount made available under
employee benefit plans, such as option plans, or (B) a specified amount issued
to acquire companies or issued in public offerings; (ii) any merger, tender
offer involving U.S. Office Products' equity securities or sale, lease or
disposition of all or substantially all of U.S. Office Products assets or other
business combination involving U.S. Office Products, unless the consideration
for such sale is all cash or is freely tradeable common stock of a public
company with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to stockholder rights plans; (v) any
dissolution or partial liquidation of U.S. Office Products; or (vi) any
modification to U.S. Office Products' organization documents or by-laws that is
inconsistent with CD&R's rights under the Investment Agreement or any other
agreements between U.S. Office Products and CD&R. The effect of this provision
is so long as CD&R can nominate three directors, at least one of them must vote
in favor of any of the above actions for it to be approved.
The following table summarizes the right of CD&R to nominate directors of
U.S. Office Products and shows when the three-fourths super-majority voting
requirement will apply:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
PERCENTAGE OF SHARES OF U.S. CD&R IS ENTITLED TO RIGHT TO THREE-FOURTHS BOARD
OFFICE PRODUCTS COMMON NOMINATE (OUT OF DESIGNATE APPROVAL FOR
STOCK RETAINED BY CD&R(1)(2) NINE)(3)(4) CHAIRMAN CERTAIN TRANSACTIONS(2)
- -------------------------------------------------- --------------------------- ------------- -------------------------
<S> <C> <C> <C>
66 2/3% to 100%................................... Three Yes Yes
33 1/3% to 66 2/3%................................ Two Yes Yes
Less than 33 1/3% (but CD&R holds at least 5% of
U.S. Office Products' then voting stock.......... One No No
Less than 5% of the then outstanding U.S. Office
Products voting stock............................ None No No
</TABLE>
- ------------------------------
(1) Includes shares acquired by CD&R in the Initial CD&R Acquisition and Shares
CD&R can acquire by exercising the Special Warrants.
(2) All of CD&R's corporate governance rights will expire on the earlier of the
fifth anniversary of the closing of the Initial CD&R Acquisition or if CD&R
ever acquires more than 50% of the voting power represented by U.S. Office
Products' then outstanding voting securities.
(3) CD&R can approve one additional nominee if the Chief Executive Officer of
U.S. Office Products is not a member of the Board or is not a Board nominee.
(4) The size of the Board can be increased up to a total of 12 members, in which
case the number of directors that CD&R has the right to nominate will
increase proportionately.
24
<PAGE>
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of U.S. Office Products' representations and warranties and compliance
by U.S. Office Products' with its obligations under the Investment Agreement;
(ii) receipt of necessary antitrust and other regulatory clearance; (iii)
absence of material litigation; (iv) U.S. Office Products stockholder approval
of the issuance of shares in the Equity Investment; (v) consummation of the
Distributions in accordance with the Distribution Agreements containing certain
terms specified in the Investment Agreement and otherwise as reasonably approved
by CD&R; (vi) execution and delivery of the Tax Allocation Agreement containing
certain terms specified in the Investment Agreement and otherwise as reasonably
approved by CD&R; (vii) execution of documents relating to financing of the
Tender Offer satisfactory in form and substance to CD&R; (viii) consummation of
the Tender Offer; (ix) execution of a consulting agreement with CD&R Inc.
providing for payment of an annual consulting fee of $500,000 and registration
rights agreement with CD&R; (x) absence of any development since October 25,
1997 that would have a material adverse effect on U.S. Office Products after
giving effect to the distributions; (xi) no person or group (other than CD&R or
its affiliates) having entered into an agreement with U.S. Office Products with
respect to a tender or exchange offer for any shares of U.S. Office Products
Common Stock, or a merger, consolidation, or other business combination with or
involving the Company; and (xii) U.S. Office Products' debt immediately
following completion of the transactions contemplated by the Strategic
Restructuring Plan shall not exceed $1.4 billion (assuming conversion of certain
convertible debt) and outstanding debt of the Spin-Off Companies shall be at
least $130.0 million plus expenditures by such entities for acquisitions after
the date of the Investment Agreement. See "The Spin-Offs from U.S. Office
Products--Distribution Agreement" and "--Tax Allocation Agreement." If U.S.
Office Products does not proceed with the Distributions, or if the Equity
Investment does not occur for certain other reasons, CD&R can terminate the
Investment Agreement and CD&R would receive a termination fee of $25.0 million
plus CD&R's reasonable fees and expenses. If the Equity Investment is completed,
CD&R, Inc. will receive a transaction fee of $15.0 million and reimbursement for
expenses it incurred in connection with the transaction. For additional
information concerning the Equity Investment, investors should refer to U.S.
Office Products' proxy statement for its special meeting to be held to consider
issuance of shares in the Equity Investment. See "Additional Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will resign as
Chairman of the Board of U.S. Office Products upon completion of the
Distributions. In connection with the adoption of the Strategic Restructuring
Plan, U.S. Office Products' Board of Directors and Mr. Ledecky concluded that it
was important to the achievement of the objectives of the plan that the Spin-Off
Companies obtain the benefit of Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into a services agreement with Mr.
Ledecky (the "Ledecky Services Agreement"). It is expected that the Company will
enter into an employment agreement with Mr. Ledecky to implement its assigned
portion of the Ledecky Services Agreement. The Ledecky Services Agreement
provides for non-competition and non-solicitation restrictions that will
continue for four years after the School Specialty Distribution has been
completed. U.S. Office Products will assign to School Specialty the ability to
enforce the non-competition provisions described above as to its own business,
which will then constitute part of Mr. Ledecky's employment agreement with the
Company. School Specialty will have the right to enforce the non-competition
provision with respect to its respective business. In consideration of this
agreement by Mr. Ledecky and his serving as a director and an employee of School
Specialty and each of the other Spin-Off Companies following the Distribution,
the Ledecky Services Agreement provides that he will receive options to purchase
up to 7.5% of the outstanding common stock of each Spin-Off Company as of the
Distribution Date without regard to the Offering. For additional information on
the terms of the Ledecky Services Agreement and the options to be granted by
School Specialty to Mr. Ledecky, see "Management of School Specialty--Director
Compensation and Other Arrangements."
School Specialty has filed a Registration Statement with the Commission for
the issuance of shares of School Specialty Common Stock in the Offering that is
expected to close following the School Specialty
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<PAGE>
Distribution. As a result of certain U.S. federal income tax limitations under
Section 355 of the Code on the number of shares that School Specialty can issue
in connection with the School Specialty Distribution without jeopardizing the
tax-free treatment of the School Specialty Distribution, the amount of School
Specialty capital stock issued in such a public offering, when aggregated with
any other School Specialty capital stock that will be issued in such a public
offering has not been determined and may be limited by the factors discussed in
"Risk Factors--Tax Matters," "--Limitation on Equity Offerings and the Use of
Company Common Stock in Acquisitions" and "--U.S. Federal Income Tax
Consequences of the School Specialty Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions on the material U.S. federal income tax
consequences of the School Specialty Distribution to U.S. Office Products and
holders of U.S. Office Products Common Stock on the Record Date. The Tax Opinion
will be based on the Code, and regulations, rulings, and judicial decisions as
of the date thereof, all of which may be repealed, revoked, or modified so as to
result in U.S. federal income tax consequences different from those described
below. Such changes could be applied retroactively in a manner that could
adversely affect a holder of U.S. Office Products Common Stock. In addition, the
authorities on which the Tax Opinion will be based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the School Specialty Distribution and of the holding, and
disposition of the School Specialty Common Stock may differ from the treatment
described below.
The Tax Opinion will apply only to holders of U.S. Office Products Common
Stock who are U. S. persons and who hold U.S. Office Products Common Stock as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. A U.S. person is the beneficial owner of U.S. Office
Products Common Stock that is (i) for U.S. federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust with respect to
the administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. The Tax Opinion will not address tax
considerations applicable to a holder of U.S. Office Products Common Stock's
particular circumstances or to a holder that may be subject to special tax rules
(such as holders subject to the alternative minimum tax) or other special
situations, such as those of dealers in securities or currencies, financial
institutions, insurance companies, persons holding U.S. Office Products Common
Stock as part of a hedging or conversion transaction or a straddle, persons
whose "functional currency" is not the U.S. dollar, and certain U.S.
expatriates.
The Tax Opinion will not address all aspects of U.S. federal income taxation
that may be relevant to holders of U.S. Office Products Common Stock in light of
their particular circumstances, nor will it address any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction. Holders of
U.S. Office Products Common Stock should consult their tax advisors about the
particular U.S. federal income tax consequences to them of the School Specialty
Distribution, or the holding and disposition of the School Specialty Common
Stock, as well as any tax consequences arising under the laws of any state,
local, or foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. Subject to the foregoing, the Tax Opinion will state Wilmer, Cutler &
Pickering's opinion that for U.S. federal income tax purposes the Distributions
(including the School Specialty Distribution) will qualify as tax-free spin-offs
under Section 355 of the Code, and will not be taxable under Section 355(e) of
the Code. U.S. Office Products will not complete the School Specialty
Distribution unless it receives the Tax Opinion. The Tax Opinion will be based
on the accuracy as of the time of the Distributions of factual representations
made by U.S. Office Products, School Specialty, the Spin-Off Companies and CD&R
and certain other
26
<PAGE>
information, data, documentation and other materials that Wilmer, Cutler &
Pickering has deemed necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the School Specialty
Distribution.
Assuming the School Specialty Distribution qualifies as a tax-free spin-off
under Section 355 and is not taxable under to Section 355(e) of the Code:
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of School Specialty
Common Stock in the School Specialty Distribution. Holders of U.S. Office
Products Common Stock will recognize gain or loss on the receipt of cash in
lieu of fractional shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the School Specialty Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the School Specialty Distribution will be
allocated among the U.S. Office Products Common Stock and the Spin-Off
Companies Common Stock (including any fractional shares) received with
respect to such U.S. Office Products Common Stock in proportion to their
relative fair market values on the Distribution Date of School Specialty.
Such allocation must be calculated separately for each block of U.S. Office
Products Common Stock (shares purchased at the same time and at the same
cost) with respect to which the Spin-Off Companies' common stock is
received.
4. The holding period of the School Specialty Common Stock (including
any fractional shares) received in the School Specialty Distribution will
include the holding period of the U.S. Office Products Common Stock with
respect to which it was distributed.
Treasury regulations governing Section 355 require that each holder of U.S.
Office Products Common Stock who receives shares of School Specialty Common
Stock pursuant to the School Specialty Distribution attach a statement to the
U.S. federal income tax return that will be filed by such stockholder for the
taxable year in which the stockholder receives School Specialty Common Stock in
the School Specialty Distribution. The regulations require that the statement
show the applicability of Section 355 to the School Specialty Distribution. U.S.
Office Products will provide each U.S. Office Products stockholder of record on
the record date with information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION As noted
above, the Tax Opinion is not binding on the IRS or the courts. Holders of U.S.
Office Products Common Stock should be aware that the requirements of Section
355 pertaining to business purpose, active trade or business, and absence of a
device of distribution of earnings and profits, as well as the requirements of
Section 355(e) pertaining to a plan or series of related transactions to acquire
50% or more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the School Specialty Distribution. Accordingly, the IRS
and/or a court reach a conclusion that differs from the conclusions in the Tax
Opinion.
BUSINESS PURPOSE. In order for the School Specialty Distribution to qualify
as a tax-free spin-off under Section 355, it must be motivated, in whole or
substantial part, by one or more corporate business purposes. U.S. Office
Products will represent that the School Specialty Distribution was motivated, in
whole or substantial part, to allow U.S. Office Products and the Company to
adopt strategies and pursue objectives that are more appropriate to their
respective industries and stages of growth; to allow the Company to pursue an
independent acquisition program with a more focused use of resources and, where
27
<PAGE>
stock is used as consideration, to allow the Company to provide stock of a
public company that is in the same industry as the business being acquired; to
allow U.S. Office Products and the Company to offer their respective employees
more focused compensation packages; and to make possible the Equity Investment,
which the Board of Directors of U.S. Office Products concluded would contribute
to U.S. Office Products' development, based on the skills and experience of
CD&R, Inc. Based on these representations and certain other information, data,
documentation and other materials, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of the Distributions that the School Specialty
Distribution satisfies the business purpose requirement of Section 355 of the
Code. However, although similar rationales have been accepted by the IRS in
other circumstances as sufficient to meet the business purpose requirement of
Code Section 355, there can be no assurances that the IRS will not assert that
the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the School Specialty Distribution to
qualify as a tax-free spin-off under Section 355, both the Company and U.S.
Office Products must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the School Specialty
Distribution, taking into account only businesses that have been acquired in
transactions in which no gain or loss was recognized. Whether current and
historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of U.S.
Office Products and the Company, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of the Distributions that the School Specialty
Distribution will satisfy the active trade or business requirement. However,
because of the inherently subjective nature of important elements of the active
trade or business requirement, and because the IRS may challenge the
representations upon which Wilmer, Cutler & Pickering relies, there can be no
assurance that the IRS will not assert that the active trade or business
requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. The School
Specialty Distribution will not qualify as a tax-free spin-off under Section 355
if the School Specialty Distribution was used principally as a device for the
distribution of the earnings and profits of U.S. Office Products or the Company.
Treasury regulations provide that this test is applied based on all the facts
and circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and the Company, Wilmer, Cutler &
Pickering expects to deliver an opinion at the time of the Distributions that
the School Specialty Distribution is not a transaction used principally as a
device for the distribution of earnings and profits of either U.S. Office
Products or the Company. However, because of the inherently subjective nature of
the device test (including the subjectivity involved in assigning weight to
various factors), and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will assert that the School Specialty Distribution is a transaction used
principally as a device for the distribution of earnings and profits of U.S.
Office Products or the Company.
If the School Specialty Distribution fails to qualify as a tax-free spin-off
under Section 355:
1. U.S. Office Products will recognize gain equal to the difference
between the fair market value of the School Specialty Common Stock on the
Distribution Date and U.S. Office Products adjusted tax basis in the School
Specialty Common Stock on the Distribution Date. If U.S. Office Products
were to recognize gain on the School Specialty Distribution, such gain would
likely be substantial.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the School Specialty Common
Stock distributed to such stockholder, including fractional shares.
28
<PAGE>
The distribution would generally be treated as ordinary dividend income to a
U.S. Office Products stockholder to the extent of such U.S. Office Products
stockholder's pro rata share of U.S. Office Products' accumulated and
current earnings and profits. To the extent the amount of the distribution
exceeds such U.S. Office Products stockholder's pro rata share of U.S.
Office Products' accumulated and current earnings and profits, such excess
would be treated first as a basis-reducing, tax-free return of capital to
the extent of the stockholder's tax basis in his or her U.S. Office Products
Common Stock and then as capital gain, provided that the U.S. Office
Products Stock is held as a capital asset. For corporate stockholders, the
portion of the taxable distribution that constitutes a dividend would be
eligible for the dividends-received deduction (subject to certain
limitations in the Code) and could be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in a
corporate stockholder's basis in its U.S. Office Products Common Stock to
the extent of such deduction and the recognition of gain to the extent the
deduction exceeds the corporate stockholder's tax basis in the U.S. Office
Products Common Stock.
3. Each U.S. Office Products stockholder's tax basis in the School
Specialty Common Stock would equal the fair market value on the Distribution
Date of the School Specialty Common Stock (including fractional shares)
distributed to such stockholder.
4. The holding period of the School Specialty Common Stock (including
fractional shares) received in the School Specialty Distribution would begin
with, and include, the day after the Distribution Date.
Whether or not the School Specialty Distribution is taxable, cash received
by a holder of U.S. Office Products Common Stock in lieu of a fractional share
of School Specialty Common Stock will be treated as received in exchange for
such fractional share and the stockholder will recognize gain or loss for U.S.
federal income tax purposes measured by the difference between the amount of
cash received and the stockholder's tax basis in the fractional share. Such gain
or loss will be capital gain or loss to the stockholder.
EFFECT OF POST-DISTRIBUTION TRANSACTION. Section 355(e) which was added in
1997, generally provides that a company that distributes shares of a subsidiary
in a spin-off that is otherwise tax-free will incur U.S. federal income tax
liability if 50% or more, by vote or value, of the capital stock of either the
company making the distribution or the subsidiary is acquired by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether this 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary occurring two years before or after the spin-off is
pursuant to a plan that includes the spin-off. However, the presumption may be
rebutted by establishing that the spin-off and the acquisition are not part of a
plan or series of related transactions. Based on the representations of U.S.
Office Products, the Company and CD&R, and the assumption that the School
Specialty Distribution is not part of a plan that is outside the knowledge of
U.S. Office Products and the Company pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of U.S. Office Products or the Company, Wilmer, Cutler & Pickering's expects to
deliver an opinion at the time of the Distributions that the School Specialty
Distribution will not be Section 355(e). However, there can be no assurance that
the IRS will not assert that the School Specialty Distribution is taxable under
Section 355(e).
If the School Specialty Distribution is taxable under Section 355(e) of the
Code, U.S. Office Products will recognize gain, equal to the difference between
the fair market value of the School Specialty Common Stock on the Distribution
Date and U.S. Office Products' adjusted tax basis in the School Specialty Common
Stock on the Distribution Date. If U.S. Office Products were to recognize gain
on the School Specialty Distribution, such gain would likely be substantial.
However, no gain or loss will be recognized by holders of U.S. Office Products
Common Stock (except with respect to cash received in lieu of fractional
29
<PAGE>
shares). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
School Specialty and the other Spin-Off Companies will jointly and severally
indemnify U.S. Office Products for any Distribution Taxes assessed against U.S.
Office Products if an Adverse Tax Act of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty will also enter into the Tax
Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, School Specialty will be liable for any
Distribution Taxes resulting from any adverse Tax Act by School Specialty and
liable (subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. Additionally, U.S. Office Products and each of the Spin-Off Companies
will be liable for its pro rata portion of any Distribution Taxes, based on the
value of each company's common stock after the Distributions, if it is
determined that there has not been Adverse Tax Act by either U.S. Office
Products or any of the other Spin-Off Companies. As a result, the Company could
become liable for a pro rata portion of any Distribution Taxes with respect not
only to the School Specialty Distribution, but also to any of the other
Distributions. See "The Spin-Offs from U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement" for a detailed discussion of the
Tax Allocation Agreement and Tax Indemnification Agreement.
WILMER, CUTLER & PICKERING'S OPINION OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK DOES NOT PURPORT TO
COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER
OF U.S. OFFICE PRODUCTS COMMON STOCK. ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE SCHOOL SPECIALTY
DISTRIBUTION TO THEM.
EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY SCHOOL SPECIALTY
EMPLOYEES
School Specialty expects that all or substantially all vested and unvested
options ("U.S. Office Products Options") to acquire U.S. Office Products Common
Stock that are held by School Specialty employees on the Distribution Date will
be replaced with options ("School Specialty Options") to acquire shares of
School Specialty Common Stock. School Specialty anticipates that the replacement
options will be issued under a stock option plan to be adopted on or prior to
the Distribution Date. As of the Distribution Date, approximately 492,833 U.S.
Office Products Options will be held by employees of School Specialty. The
number of School Specialty Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products Common
Stock around the time of the Distributions and the public offering price of the
Company Common Stock in the Offering. For those reasons, the number of School
Specialty Options into which the U.S. Office Products Options will convert is
not yet determinable. The exercise price for U.S. Office Products Options will
be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price of
School Specialty Common Stock in the Offering___________________________________
Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Share (New) = Option Shares (Old) XTrading Price of U.S. Office Products
Common Stock Pre-School Specialty Distribution__________________________________
Initial Public Offering Price of School Specialty
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a)
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ten business days preceding the Distributions or (b) the number of business days
falling between the expiration of the Tender Offer and the completion of the
Distributions. The foregoing formula adjustments are intended to preserve for
the holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S. Office
Products Common Stock at the time of the School Specialty Distribution and the
exercise price of such option. The intrinsic value of the School Specialty
Options will be no greater than the intrinsic value of the U.S. Office Products
Options immediately before the Distributions, and the ratio of exercise price to
market price will not be less than the ratio immediately before the
Distributions.
Management anticipates that the replacement options will be issued under a
stock option plan to be adopted on or prior to the Distribution Date. It is
anticipated that all other terms of the School Specialty Options will be the
same as the terms of the U.S. Office Products options they replace. As a result
of the adjustment of the U.S. Office Products Options described above, the
options held by the School Specialty employees after the School Specialty
Distribution would represent a greater percentage interest in School Specialty
than the percentage interest in U.S. Office Products that such options
represented before the Distributions.
RESTRICTIONS ON TRANSFER
Shares of School Specialty Common Stock distributed to the U.S. Office
Products Stockholders pursuant to School Specialty Distribution will be freely
transferable under the Securities Act, except for shares received by any persons
who may be deemed to be "affiliates" of School Specialty as that term is defined
in Rule 144 promulgated under the Securities Act. Persons who may be deemed to
be affiliates of School Specialty after School Specialty Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, School Specialty and may include certain officers and
directors of School Specialty as well as principal stockholders of School
Specialty. Persons who are affiliates of School Specialty will be permitted to
sell their shares of School Specialty Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions provided
for private transactions or Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that the direct legal, financial advisory,
investment banking, financing, accounting, printing, mailing and other expenses
(including the fees of U.S. Office Products' and the Spin-Off Companies'
transfer agents) of the Strategic Restructuring Plan (including CD&R's fees and
expenses), including the Distributions, will total approximately $75.0 million.
Upon request, U.S. Office Products will pay the reasonable expenses of brokerage
firms, custodians, nominees and fiduciaries who are record holders of U.S.
Office Products Common Stock for forwarding this Information Statement/
Prospectus to the beneficial owners of such shares. The foregoing expenses will
be allocated among U.S. Office Products and the Spin-Off Companies pursuant to a
formula to be determined. See "The Spin-Offs from U.S. Office
Products--Distribution Agreement."
31
<PAGE>
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
Following the School Specialty Distribution, U.S. Office Products and School
Specialty will operate independently, and (except for interests U.S. Office
Products may retain pursuant to certain pledge agreements) neither will have any
stock ownership, beneficial or otherwise, in the other. For the purposes of
governing certain of the ongoing relationships among U.S. Office Products,
School Specialty and the Other Spin-Off Companies after the Distributions, and
to provide mechanisms for an orderly transition, on or before the Distribution
Date, U.S. Office Products, School Specialty and the Other Spin-Off Companies
will enter into the Distribution Agreement, the Tax Allocation Agreement, and
the Employee Benefits Agreement and the Spin-Off Companies will enter into the
Tax Indemnification Agreement. The terms of the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
Benefits Agreement have been determined while School Specialty is a wholly-owned
subsidiary of U.S. Office Products. In addition, the Investment Agreement
specifies certain terms of those agreements and provides that they are subject
to CD&R's reasonable approval. Therefore, they will not be the result of
arm's-length negotiations between independent parties.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement will
provide for the transfer from U.S. Office Products to School Specialty of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of School Specialty as well as the
transfer, in certain instances, of other assets related to the business of
School Specialty. It also will provide that the recovery on any claims under
applicable acquisition agreements that U.S. Office Products may have against the
persons who sold businesses to U.S. Office Products that will become part of
School Specialty in connection with the Distributions (the "School Specialty
Acquisition Indemnity Claims") will be shared between U.S. Office Products and
School Specialty. In addition, to the extent that the School Specialty
Acquisition Indemnity Claims are currently secured by the pledge of stock of
U.S. Office Products, the pledged shares will be used, subject to the final
resolution of the claim, to reimburse U.S. Office Products and School Specialty
for their respective damages and expenses in accordance with an agreed upon
allocation of recovery rights, which will be determined prior to the School
Specialty Distribution.
DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires each Spin-Off Company, on or prior to the Distribution, to
obtain credit facilities, to borrow funds under such facilities and to use the
proceeds of such borrowings to pay off the U.S. Office Products' debt so
allocated plus any additional debt incurred by U.S. Office Products after
January 12, 1998 (the date of the Investment Agreement) in connection with the
acquisition of an entity that has become or will become a subsidiary of such
Spin-Off Company. Under the Distribution Agreement, $80 million of U.S. Office
Products' debt has been allocated to School Specialty, and since January 12,
1998, U.S. Office Products has incurred an additional $3.3 million of debt in
connection with School Specialty's acquisition of Education Access. Prior to the
Distribution, School Specialty will enter into the credit facility described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations of School Specialty--Liquidity and Financial Resources" and will
borrow $83.3 million under the facility to pay off debt of U.S. Office Products.
School Specialty's historical balance sheets reflect payables to U.S. Office
Products, which arose primarily as a result of U.S. Office Products' funding of
the cash portions of acquisitions, paying the acquisition costs and repaying
outstanding debt of acquired companies, as well as an allocation of U.S. Office
Products' corporate expenses. The amount of such payables to U.S. Office
Products at January 24, 1998 in excess of the $80 million of U.S. Office
Products' debt allocated to School Specialty under the Distribution Agreement
was forgiven by U.S. Office Products. Accordingly, School Specialty's historical
balance sheet as of January 24, 1998 includes aggregate payables to U.S. Office
Products of $80 million and a capital contribution by U.S. Office Products equal
to such excess. School Specialty's pro forma balance sheet as of January 24,
1998 reflects the $3.3 million of debt incurred by U.S. Office Products in
School
32
<PAGE>
Specialty's acquisition of Education Access as an additional payable to U.S.
Office Products and the refinancing of the payable to U.S. Office Products with
the proceeds of the $83.3 million borrowing under the new credit facility.
LIABILITIES. Under the Distribution Agreement, School Specialty will be
liable for (i) any liabilities arising out of or in connection with the business
conducted by it or its subsidiaries, (ii) its liabilities under the Employee
Benefits Agreement, Tax Allocation Agreement and related agreements described
below, (iii) the U.S. Office Products debt that has been allocated to the
Company as described above, (iv) liabilities under the securities laws relating
to the Prospectus in respect of the Offering and portions of this Information
Statement/Prospectus distributed to stockholders of U.S. Office Products in
connection with the School Specialty Distribution, as well as other securities
law liabilities related to the School Specialty business that arise from
information supplied to U.S. Office Products (or that should have been supplied,
but was not) by School Specialty, (v) U.S. Office Products' liabilities for
earn-outs from acquisitions in respect of School Specialty and its subsidiaries,
(vi) School Specialty's costs and expenses related to the Offering and its new
credit facility, and (vii) $1.0 million of the transaction costs (including
legal, accounting, investment banking and financial advisory) and other fees
incurred by U.S. Office Products in connection with its Strategic Restructuring
Plan. Each of the other Spin-Off Companies will be similarly obligated to U.S.
Office Products. School Specialty and the other Spin-Off Companies have also
agreed to bear a pro rata portion of U.S. Office Products' liabilities under the
securities laws (other than claims relating solely to a specific Spin-Off
Company or relating specifically to the continuing businesses of U.S. Office
Products) and U.S. Office Products' general corporate liabilities (other than
debt, except for that specifically allocated to the Spin-Off Companies) incurred
prior to the Distributions (i.e., liabilities not related to the conduct of a
particular distributed or retained subsidiary's business) (the "Shared
Liabilities"). If one of the Spin-Off Companies defaults on an obligation owed
to U.S. Office Products, the non-defaulting Spin-Off Companies will be obligated
on a pro rata basis to pay such obligation ("Default Liability"). The aggregate
of the Shared Liabilities and Default Liability for which any Spin-Off Company
may be liable is, however, limited to $1.75 million.
The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and (b) their operating income
relative to that of U.S. Office Products; the residual will be U.S. Office
Products' pro rata share. Based upon financial data for the nine-month period
ended January 24, 1998, the Company's pro rata share of Shared Liabilities would
have been 11.9%, the other Spin-Off Companies' pro rata share would have
aggregated 22.5%, and U.S. Office Products' pro rata share would have been
65.6%. As to any Default Liability, each non-defaulting company's pro rata share
will be increased to include a portion of the defaulting Spin-Off Company's pro
rata share.
The Distribution Agreement will provide that each party will indemnify and
hold all of the other parties harmless from any and all liabilities for which
the former assumed liability under the Distribution Agreement. All indemnity
payments will be subject to adjustment upward or downward to take account of tax
costs or tax benefits as well as insurance proceeds. If there are any claims
made under U.S. Office Products' existing insurance policies, the amount of any
deductible or retention will be allocated by U.S. Office Products among the
claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement will have other customary
provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
33
<PAGE>
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. School Specialty will also
enter into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible for the Adverse Tax Act
will indemnify the other Spin-Off Companies for any liability to U.S. Office
Products under the Tax Allocation Agreement. As a consequence, School Specialty
will be liable for any Distribution Taxes resulting from any Adverse Tax Act by
School Specialty and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
each of U.S. Office Products and the Spin-Off Companies will be liable for its
pro rata portion of such Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, School Specialty could become
liable for a pro rata portion of Distribution Taxes with respect not only to the
School Specialty Distribution but also any of the other Distributions. The
liabilities of School Specialty under the Tax Allocation Agreement and the Tax
Indemnification Agreement are not subject to any limits.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products will enter into
the Employee Benefits Agreement with School Specialty and the other Spin-Off
Companies to provide for an orderly transition of benefits coverage between U.S.
Office Products and the Spin-off Companies. Pursuant to this agreement, the
respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distribution subsidiaries will retain or assume
responsibility for their current and previous employees. The proposed Employee
Benefits Agreement reflects U.S. Office Products' expectation that each of the
Spin-Off Companies will establish 401(k) plans for their respective employees
effective as of, or shortly after, the Distribution Date and that U.S. Office
Products will transfer 401(k) accounts to those plans as soon as practicable.
The agreement will provide for spinning off portions of the U.S. Office
Products' cafeteria plan that relate to employees of the Spin-Off Companies (and
their subsidiaries) and having those spun-off plans assume responsibilities for
claims submitted on or after the Distribution.
DIVIDEND POLICY
School Specialty does not anticipate declaring and paying cash dividends on
School Specialty Common Stock in the foreseeable future. The decision whether to
apply any legally available funds to the payment of dividends on School
Specialty Common Stock will be made by the Board of Directors of School
Specialty (the "School Specialty Board") from time to time in the exercise of
its business judgment, taking into account School Specialty's financial
condition, results of operations, existing and proposed commitments for use of
School Specialty's funds and other relevant factors. School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of School Specialty at
January 24, 1998 (i) on a historical basis, (ii) on a pro forma basis to reflect
the refinancing of all amounts payable to U.S. Office Products, the purchase
acquisition completed subsequent to January 24, 1998 and the Distribution and
(iii) on such pro forma basis as adjusted to give effect to the Offering, the
direct sale by the Company of 250,000 shares of Common Stock to Messrs.
Spalding, Vander Zanden and Pate and the application of the net proceeds
therefrom to the payment of debt (assuming an inital public offering price of
$15.00 per share and no exercise of the Underwriter's overallotment option,
after deducting the estimated offering expenses). This table should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of School Specialty," the historical
consolidated financial statements and the pro forma combined financial
statements of School Specialty, and the related notes to each thereof, included
elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
----------------------- PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................................................ $ 272 $ 272 $ 272
Short-term payable to U.S. Office Products................................. 16,873
---------- ----------- -------------
Total short-term debt................................................ $ 17,145 $ 272 $ 272
---------- ----------- -------------
---------- ----------- -------------
Long-term debt............................................................. $ 385 $ 82,978 $ 51,347
Long-term payable to U.S. Office Products.................................. 62,470
Stockholder's equity:
Preferred stock (1,000,000 shares authorized; no shares outstanding).....
Common stock, $0.001 par value (150,000,000 shares authorized; 12,299,593
shares outstanding pro forma; 14,674,593 shares outstanding pro forma,
as adjusted)(1)........................................................ 13 15
Additional paid-in capital............................................... 93,300 124,929
Divisional equity........................................................ 93,313
Retained earnings........................................................ 5,179 5,179 5,179
---------- ----------- -------------
Total stockholder's equity........................................... 98,492 98,492 130,123
---------- ----------- -------------
Total capitalization................................................. $ 161,347 $ 181,470 $ 181,470
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
- ------------------------
(1) Outstanding shares do not include shares authorized for issuance upon
exercise of stock options granted or to be granted. See "Management of
School Specialty--Replacement of Outstanding U.S. Office Products' Options"
and "--1998 Stock Incentive Plan". The approximately 12.3 million shares of
Common Stock outstanding on a pro forma basis was calculated by dividing the
approximately 110.7 million shares of U.S. Office Products common stock
expected to be outstanding on the Distribution Date by nine, which is the
Distribution Ratio. The approximately 14.7 million shares of Common Stock
outstanding on a pro forma basis, as adjusted, was calculated by adding to
the approximately 12.3 million shares (a) the 2,125,000 shares offered
hereby and (b) the 250,000 shares to be sold to Messrs. Spalding, Vander
Zanden and Pate.
35
<PAGE>
SELECTED FINANCIAL DATA
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
School Specialty", all of which appear elsewhere in this Information
Statement/Prospectus.
The historical Selected Financial Data for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996 and the fiscal year ended April
26, 1997 (except pro forma amounts) have been derived from School Specialty's
consolidated financial statements that have been audited and are included
elsewhere in the Prospectus/Information Statement. The historical Selected
Financial Data for the years ended December 31, 1992 and 1993 have been derived
from unaudited consolidated financial statements and are not included elsewhere
in this Information Statement/Prospectus. The Selected Financial Data for the
nine months ended January 25, 1997 and January 24, 1998 (except pro forma
amounts) have been derived from unaudited consolidated financial statements that
appear elsewhere in this Information Statement/Prospectus. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results of operations for the periods presented.
The pro forma income statement data, which have been derived from School
Specialty's unaudited pro forma financial statements included elsewhere in this
Prospectus, give effect, as applicable, to the refinancing of all amounts
payable to U.S. Office Products and the acquisitions completed by the Company
since May 1, 1996 as if all such transactions had been consummated by May 1,
1996. The unaudited pro forma combined financial data discussed herein do not
purport to represent the results that the Company would have obtained had the
transactions which are the subject of the pro forma adjustments occurred at the
beginning of the applicable periods, as assumed, or the future results of the
Company. See additional disclosure regarding pro forma results in the Financial
Statements section.
36
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL(1)
---------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ APRIL 30, FISCAL YEAR ENDED
1992 1993 1994 1995 1996 APRIL 26, 1997(2)
------- ------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $65,042 $76,926 $119,510 $150,482 $28,616 $ 191,746
Cost of revenues...................... 48,111 56,280 87,750 105,757 20,201 136,577
------- ------- -------- -------- ----------- --------
Gross profit.......................... 16,931 20,646 31,760 44,725 8,415 55,169
Selling, general and administrative
expenses............................ 17,729 18,294 27,281 39,869 10,307 43,462
Non-recurring acquisition costs....... 1,048 1,122 1,792
Restructuring costs................... 2,532 194
------- ------- -------- -------- ----------- --------
Operating income (loss)............... (1,846) 2,352 4,479 2,324 (3,014) 9,721
Interest expense...................... 1,660 1,845 3,007 5,536 1,461 4,197
Interest income....................... (6)
Other (income) expense................ 99 228 (86) (18) 67 )(196
------- ------- -------- -------- ----------- --------
Income (loss) before provision for
(benefit from) income taxes......... (3,605) 279 1,558 (3,194) (4,536) 5,720
Provision for (benefit from) income
taxes(3)............................ 216 199 218 173 139 (2,412)
------- ------- -------- -------- ----------- --------
Net income (loss)..................... $(3,821) $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,132
------- ------- -------- -------- ----------- --------
------- ------- -------- -------- ----------- --------
Net income (loss) per share(4):.......
Basic............................. $ (0.78) $ 0.02 $ 0.26 $ (0.51) $ (0.54) $ 0.81
Diluted........................... $ (0.78) $ 0.02 $ 0.26 $ (0.50) $ (0.53) $ 0.80
Weighted average shares
outstanding(4):.....................
Basic............................. 4,918 4,918 5,062 6,562 8,611 10,003
Diluted........................... 4,918 4,918 5,078 6,669 8,789 10,196
<CAPTION>
PRO FORMA (2)
------------------------------------
NINE MONTHS ENDED NINE MONTHS
----------------------------------- ENDED
JANUARY 25, JANUARY 24, FISCAL YEAR ENDED ----------------
1997(2) 1998(2) APRIL 26, 1997 JANUARY 25, 1997
---------------- ---------------- ----------------- ----------------
<S> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $159,977 $247,880 $ 350,760 $292,244
Cost of revenues...................... 114,380 176,501 244,396 203,705
-------- -------- -------- --------
Gross profit.......................... 45,597 71,379 106,364 88,539
Selling, general and administrative
expenses............................ 33,396 50,999 85,430 66,926
Non-recurring acquisition costs....... 1,792 1,792 1,792
Restructuring costs................... 194
-------- -------- -------- --------
Operating income (loss)............... 10,409 20,380 18,948 19,821
Interest expense...................... 3,358 4,100 7,300 5,535
Interest income....................... (101) (109)
Other (income) expense................ (204) 441 )(158 (174)
-------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes......... 7,356 15,948 11,806 14,460
Provision for (benefit from) income
taxes(3)............................ 3,750 7,113 92 6,651
-------- -------- -------- --------
Net income (loss)..................... $ 3,606 $ 8,835 $ 11,714 $ 7,809
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share(4):.......
Basic............................. $ 0.38 $ 0.69 $ 0.95 $ 0.63
Diluted........................... $ 0.37 $ 0.68 $ 0.95 $ 0.63
Weighted average shares
outstanding(4):.....................
Basic............................. 9,553 12,751 12,300 12,300
Diluted........................... 9,758 13,020 12,300 12,300
<CAPTION>
JANUARY 24, 1998
----------------
STATEMENT OF INCOME DATA:
Revenues.............................. $318,667
Cost of revenues...................... 227,485
--------
Gross profit.......................... 91,182
Selling, general and administrative
expenses............................ 66,623
Non-recurring acquisition costs.......
Restructuring costs...................
--------
Operating income (loss)............... 24,559
Interest expense...................... 5,535
Interest income.......................
Other (income) expense................ 522
--------
Income (loss) before provision for
(benefit from) income taxes......... 18,502
Provision for (benefit from) income
taxes(3)............................ 8,511
--------
Net income (loss)..................... $ 9,991
--------
--------
Net income (loss) per share(4):.......
Basic............................. $ 0.81
Diluted........................... $ 0.81
Weighted average shares
outstanding(4):.....................
Basic............................. 12,300
Diluted........................... 12,300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1992
---------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (51)
Total assets......................................................................................................... 21,905
Long-term debt, less current portion................................................................................. 8,205
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (365)
<CAPTION>
1993
---------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 1,140
Total assets......................................................................................................... 23,190
Long-term debt, less current portion................................................................................. 7,175
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 545
<CAPTION>
1994
---------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 3,512
Total assets......................................................................................................... 44,267
Long-term debt, less current portion................................................................................. 11,675
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 1,827
<CAPTION>
1995
---------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (1,052)
Total assets......................................................................................................... 54,040
Long-term debt, less current portion................................................................................. 15,294
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (620)
<CAPTION>
APRIL 30,
1996
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (3,663)
Total assets......................................................................................................... 54,573
Long-term debt, less current portion................................................................................. 15,031
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (4,267)
<CAPTION>
APRIL 26,
1997
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 14,460
Total assets......................................................................................................... 87,685
Long-term debt, less current portion................................................................................. 566
Long-term payable to U.S. Office Products............................................................................ 33,226
Stockholder's (deficit) equity....................................................................................... 16,329
<CAPTION>
JANUARY
24, 1998
----------
ACTUAL
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 43,613
Total assets......................................................................................................... 201,207
Long-term debt, less current portion................................................................................. 385
Long-term payable to U.S. Office Products............................................................................ 62,470
Stockholder's (deficit) equity....................................................................................... 98,492
<CAPTION>
PRO
FORMA (5)
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 60,586
Total assets......................................................................................................... 204,457
Long-term debt, less current portion................................................................................. 82,978
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 98,492
</TABLE>
37
<PAGE>
- ------------------------
(1) The historical financial information of the Pooled Companies have been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions.
(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
School Specialty since May 1, 1996 as if all such transactions had occurred
on May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(3) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) include benefit from income
taxes of $2.4 million primarily arising from the reversal of a $5.3 million
valuation allowance in the quarter ended April 26, 1997. The valuation
allowance had been established in fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's deferred tax
assets, because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to the Company's
being acquired by U.S. Office Products, because it was deemed "more likely
than not", based on improved results, that such tax benefit would be
realized.
(4) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note (k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate, and in the
Offering, would have been 14.7 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of proceeds from such sales to reduce
debt, would have been:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED -----------------
APRIL 26, 1997 JANUARY 25, 1997
----------------- -----------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic.................................................................................. $ 0.90 $ 0.61
Diluted................................................................................ $ 0.90 $ 0.61
<CAPTION>
JANUARY 24, 1998
-----------------
<S> <C>
Pro forma net income per share, as adjusted:
Basic.................................................................................. $ 0.76
Diluted................................................................................ $ 0.76
</TABLE>
(5) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by School Specialty
subsequent to January 24, 1998, and (iii) the Distribution as if such
transactions had occurred on January 24, 1998. The pro forma balance sheet
data are not necessarily indicative of the financial position that would
have been achieved had these events actually then occurred and should not be
construed as representative of future financial position.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SCHOOL SPECIALTY
OVERVIEW
School Specialty is the largest U.S. distributor focusing on non-textbook
educational supplies and furniture for grades pre-K-12. The Company provides a
comprehensive offering of high quality educational supplies and furniture to
school districts, school administrators and teachers through the broad
distribution of its catalogs. Specialty brands, which target specific curriculum
disciplines, include Childcraft, which sells to the early childhood market; Sax
Arts & Crafts, which distributes a broad line of art supplies and materials; and
Gresswell, which distributes library-related products in the United Kingdom.
Revenues have increased from $65.0 million in the fiscal year ended December
31, 1992 to $279.6 million for the twelve months ended January 24, 1998. This
increase resulted primarily from 15 acquisitions, 13 of which occurred during
fiscal 1997 and the first nine months of fiscal 1998, as well as internally
generated growth.
School Specialty's gross profit margins have improved by achieving increased
buying power and by acquiring specialty companies which usually have higher
gross margins than the Company's general products divisions. The Company expects
gross profit margins to be further enhanced by acquiring additional specialty
companies and continuing to improve its purchasing power.
School Specialty's operating margin has improved significantly over the last
several years. This improvement reflects the Company's acquisition of specialty
companies which have higher operating margins than the Company's general
products divisions. In addition, operating margins have increased as the Company
has reduced selling, general and administrative expenses of acquired companies
by eliminating redundant administrative functions. Currently, nine of the ten
general school supply companies acquired since May 1996 have been integrated.
However, the Company believes that the full benefit of the integrations has not
yet been realized as there continue to be opportunities for the Company to
eliminate redundant costs.
The benefit from income taxes in Fiscal 1997 of $2.4 million reflects the
reversal of a $5.3 million deferred tax valuation allowance in the fourth
quarter. The Company believes the effective income tax rate of 46%, which is
reflected in the pro forma financial statements for the most recent interim
period, is more representative of future effective income tax rates. See
"--Consolidated Historical Results of Operations".
School Specialty's business and working capital needs are highly seasonal
with peak sales levels occurring from May through October. During this period,
the Company receives, ships and bills the majority of its orders so that schools
and teachers receive their merchandise by the start of each school year. School
Specialty's inventory levels increase in April through July in anticipation of
the peak selling season. The majority of cash receipts are collected from
September through December.
In the past, the Company has recorded restructuring costs associated with
consolidation of warehouse facilities. These costs typically include: costs to
exit the facility, such as rent under remaining lease terms, occupancy,
relocation costs and facility restoration; employee costs, such as severance;
and asset impairment costs. The Company expects to incur such costs in the
future as it continues to integrate acquired companies. Based on the additional
time and resources expected to be involved in the development, review and
approval of any such restructuring plans, the Company cannot presently predict
the timing or overall magnitude of such a charge.
The Company anticipates recording in the fourth quarter of fiscal 1998 $2.0
to $2.5 million of one-time non-recurring costs, primarily consisting of a
write-down of deferred catalog costs and employee severance and asset impairment
costs and $1.0 million of the transaction costs allocated to the Company under
the Distribution Agreement. In the first quarter of fiscal 1999, the Company
will record a
39
<PAGE>
compensation charge of approximately $263,000, representing the difference
between the amount which Messrs. Spalding, Vander Zanden and Pate will pay for
the 250,000 shares of Common Stock to be purchased directly from the Company and
the amount which they would have paid for such shares if the purchase price per
share had been the initial public offering price of the shares offered in the
Offering.
School Speciality is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products, which
acquired School Specialty, Inc., a Wisconsin corporation ("Old School"), in May
1996 and Re-Print in July 1996. The Company's consolidated financial statements
give retroactive effect to these two business combinations under the
pooling-of-interests method (Old School and Re-Print are referred to as the
"Pooled Companies") and include the results of companies acquired in business
combinations accounted for under the purchase method from their respective dates
of acquisition. Prior to their respective dates of acquisition by U.S. Office
Products, the Pooled Companies reported results on years ending on December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Information Statement/Prospectus.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues on
a historical basis for the years ended December 31, 1994 and 1995, fiscal 1997
and for the nine months ended January 25, 1997 and January 24, 1998, and on a
pro forma basis for fiscal 1997 and for the nine months ended January 25, 1997
and January 24, 1998, reflecting the refinancing of the amounts payable to U.S.
Office Products and the results of the companies acquired since May 1, 1996 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL -------------
-----------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR
FOR THE YEAR ENDED ENDED NINE MONTHS ENDED ENDED
-------------------------------- ------------- ---------------------------- -------------
DECEMBER 31, DECEMBER 31, APRIL 26, JANUARY 25, JANUARY 24, APRIL 26,
1994 1995 1997 1997 1998 1997
--------------- --------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......... 73.4 70.3 71.2 71.5 71.2 69.7
------ ------ ------ ------ ------ ------
Gross profit........... 26.6 29.7 28.8 28.5 28.8 30.3
Selling, general and
administrative
expenses............... 22.9 26.5 22.7 20.9 20.6 24.4
Non-recurring acquisition
costs.................. 0.9 1.1 0.5
Restructuring costs...... 1.7 0.1
------ ------ ------ ------ ------ ------
Operating income....... 3.7 1.5 5.1 6.5 8.2 5.4
Interest expense, net.... 2.5 3.6 2.1 2.2 1.6 2.1
Other (income) expense... (0.1) (0.1) (0.1) 0.2
------ ------ ------ ------ ------ ------
Income (Loss) before
provision for income
taxes.................. 1.3 (2.1) 3.0 4.5 6.4 3.3
Provision for (benefit
from) income taxes..... 0.2 0.1 (1.3) 2.3 2.9 0.0
------ ------ ------ ------ ------ ------
Net income (Loss)........ 1.1% (2.2)% 4.3% 2.2% 3.5% 3.3%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<CAPTION>
NINE MONTHS ENDED
----------------------------
JANUARY 25, JANUARY 24,
1997 1998
------------- -------------
<S> <C> <C>
Revenues................. 100.0% 100.0%
Cost of revenues......... 69.7 71.4
------ ------
Gross profit........... 30.3 28.6
Selling, general and
administrative
expenses............... 22.9 20.9
Non-recurring acquisition
costs.................. 0.6
Restructuring costs......
------ ------
Operating income....... 6.8 7.7
Interest expense, net.... 1.9 1.7
Other (income) expense... (0.1) .2
------ ------
Income (Loss) before
provision for income
taxes.................. 5.0 5.8
Provision for (benefit
from) income taxes..... 2.3 2.7
------ ------
Net income (Loss)........ 2.7% 3.1%
------ ------
------ ------
</TABLE>
40
<PAGE>
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 54.9%, from $160.0 million for the nine
months ended January 25, 1997, to $247.9 million for the nine months ended
January 24, 1998. This increase was primarily due to the inclusion of revenues
from the seven companies acquired in business combinations accounted for under
the purchase method during the nine months ended January 24, 1998 (the "Fiscal
1998 Purchased Companies") from their respective dates of acquisition and
revenues from the six companies acquired during fiscal 1997 in business
combinations accounted for under the purchase method ("the Fiscal 1997 Purchased
Companies") for the entire nine month period. Revenues also increased due to
sales to new accounts, increased sales to existing customers and higher pricing
on certain products in response to increased product costs. Product cost is the
most significant element in cost of revenues. Inbound freight, occupancy and
delivery charges are also included in cost of revenues.
Gross profit increased 56.5%, from $45.6 million, or 28.5% of revenues, for
the nine months ended January 25, 1997 to $71.4 million, or 28.8% of revenues,
for the nine months ended January 24, 1998. The increase in gross profit as a
percentage of revenues was due primarily to an increase in revenues from higher
margin products, primarily as a result of the purchase acquisitions of three
companies selling higher margin specialty product lines during the nine months
ended January 24, 1998, and as a result of improved purchasing power and rebate
programs negotiated with vendors. These factors were partly offset by an
increase in the cost of revenues as a result of the increased freight costs
caused by the UPS strike in the summer of 1997 and an increase in the portion of
revenues represented by lower margin bid revenues.
Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, general administrative overhead (which includes information systems and
customer service), and accounting, legal, human resources and purchasing
expenses. Selling, general and administrative expenses increased 52.7%, from
$33.4 million, or 20.9% of revenues, for the nine months ended January 25, 1997
to $51.0 million, or 20.6% of revenues, for the nine months ended January 24,
1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to efficiencies generated from the
elimination of certain redundant administrative functions, including purchasing,
accounting, finance and information systems, of the Fiscal 1997 Purchased
Companies and the consolidation of two warehouses into one regional facility in
the Northeastern U.S during the third quarter of fiscal 1997. School Specialty
has established a 24-month integration process in which a transition team is
assigned to (i) sell or discontinue incompatible business units, (ii) reduce the
number of SKUs, (iii) eliminate redundant administrative functions, (iv)
integrate the acquired entity's MIS system, and (v) improve buying power.
However, the length of time it takes the Company to fully implement its strategy
for assimilating an acquired company can vary depending on the nature of the
company acquired and the season in which it is acquired.
The Company incurred non-recurring acquisition costs of $1.8 million for the
nine months ended January 25, 1997, in conjunction with the acquisition of the
Pooled Companies. These non-recurring acquisition costs included accounting,
legal, investment-banking fees, real estate and environmental assessments and
appraisals and various regulatory fees. Generally accepted accounting principles
("GAAP") require the Company to expense all acquisition costs (both those paid
by the Company and those paid by the sellers of the acquired companies) related
to business combinations accounted for under the pooling-of-interests method of
accounting. In accordance with GAAP, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of two
years following the completion of the Strategic Restructuring Plan. During this
period, the Company will not reflect any non-recurring acquisition costs in its
results of operations, as all costs incurred of this nature would be related to
acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration. See "Risk Factors--Risks
Related to Inability to Use Pooling-of-Interests Method to Account for Future
Acquisitions".
41
<PAGE>
Since U.S. Office Products' acquisition of its Pooled Companies, interest
has been allocated to the Company based upon the Company's average outstanding
payable balance with U.S. Office Products at U.S. Office Products' weighted
average interest rate during such period. Interest expense, net of interest
income, increased 22.5%, from $3.3 million for the nine months ended January 25,
1997 to $4.0 million for the nine months ended January 24, 1998. The increase is
due primarily to higher amounts payable to U.S. Office Products incurred as a
result of the acquisition of the seven companies acquired in fiscal year 1998.
Provision for income taxes increased from $3.8 million for the nine months
ended January 25, 1997 to $7.1 million for the nine months ended January 24,
1998, reflecting effective income tax rates of 51.0% and 44.6%, respectively.
The high effective income tax rates for the nine months ended January 25, 1997
and January 24, 1998, compared to the federal statutory rate of 35.0%, was
primarily due to state income taxes and non-deductible goodwill amortization.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 27.4%, from $150.5 million in 1995, to
$191.7 million in fiscal 1997. This increase was primarily due to the inclusion,
for fiscal 1997, of revenues from the Fiscal 1997 Purchased Companies from their
respective dates of acquisition, sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.
Gross profit increased 23.4%, from $44.7 million, or 29.7% of revenues, in
1995 to $55.2 million, or 28.8% of revenues, in fiscal 1997. The decrease in
gross profit as a percentage of revenues was due primarily to a shift in revenue
mix, resulting from the acquisition of the Fiscal 1997 Purchased Companies,
which traditionally had lower gross profits as a percentage of revenues. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors and the Company's ability to take advantage of term
discounts due to improved cash flows.
Selling, general and administrative expenses increased 9.0%, from $39.9
million, or 26.5% of revenues, in 1995 to $43.5 million, or 22.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses as
a percentage of revenues was due primarily to the consolidation of two
warehouses into one regional facility in the Northeastern U.S. during third
quarter of fiscal 1997, the elimination of certain redundant administrative
functions of a company acquired during 1995 in a business combination accounted
for under the purchase method (the "1995 Purchased Company") and reduced
executive compensation expense at one of the Pooled Companies after being
acquired by U.S. Office Products in July 1996.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $0.7 million or 7.7%.
The Company incurred non-recurring acquisition costs of $1.8 million in
fiscal 1997, in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal, investment-banking fees, real estate and environmental
assessments and appraisals and various regulatory fees.
The Company incurred restructuring costs of $2.5 million and $194,000 during
1995 and fiscal 1997, respectively. These costs represent the external costs and
liabilities to close redundant Company facilities, severance costs related to
the Company's employees and other costs associated with the Company's
restructuring plans. The Company expects to incur similar costs in the future as
the Company continues to
42
<PAGE>
review its operations, with the intention of continuing to eliminate redundant
facilities. See "Business--Cost Reduction and Other Efficiencies".
Interest expense, net of interest income, decreased 24.2%, from $5.5 million
in 1995 to $4.2 million in fiscal 1997. The decrease was due primarily to the
repayment of substantially all of the Company's debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on the Company's short-term and long-term debt with U.S.
Office Products.
Provision for income taxes decreased from a tax expense of $173,000 in 1995
to a tax benefit of $2.4 million in fiscal 1997. The Company incurred a tax
expense in 1995, notwithstanding the fact that it reported a pre-tax loss,
because one of the Pooled Companies' earnings were not offset by the other
Pooled Companies' loss. In 1995, the Company recorded a full valuation allowance
of $5.3 million on the deferred tax asset resulting from the net operating loss
carryforwards created during 1995. The valuation allowance had been established
by one of the Pooled Companies prior to its acquisition by U.S. Office Products
to offset the tax benefit from such loss carryforwards, because at the time it
was not likely that such tax benefit would be realized. The benefit from income
taxes in Fiscal 1997 of $2.4 million arose from the reversal of the $5.3 million
deferred tax asset valuation allowance in the fourth quarter. The valuation
allowance was reversed subsequent to the Company's being acquired by U.S. Office
Products, because it was deemed "more likely than not", based on improved
results, that the tax benefit from such operating loss carryforwards would be
realized. The Company believes that the effective income tax rate of 46%
reflected in the pro forma interim financial statements is more representative
of future effective income tax rates.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues increased 25.9%, from $119.5 million in 1994, to
$150.5 million in 1995. This increase was primarily due to the inclusion in 1995
of the 1995 Purchased Company from its date of acquisition and revenues from one
company acquired in a business combination accounted for under the purchase
method of accounting during 1994 (the "1994 Purchased Company") for the entire
year.
Gross profit increased 40.8%, from $31.8 million, or 26.6% of revenues, in
1994 to $44.7 million, or 29.7% of revenues, in 1995. The increase in gross
profit as a percentage of revenues was due primarily to a shift in revenue mix,
primarily attributed to the acquisition of the 1995 Purchased Company, which had
a higher gross profit as a percentage of revenues and a reduction in lower
margin bid revenues.
Selling, general and administrative expenses increased 46.1%, from $27.3
million, or 22.8% of revenues, in 1994 to $39.9 million, or 26.5% of revenues,
in 1995. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the 1994 and 1995 Purchased
Companies, which operated with higher levels of selling, general and
administrative expenses as a percentage of revenues.
Interest expense, net of interest income, increased 84.1%, from $3.0 million
in 1994 to $5.5 million in 1995. The increase was due primarily to additional
borrowings to finance the acquisition of the 1995 Purchased Company, a full year
of interest expense on debt incurred to finance the acquisition of the 1994
Purchased Company and higher average borrowings on the Company's revolving
credit facility resulting from financing the operations of the 1994 and 1995
Purchased Companies.
Provision for income taxes decreased from $218,000 in 1994 to $173,000 in
1995. The Company incurred a tax expense in 1995, notwithstanding the fact that
it reported a pre-tax loss, because one of the Pooled Companies' earnings were
not offset by the other Pooled Companies' loss. The low effective income tax
rate of 14% in 1994 is due to the Company's utilization of a net operating loss
carryforward the benefit of which had not been reflected as income in prior
years.
43
<PAGE>
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma combined financial data does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred May 1, 1996, as assumed,
and are not necessarily representative of the Company's results of operations in
any future period.
NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Pro forma revenues increased 9.0%, from $292.2 million for the nine months
ended January 25, 1997, to $318.7 million for the nine months ended January 24,
1998. This increase was primarily due to sales to new accounts, increased sales
to existing customers, and higher pricing on certain products in response to
increased product costs.
Gross profit increased 3.0%, from $88.5 million, or 30.3% of revenues, for
the nine months ended January 25, 1997 to $91.2 million, or 28.6% of revenues,
for the nine months ended January 24, 1998. The decrease in gross profit as a
percentage of revenues was primarily due to higher freight costs as a result of
the UPS strike in the summer of 1997 and an increase in the portion of revenues
represented by lower margin bid revenues and the discontinuation of higher
margin retail operations at some of the Fiscal 1997 Purchased Companies.
Selling, general and administrative expenses were $65.0 million, or 22.2% of
revenues, for the nine months ended January 25, 1997 and $64.7 million, or 20.3%
of revenues, for the nine months ended January 24, 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues
reflects the elimination of certain redundant administrative functions,
including purchasing, accounting, finance and information systems of the Fiscal
1997 Purchased Companies and the consolidation of two warehouses into one
regional facility in the Northeastern U.S. during the third quarter of fiscal
1997. The Company has a 24-month integration strategy to consolidate operations
of purchased businesses; however, the length of time it takes for the Company to
fully implement its strategy for assimilating an acquired company can vary
depending on the nature of the company acquired and the season in which it is
acquired. See "Business--Company Strengths--Ability to Integrate Acquisitions."
The decrease in selling, general and administrative expense as a percentage of
revenues was partly offset by the inclusion of the pro forma results of
Education Access, which the Company acquired out of a bankruptcy proceeding in
March 1998.
Provision for income taxes increased 28.0% from $6.7 million for the nine
months ended January 25, 1997 to $8.5 million for the nine months ended January
24, 1998, reflecting an effective income tax rate of 46.0% in both periods. The
high effective income tax rate, compared to the federal statutory rate of 35.0%,
was primarily due to state income taxes and non-deductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the acquisition by U.S. Office Products of the Pooled
Companies and prior to the Distribution, U.S. Office Products funded the cash
portions of School Specialty's acquisitions, paid the acquisition costs, repaid
outstanding debt of acquired companies, allocated a portion of U.S. Office
Products' corporate expenses to School Specialty and made daily advances or
sweeps of cash to keep School Specialty's cash balance at or near zero on a
daily basis. The net amount of such transactions was recorded as a payable from
School Specialty to U.S. Office Products. At January 24, 1998, the Company had
working capital of $43.6 million. The Company's capitalization, defined as the
sum of long-term debt, long-term payable to U.S. Office Products and
stockholders' equity, at January 24, 1998 was $161.3 million. On a pro forma
basis at January 24, 1998, the Company had working capital of $60.6 million and
capitalization of $181.5 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $15.4 million. Net cash used in investing activities
was $96.5 million, including $92.1 million for acquisitions
44
<PAGE>
and $4.1 million for additions to property and equipment. Net cash provided by
financing activities was $81.1 million, including $89.2 million provided by U.S.
Office Products to fund the cash portion of the purchase price and the repayment
of debt assumed with the acquisition of the fiscal 1998 Purchased Companies,
$69.8 million of which was considered a contribution of capital by U.S. Office
Products, partially offset by $8.0 million used to repay indebtedness.
During the nine months ended January 25, 1997, net cash provided by
operating activities was $4.2 million. Net cash used in investing activities was
$14.7 million, including $7.6 million for acquisitions, $5.3 million for
additions to property and equipment and $1.7 million to pay non-recurring
acquisition costs. Net cash provided by financing activities was $11.2 million,
including $55.0 million provided by U.S. Office Products to fund the cash
portion of the purchase price and the repayment of debt associated with 1997
Purchased Companies acquired during the nine months ended January 25, 1997,
partially offset by $46.9 million used for the repayment of indebtedness,
primarily at the 1997 Purchased Companies acquired during the nine months ended
January 25, 1997.
During fiscal 1997, net cash provided by operating activities was $918,000.
Net cash used in investing activities was $16.7 million, including $7.7 million
for acquisitions, $7.2 million for additions to property and equipment and $1.8
million to pay non-recurring acquisition costs. Net cash provided by financing
activities was $15.8 million, including $59.9 million provided by U.S. Office
Products to fund the cash portion of the purchase price and the repayment of
debt associated with the fiscal 1997 Purchased Companies and the payment of debt
of the Pooled Companies, partially offset by $46.9 million used for the net
repayment of indebtedness, primarily at the fiscal 1997 Purchased Companies.
During 1995, net cash provided by operating activities was $4.8 million. Net
cash used in investing activities was $6.0 million, including $5.4 million for
acquisitions and $881,000 for additions to property and equipment. Net cash
provided by financing activities was $1.2 million, including net proceeds from
the issuance of debt of $2.4 million and $500,000 received from the issuance of
common stock partially offset by payments of indebtedness of $1.5 million.
During 1994, net cash used in operating activities was $268,000. Net cash
used in investing activities was $2.9 million, including $2.1 million for
acquisitions and $630,000 for additions to property and equipment. Net cash
provided by financing activities was $3.2 million, consisting of proceeds from
the issuance of debt of $5.1 million, partially offset by payments of
indebtedness of $2.0 million.
The Company's anticipated capital expenditures budget for the next twelve
months is approximately $3.0 million. The largest items include operational and
financial reporting software, computer hardware and warehouse equipment.
Under the Distribution Agreement, the Company is required, on or prior to
the Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off $83.3 million of
U.S. Office Products' debt, as described under "The Spin-Offs from U.S. Office
Products--Distribution Agreement--Debt". The Company has received a committment
letter for a secured $250.0 million revolving credit facility from NationsBank,
N.A. as administrative agent. NationsBanc Montgomery Securities LLC, one of the
Underwriters and an affiliate of NationsBank, N.A., is the Arranger and
Syndication Agent. The credit facility will terminate five years from the
Distribution Date. Interest on borrowings under the credit facility will accrue
interest at a rate of, at the Company's option, either LIBOR plus 1.00% or the
lender's base rate, plus a margin of 0% to .25% for up to the first 6 months
under the agreement. Thereafter, interest will accrue at a rate of (i) LIBOR
plus a range of .625% to 1.625%, or (ii) the lender's base rate plus a range of
.125% to .250% (depending on the Company's leverage ratio of funded debt to
EBITDA). Indebtedness will be secured by substantially all of the assets of the
Company. The credit facility will be subject to terms and conditions typical of
facilities of such size and will include certain financial covenants. The
Company will borrow under the credit facility to repay the U.S. Office Products'
debt which it is obligated under the Distribution Agreement to repay. The
balance of
45
<PAGE>
the credit facility will be available for working capital, capital expenditures
and acquisitions, subject to the maintenance of required covenants.
School Specialty intends to use the net proceeds from the Offering and the
sale of 250,000 shares of Common Stock to Messrs. Spalding, Vander Zanden and
Pate to repay a portion of the $83.3 million to be borrowed under a $250 million
credit facility to refinance all amounts payable to U.S. Office Products. After
such repayment, approximately $200 million will be available under the credit
facility (subject to compliance with the financial covenants), which may be used
for general corporate purposes, including working capital, and for acquisitions.
On March 6, 1998, School Specialty filed a Registration Statement with the
SEC for the issuance of School Specialty Common Stock in an underwritten public
offering that is expected to close prior to or concurrent with the School
Distribution. The public offering is expected to close prior to or concurrent
with the School Specialty Distribution. The public offering is expected to be
for 2,125,000 shares (plus 318,750 shares subject to the underwriters' option to
purchase shares to cover overallotments). A preliminary prospectus dated May 15,
1998 estimated that the initial public offering price will be between $14.00 and
$16.00 per share. The Company anticipates that its current cash on hand, cash
flow from operations, the net proceeds from the Offering and additional
financing under the bank line of credit will be sufficient to meet the Company's
liquidity requirements for its operation for the next 12 months. However, the
Company intends to pursue acquisitions, which are expected to be funded through
cash, stock or a combination thereof. There can be no assurance that additional
sources of financing will not be required during the next 12 months or
thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been dramatically higher in the first
two quarters of its fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of each school year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
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
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for the year ended December 31, 1995, fiscal 1997 and the first
three quarters of fiscal 1998 (in thousands). The information has been derived
from unaudited consolidated financial statements that in the opinion of
management reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such quarterly information. This
quarterly information is not comparative because of the high degree of
seasonability in School Specialty's business. Revenues and profitability are
significantly higher in the months of May through October, with the most
significant portion of revenue and profit occurring in the months of July
through September. On a fiscal year basis (years ending in April) this six-month
(May through October) period falls in the first two quarters of the fiscal year.
On a calendar year basis, the most profitable three months (July through
September) fall in the third quarter.
46
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
Revenues..................................... $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit................................. 4,960 11,130 20,795 7,840 44,725
Operating income (loss)...................... (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)............................ (3,711) (252) 4,309 (3,713) (3,367)
<CAPTION>
YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit................................. 18,110 19,823 7,664 9,572 55,169
Operating income (loss)...................... 5,197 6,732 (1,520) (688) 9,721
Net income (loss)............................ 1,981 2,692 (1,067) 4,526(1) 8,132
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 24, 1998
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD TOTAL
--------- --------- --------- ---------
Revenues.............................................. $ 87,029 $ 111,460 $ 49,391 $ 247,880
Gross profit.......................................... 26,090 33,619 11,670 71,379
Operating income (loss)............................... 11,872 12,155 (3,647) 20,380
Net income (loss)..................................... 5,804 5,965 (2,934) 8,835
</TABLE>
(1) For the year ended April 26,1997, fourth quarter net income was
increased by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 3 to "Selected Financial Data".
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the years ended December 31, 1994 and 1995 or the
fiscal year ended April 26, 1997.
NEW ACCOUNTING PRONOUNCEMENT
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company intends to
adopt SFAS No. 130 in fiscal 1999.
47
<PAGE>
INDUSTRY OVERVIEW
The school supply market consists of the sale of non-textbook school
supplies, furniture and equipment to school districts, individual schools,
teachers and curriculum specialists who purchase products for school and
classroom use. The Company believes that sales of educational supplies and
equipment (which is defined as educational products sold by dealers for use by
educational institutions or as a supplement to learning outside of the
classroom) to the school supply market is approximately $6.1 billion, with over
$3.6 billion sold to institutions and $2.5 billion sold to consumers.
According to the U.S. Department of Education, in all 50 states, there are
15,996 school districts, 108,577 public and private elementary and secondary
schools, and 3.1 million teachers. School supply procurement decisions are made
at the school district level by administrators and curriculum specialists, at
the school level by principals and at the classroom level by teachers. Some
school supplies are purchased directly from manufacturers while others are
purchased through distributors. The Company believes that there are over 3,400
distributors of school supplies. The majority of these distributors are family-
or employee-owned companies with revenues under $20 million that operate in a
single region. In addition to School Specialty, only two other companies have a
measurable presence in the market, with annual revenues in excess of $130
million. School Specialty believes the demand for timely order fulfillment at
competitive prices, combined with the need to invest in automated inventory
management systems and electronic ordering systems, is accelerating the trend
toward consolidation in the industry.
The volume of school supplies is directly influenced by the size of the
student population. According to the U.S. Department of Education, student
enrollment in grades K-12 began growing in 1986, reaching an all-time peak in
1996 with 51.5 million students (1997 data not yet available). Current
projections by the U.S. Department of Education indicate that student enrollment
will continue to grow to 54.3 million by the year 2006. As a result of these
trends, the U.S. Department of Education projects that expenditures in public
elementary and secondary schools will rise through the year 2007. In current
dollars, expenditures of $272.4 billion in 1997 are projected to increase to
$340.7 billion by the year 2001. These projected increases in expenditures
include a projected increase in total per pupil spending in current dollars from
$5,961 per pupil in 1997 to $7,179 by the year 2001.
48
<PAGE>
BUSINESS
School Specialty is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products. School
Specialty, Inc., a Wisconsin corporation ("Old School") formed in October 1959,
was acquired by U.S. Office Products in May 1996. U.S. Office Products'
Educational Supplies and Products Division also includes Re-Print, which it
acquired in July 1996, and which has been in operation since 1921. The specialty
product lines, Childcraft, Sax Arts & Crafts and Gresswell, were all acquired by
U.S. Office Products in 1997, and have been in operation since 1946, 1945, and
1938, respectively. School Specialty has 1,322 employees in the United States
and the United Kingdom, providing service to all 50 states and the United
Kingdom. School Specialty's principal offices are located at 1000 North
Bluemound Drive, Appleton, Wisconsin 54914, and its telephone number is (920)
734-2756. School Specialty's world wide website is located at
http:\\www.schoolspecialty.com. Information contained in this website is not
deemed to be a part of this Information Statement/Prospectus.
COMPANY STRENGTHS
School Specialty attributes its strong competitive position to the following
key strengths:
LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. School Specialty has
developed a group of strong brand names including School Specialty, Re-Print,
Childcraft, Sax Arts & Crafts and Gresswell. The Company believes its annual
revenues exceed those of its next two largest competitors combined and that its
large size and brand recognition have resulted in significant buying power,
economies of scale and customer loyalty.
BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and, as a result, the Company currently offers over 32,000 SKUs ranging from
classroom supplies to playground equipment. The Company's specialty brands
enrich its general product offering and create opportunities to cross
merchandise its specialty school supplies to the customers of its general lines.
Specialty brands include Childcraft, which sells materials, classroom furniture
and equipment such as library shelving, cubbies, easels, desks and play vehicles
to the early childhood market; Sax Arts & Crafts, which distributes art supplies
such as paint, brushes, paper, ceramics, leather and wood crafts; and Gresswell,
which distributes library-related products including supplies, furniture and
media display and storage in the United Kingdom. School Specialty offers
customers one source for virtually all of their school supply and furniture
needs.
INNOVATIVE TWO-PRONGED DISTRIBUTION. School supply procurement decisions
are made at the district and school levels by administrators and principals, and
at the classroom level by curriculum specialists and teachers. The Company
targets both of these groups, addressing administrative decision makers with a
"top down" approach through its 290 person sales force and School Specialty
Catalog, and targeting teachers and curriculum specialists with a "bottom up"
approach primarily through the 6.3 million Re-Print general supply and catalogs,
Childcraft, Sax Arts & Crafts and Gresswell specialty catalogs mailed each year.
School Specialty utilizes its customer database across its family of catalogs to
maximize their effectiveness and increase the Company's marketing reach.
ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. School Specialty has established a 24-month integration
process in which a transition team is assigned to (i) sell or discontinue
incompatible business units, (ii) reduce the number of SKUs, (iii) eliminate
redundant administrative functions, (iv) integrate the acquired entity's MIS
system, and (v) improve buying power. To date, the Company's integration efforts
have focused on acquired general products companies. The Company intends to
consolidate certain administrative functions at its specialty divisions. The
Company believes that through these processes it can generate significant
economies of scale and rapidly improve the margins of acquired
49
<PAGE>
entities, as well as increase sales by channeling acquired entities' products
through its broad distribution network.
USE OF TECHNOLOGY. The Company believes that through the utilization of
technology in areas such as (i) purchasing and inventory management, (ii)
customer order fulfillment, and (iii) database management, School Specialty is
able to turn inventory more quickly than competitors, offer customers more
convenient and cost effective product ordering methods and conduct more
precisely targeted sales and marketing campaigns.
EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its stockholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.
COMPANY GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the Company
has a limited presence, and (ii) specialty companies focusing on disciplines
such as physical education, science, technology and music. School Specialty
believes it can improve the margins of acquired entities through its efficient
integration process to achieve economies of scale. Although the Company is the
largest distributor in the industry, its share of the $6.1 billion school supply
market is less than 6%, giving the Company substantial growth opportunities.
In furtherance of its acquisition strategy, School Speciality routinely
reviews and conducts investigations of potential acquisitions of school supply
businesses. When School Speciality believes a favorable opportunity exists, it
enters into discussion with the owners of such businesses regarding the
possibility of an acquisition by School Speciality. As of the date of this
Information Statement/Prospectus, School Speciality does not have any agreements
for pending acquisitions and no acquisitions are probable.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 7.0% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase sales by adding sales representatives in
geographic markets in which the Company does not have a significant presence. In
addition, the Company believes that it can further increase sales by cross
merchandising its specialty supplies to its general supplies customers. Lastly,
the Company intends to increase international sales in English-speaking
countries.
PRODUCT LINES
SCHOOL SPECIALTY. The School Specialty Catalog offers a comprehensive
selection of classroom supplies, instructional materials, educational games, art
supplies, school forms (such as reports, planners and academic calendars),
physical education equipment, audio-visual equipment, school furniture, and
indoor and outdoor equipment and is targeted to administrative decision makers.
School Specialty believes it is the largest school furniture resale source in
the United States. School Specialty has been granted exclusive franchises for
certain furniture lines in specific territories and School Specialty enjoys
significant purchasing power in open furniture lines.
50
<PAGE>
The Company's specialty brands offer product lines for specific educational
disciplines.
RE-PRINT. Re-Print offers its customers substantially the same products as
the School Specialty Catalog but focuses on reaching teachers and curriculum
specialists directly through its mail-order catalogs.
CHILDCRAFT. Childcraft distributes early childhood education products and
materials. Childcraft also distributes over 1,000 proprietary or exclusive
products manufactured by its Bird-in-Hand Woodworks subsidiary, including wood
classroom furniture and equipment such as library shelving, cubbies, easels,
desks and play vehicles.
SAX ARTS & CRAFTS. Sax Arts & Crafts is a leading distributor of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts & Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 15 professional
artists to respond to customer questions.
GRESSWELL. Gresswell distributes library-related products in the U.K.
including furniture, and media display and storage. Gresswell's dedicated sales
and design team helps customers plan, design and install library projects using
Computer Assisted Design equipment.
EDUCATION ACCESS. Education Access is a catalog reseller of technology
solutions for the K-12 education market. This product line offers curriculum
software, productivity software, peripherals, networking products, and other
related products. Education Access publishes a 110-page catalog twice a year and
mails interim Technology Flash Updates to the K-12 education market in the
United States.
School Specialty employs merchandising managers who continually review and
update the product lines for each operating division. The merchandising managers
convene customer focus groups and advisory panels to ascertain whether current
offerings are well-received and to anticipate future demand. The merchandising
managers also travel to product fairs and conventions seeking out new product
lines. This annual review process results in an organic reshaping and expansion
of the educational materials being offered by School Specialty.
OPERATIONS
SALES AND MARKETING
School Specialty believes it has developed a substantially different sales
and marketing model from that of traditional school supply and school
furnishings distribution companies in the United States. School Specialty's
strategy is to use its position of owning two distribution platforms with which
it can approach the school market. School Specialty's 290 sales representatives
focus on "top down" selling (through districts, school purchasing authorities
and schools), while School Specialty's Re-Print Division uses the "bottom up"
approach through its direct mail catalog selling directly to teachers. To
further strengthen its position in the market, School Specialty also owns
premier specialty education brands (Childcraft, Sax Arts & Crafts, and
Gresswell) that have the potential to enrich the general product offering
through cross-merchandising.
School Specialty has a broad customer base and no single customer accounted
for more than 2% of sales during fiscal 1997. Schools typically purchase school
supplies and furniture based on an established relationship with relatively few
suppliers. School Specialty establishes and maintains its relationship with its
customers by assigning accounts within a specific geographic territory to a
local area sales representative. Additionally, each account is assigned its
designated inside customer service representative.
School Specialty's customer service representatives call on existing
customers frequently to ascertain and fulfill their school supply needs. The
representatives maintain contact with customers throughout the order cycle and
assist in processing orders.
51
<PAGE>
School Specialty's primary compensation program for sales representatives is
based on commissions as a percentage of gross profit on sales. For new and
transitioning sales representatives, School Specialty offers salary and expense
reimbursement until the representative is moved to a full commission
compensation structure.
School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft, Gresswell, and Sax Arts &
Crafts lines. The catalog distribution calendar is generally the same across all
product lines. A major catalog containing all product offerings is distributed
toward the end of the calendar year so that it is available for school buyers at
the beginning of the year. During the year, various catalog supplements are
distributed to coincide with the peak school buying season in June through
September and following the return of students to school in the fall.
The approximate number of catalogs distributed for School Specialty,
Re-Print, Childcraft, Gresswell and Sax Arts & Crafts for each of the past three
calendar years and projected catalog distribution for 1998 is set out below. The
figures set forth below include all books of over 32 pages sent out (or, with
respect to 1998, expected to be sent out) during the calendar year but do not
include catalogs that were distributed by discontinued operations.
<TABLE>
<CAPTION>
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
School Specialty Catalog............................... 115,000 296,750 450,750 600,000
Re-Print............................................... 998,000 1,175,000 2,275,000 3,400,000
Childcraft............................................. 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell.............................................. 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts...................................... 750,000 823,000 1,043,500 1,064,000
--------- --------- --------- ---------
Total.............................................. 3,546,000 3,782,750 5,259,250 6,942,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes an extra catalog published against a competitive launch.
Pricing for School Specialty's general and specialty product offerings
varies by product and channel of distribution. The Company generally offers a
negotiated discount from catalog prices for supplies and responds to quote and
bid requests for furniture and equipment. In addition, local sales
representatives work with the Company's corporate sales force and school supply
buyers to achieve an acceptable pricing structure based upon the mix of products
being procured.
School Specialty distributes products through its distribution centers as
well as placing customer orders directly with School Specialty's suppliers.
Furniture is generally shipped directly from the manufacturer to the user,
bypassing School Specialty's distribution centers.
PURCHASING AND INVENTORY MANAGEMENT
School Specialty manages its inventory by continually reviewing daily
inventory levels compared to a running 90-day inventory for the previous year,
adjusted for incoming orders. School Specialty constantly refines the focus of
inventory products through its automated inventory management system to pursue
the optimum level of scope and depth of product offered. Every item in each of
the various distribution regions is forecasted on a daily basis to account for
the anticipated demand curve, current order activity, and available stock as
well as the expected lead time from the supplier. The forecast allows inventory
purchases to respond quickly to the high seasonal demand while keeping
off-season inventory to a minimum. The information systems for all of School
Specialty's distribution centers are interconnected to allow transfer of
inventory between facilities to fill regional demand. In addition, all orders
can be redirected to the distribution center which is the primary stocking
location for a product. School Specialty's inventory management results in
inventory turnover that management believes is higher than industry
52
<PAGE>
turnover rates and reduces the level of discontinued, excess and obsolete
inventory compared to businesses acquired by School Specialty.
School Specialty believes its large size enhances its purchasing power with
suppliers and results in lower product costs than most of the Company's
competitors. Further, School Specialty believes it can leverage this purchasing
power to acquired companies in the future to improve the operating margins for
both general supply and specialty businesses. The Company also believes its
purchasing power for general supplies should result in improved margins for its
specialty businesses.
Market surveys by Krebs and Company have shown that the primary determinants
of customer satisfaction in the educational supply industry are the completeness
and accuracy of shipments received and the timeliness of delivery. School
Specialty continues to invest in sophisticated computer systems to automate the
order taking, inventory allocation and management, and order shipment processes.
As a result, School Specialty has been able to provide superior order
fulfillment to its customers. In addition, School Specialty has developed OMS,
which allows schools to customize their orders and enter them electronically
with School Specialty and provides historical usage reports to schools useful
for their budgeting process. During the academic year, School Specialty seeks to
fill orders within twenty-four hours of receipt of the order at a 95.0% fill
rate and a 99.5% order accuracy rate. During the summer months, School Specialty
shifts to a production environment and schedules shipments to coincide with the
start of the school year. During the summer months, School Specialty's
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. In the
aggregate, School Specialty's order fill rate for June, July and August 1997
exceeded 97.0%. The Company defines "fill rate" as the percentage of line items
in a customer's order that are initially shipped to the customer in response to
the order by the requested ship date.
During the peak shipping season between June 1 and September 30, each of
School Specialty's distribution centers contracts with local common carriers to
deliver its product to schools and school warehouses. Re-Print and Sax Arts &
Craft rely on carriers such as Roadway Package Service, United Parcel Service
and the U.S. Postal Service for distribution to customers.
INFORMATION SYSTEMS
The Company believes that through the utilization of technology in areas
such as (i) purchasing and inventory management, (ii) customer order fulfillment
and (iii) database management, School Specialty is able to turn inventory more
quickly than competitors, offer customers more convenient and cost effective
product ordering methods and conduct more precisely targeted sales and marketing
campaigns. School Specialty uses two principal information systems, one for its
general distribution and another for its specialty market distribution. In
general school supply distribution, School Specialty utilizes a specialized
distribution software package used primarily by office products and paper
distributors. The software offers a fully integrated process from sales order
entry through customer invoicing, and inventory requirements planning through
accounts payable. School Specialty's system provides information through daily
automatic posting to the general ledger and integrated inventory control. School
Specialty has made numerous enhancements to this process that allow greater
flexibility in addressing seasonal requirements of the industry and meeting
specific customer needs.
The specialty divisions are moving towards a common mail order system
provided by Smith-Gardner & Associates. The Mail-order and Catalog System
("MACS") meets the unique needs of the direct marketing approach with extensive
list management and tracking of multiple marketing efforts. The system provides
complete and integrated order processing, inventory control, warehouse
management, and financial applications.
Although School Specialty has two principal information systems, these
systems integrate general ledger, purchasing and inventory management functions.
The software and hardware allow for continued incremental growth as well as the
opportunity to integrate new client-server and other technologies into
53
<PAGE>
the information systems. Currently, all acquired School Specialty general
distribution companies (except one acquired in December 1997) are on the same
computer system. The specialty businesses and Re-Print operate on different
systems but intend to implement the common MACS system. School Specialty intends
to continue to use two principal information systems in its business.
YEAR 2000 COMPLIANCE
School Specialty's current information systems, as well as those being
considered for acquisition by School Specialty's mail order and specialty
distribution divisions, currently meet information standards for Year 2000
compliance. School Specialty does not expect that it will incur any material
costs and expenses related to bringing its information systems to Year 2000
compliance. See "Risk Factors--Dependence on Systems".
COMPETITION
School Specialty operates in a highly competitive environment. The Company's
principal competitors are other national and regional school supply distribution
companies. School Specialty is also faced with increasing competition from
non-traditional alternate channel competitors, such as office products contract
stationers and superstores. Among traditional school supply distributors, School
Specialty believes that there are only two other companies with sales in excess
of $130 million: Beckley-Cardy and the J.L. Hammett Co. School Specialty
believes that it competes favorably with these companies on the basis of service
and price.
The market is highly competitive on a regional basis, but School Specialty
believes its heaviest competition is coming from alternate channel competitors
such as office product contract stationers and superstores. Their primary
advantages over School Specialty are size, location, greater financial resources
and buying power. Their primary disadvantage is that their product mix covers
only 15% to 20% of the school's needs (measured by volume). In addition, the
Company's competitors do not offer special order fulfillment software, which
School Specialty believes is increasingly important to adequately service school
needs. School Specialty believes it competes favorably with these companies on
the basis of service and product offering.
EMPLOYEES
As of December 31, 1997, School Specialty had 1,322 full-time employees, 266
of whom were employed primarily in management and administration, 430 in
regional warehouse and distribution operations, and 626 in marketing, sales,
order processing, and customer service. To meet the seasonal demands of its
customers, School Specialty employs many seasonal employees during the late
spring and summer seasons. Historically, School Specialty has been able to meet
its requirements for seasonal employment. As of January 12, 1998, approximately
27 of School Specialty's employees were members of the Teamsters Labor Union at
Sax Arts & Crafts' New Berlin, Wisconsin facility. School Specialty considers
its relations with its employees to be very good.
FACILITIES
School Specialty's corporate headquarters are located at 1000 North
Bluemound Drive, Appleton, Wisconsin, a combined office and warehouse facility
of approximately 120,000 square feet. School
54
<PAGE>
Specialty's lease on the Appleton headquarters expires on December 31, 2001.
School Specialty leases or owns the following distribution facilities:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/ LEASE
LOCATIONS FOOTAGE LEASED EXPIRATION
- -------------------------------------------------- ------------- ----------- -----------------
<S> <C> <C> <C>
Agawam, Massachusetts............................. 163,300 Owned --
Bethlehem, Pennsylvania........................... 25,600 Leased February 28, 1999
Birmingham, Alabama............................... 180,365 Leased November 20, 2006
Bowling Green, Kentucky........................... 42,000 Leased June 30, 2001
Cary, Illinois.................................... 75,767 Owned --
Enfield, London, England.......................... 8,000 Owned --
Fresno, California................................ 18,480 Leased December 31, 2001
Hoddesdon, London, England........................ 10,000 Leased September 1999
Hoddesdon, London, England........................ 10,000 Leased September 2015
Lancaster, Pennsylvania........................... 75,434 Leased December 31, 2002
Lancaster, Pennsylvania........................... 165,750 Leased February 28, 1999
Mt. Laurel, New Jersey............................ 48,000 Leased May 31, 2001
New Berlin, Wisconsin............................. 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma........................... 37,340 Leased July 16, 2001
Pollocksville, North Carolina..................... 84,071 Owned --
Portland, Oregon.................................. 30,456 Leased May 31, 2001
Salina, Kansas.................................... 123,000 Owned --
</TABLE>
The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition,
School Specialty has ten sales offices throughout the United States.
School Specialty believes that its properties are adequate to support its
operations for the foreseeable future. School Specialty reviews on a regular
basis the consolidation of its facilities.
55
<PAGE>
MANAGEMENT OF SCHOOL SPECIALTY
DIRECTORS AND EXECUTIVE OFFICERS
Following the School Specialty Distribution, it is anticipated that the
directors and executive officers of School Specialty will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Daniel P. Spalding........................ 43 Chairman of the Board and Chief Executive
Officer
David J. Vander Zanden.................... 43 President, Chief Operating Officer, and
Director*
Donald J. Noskowiak....................... 40 Executive Vice President and Chief
Financial Officer
Douglas Moskonas.......................... 53 Executive Vice President for School
Specialty Divisions
Melvin D. Hilbrown........................ 50 Executive Vice President for Gresswell
Richard H. Nagel.......................... 57 Executive Vice President for Sax Arts &
Crafts
Donald Ray Pate, Jr....................... 35 Executive Vice President for Re-Print
Ronald E. Suchodolski..................... 52 Executive Vice President for Childcraft
Michael J. Killoren....................... 41 Vice President for School Specialty
Divisions
Lillian R. Kellogg........................ 45 President for Education Access Division
Jonathan J. Ledecky....................... 40 Director*
Leo C. McKenna............................ 64 Director*
Rochelle Lamm Wallach..................... 50 Director*
</TABLE>
- ------------------------
* Messrs. Vander Zanden, Ledecky and McKenna and Ms. Wallach will join the Board
of Directors of School Specialty prior to the issuance of the shares offered in
the Offering.
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. Mr. Spalding has served as President of
the Educational Supplies and Products Division of U.S. Office Products since
1996. Prior to that time, he served as President, Chief Executive Officer, and a
director of Old School since 1988. Prior to 1988, Mr. Spalding was an officer of
JanSport, a manufacturer of sports apparel and backpacking equipment. Mr.
Spalding was a co-founder of JanSport, and served as President and Chief
Executive Officer from 1977 to 1984. Mr. Spalding has been a director of the
National School Supply and Equipment Association since 1992 and completed his
term as the association's Chairman in November 1997. Mr. Spalding is Michael J.
Killoren's cousin.
DAVID J. VANDER ZANDEN became the Chief Operating Officer of School
Specialty in March 1998. Prior to that time, he served as President of Ariens
Company since 1992, a manufacturer of outdoor lawn and garden equipment.
DONALD J. NOSKOWIAK has served as Chief Financial Officer of School
Specialty since 1997. In February 1998, Mr. Noskowiak became an Executive Vice
President of School Specialty. He was Vice President, Treasurer and Principal
Financial Officer of Old School since 1994. From 1992 through 1994 he was the
Corporate Controller of Old School.
DOUGLAS MOSKONAS joined Old School in 1993 as Vice President of Sales for
the Valley Division. Since that time he has served as General Manager for the
Valley Division from 1994 through 1996 and was appointed President of School
Specialty Distribution in 1997. Prior to joining School Specialty, Mr. Moskonas
served as Vice President of Sales for Emmons-Napp Office Products from 1979
through 1993. As of the School Specialty Distribution, Mr. Moskonas is expected
to be elected an Executive Vice President of School Specialty for School
Specialty Divisions.
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MELVIN D. HILBROWN joined School Specialty as Managing Director of Gresswell
with School Specialty's acquisition of Don Gresswell, Ltd. in 1997. He has been
Managing Director of Gresswell since 1989. As of the School Specialty
Distribution, Mr. Hilbrown is expected to be elected an Executive Vice President
of School Specialty for Greswell.
RICHARD H. NAGEL joined School Specialty with the acquisition of Sax Arts &
Crafts in 1997 and serves as President of Sax Arts & Crafts. Mr. Nagel has been
with Sax Arts & Crafts since 1975 when he was hired as Assistant General
Manager. He was named President of Sax Arts & Crafts in 1990. As of the School
Specialty Distribution, Mr. Nagel is expected to be elected an Executive Vice
President of School Specialty for Sax Arts & Crafts.
DONALD RAY PATE, JR. joined School Specialty with the acquisition of
Re-Print in 1996 and serves as President of Re-Print. Mr. Pate has served as
President of Re-Print since he acquired it in 1988. As of the School Specialty
Distribution, Mr. Pate is expected to be elected an Executive Vice President of
School Specialty for Re-Print.
RONALD E. SUCHODOLSKI joined School Specialty with the acquisition of
Childcraft in 1997 and serves as President of Childcraft. Mr. Suchodolski has
been President of Childcraft since 1995 and was Director of Childcraft's School
Division from 1984 through 1989. From 1989 to 1993, Mr. Suchodolski was
President of the Judy/Instructo Division of Paramount, and from 1993 through
1995 Mr. Suchodolski served as Senior Vice President of Sales and Marketing for
Paramount Publishing's Supplementary Materials Division. As of the School
Specialty Distribution, Mr. Suchodolski is expected to be elected an Executive
Vice President of School Specialty for Childcraft.
MICHAEL J. KILLOREN has served as Chief Operating Officer of School
Specialty Distribution since 1997. From 1992 to 1997, he was Vice
President/Operations of School Specialty. Mr. Killoren is Daniel P. Spalding's
cousin. As of the School Specialty Distribution, Mr. Killoren is expected to be
elected an Vice President of School Specialty for School Speciality Divisions.
LILLIAN R. KELLOGG joined the Company with the acquisition of Education
Access in March 1998 and serves as President of the Company's Education Access
Division. Ms. Kellogg previously served as Executive Vice President of Education
Access, Inc. from March 1997 to March 1998 and as President of Computer Plus,
Inc. from March 1984 to March 1997. On January 19, 1998, Education Access, Inc.
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company acquired substantially all of the assets of its catalog
division on March 20, 1998.
JONATHAN J. LEDECKY will serve as a director and an employee of School
Specialty and each of the other Spin-Off Companies. He founded Consolidation
Capital Corporation in February 1997 and serves as its Chairman and Chief
Executive Officer. Mr. Ledecky founded U.S. Office Products in October 1994 and
will serve as its Chairman of the Board until the Distribution Date and served
as its Chief Executive Officer until November 5, 1997. Mr. Ledecky has also
served as the Non-Executive Chairman of the Board of USA Floral Products, Inc.
since April 1997 and as a director of UniCapital Corporation since October 1997.
Mr. Ledecky served from 1989 to 1991 as the President of The Legacy Fund, Inc.,
and from 1991 to September 1994 as President and Chief Executive Officer of
Legacy Dealer Capital Fund, Inc., a wholly-owned subsidiary of Steelcase Inc.
Prior to his tenure at The Legacy Fund, Inc., Mr. Ledecky was a partner at Adler
and Company and a Senior Vice President at Allied Capital Corporation, an
investment management company.
LEO C. MCKENNA is a self-employed financial consultant working with personal
asset management, corporate planning, acquisitions, merger studies, and
negotiations. Mr. McKenna is currently a Member of the Board of Life Insurance
Company of Boston and New York (Subsidiary of Boston Mutual Life). He is founder
and a director of Ledyard National Bank, where he also serves on the Audit
Committee. He is also a director of Rosenthal, A.G. USA. He is a director and
member of the John Brown Cook Foundation and
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an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.
ROCHELLE LAMM WALLACH was associated with Strong Advisory Services, a
division of Strong Capital Management, as its President from 1995 to March,
1998. Prior to that time, she was Chief Operating Officer of AAL Capital
Management, a mutual fund manager which she founded in 1986.
The Company intends to name two additional independent directors after the
completion of the Offering.
COMMITTEES OF THE BOARD
The School Specialty Board will create an Audit Committee effective
immediately prior to the issuance of shares in the Offering. The Audit Committee
is charged with reviewing School Specialty's annual audit and meeting with
School Specialty's independent accountants to review School Specialty's internal
controls and financial management practices.
The School Specialty Board will create a Compensation Committee effective
immediately prior to the issuance of shares in the Offering. The Compensation
Committee is charged with determining the compensation of executive officers of
School Specialty and administering any stock option plan School Specialty may
adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by School Specialty for services rendered during the years ended April 26,
1997 and April 25, 1998 to the Chief Executive Officer and to each of the four
other most highly compensated officers of School Specialty (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG TERM
--------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(1) COMPENSATION
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding.................................. 1997 $ 178,846 -- -- --
Chairman of the Board, CEO and Director 1998 212,104 $ 34,200 150,000 --
Ronald E. Suchodolski(2)............................ 1997 $ 141,535 $ 30,000 -- --
President, Childcraft 1998 157,646 62,633 20,000 --
Richard H. Nagel(2)(3).............................. 1997 $ 118,000 $ 29,500 -- $ 32,000
President, Sax Arts & Crafts 1998 130,660 29,500 20,000 --
Donald Ray Pate, Jr.(2)............................. 1997 $ 220,901 -- -- --
President, Re-Print 1998 117,000 -- --
Douglas Moskonas.................................... 1997 $ 97,266 $ 44,500 15,000 --
President, School Specialty Division 1998 139,525 -- 20,000 --
</TABLE>
- ------------------------
(1) The number of U.S. Office Products Options will be adjusted as described
under "--Replacement of Outstanding U.S. Office Products' Options."
(2) Mr. Suchodolski, Mr. Nagel and Mr. Pate joined School Specialty in May 1997,
July 1997 and July 1996, respectively. The compensation information included
in this table reflects the compensation received when employed by
predecessor companies.
(3) Other compensation refers to Mr. Nagel's automobile allowance and stay-bonus
compensation received by his prior employer.
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<PAGE>
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire School Specialty Common Stock in connection
with the School Specialty Distribution. See "--Replacement of Outstanding U.S.
Office Products' Options." Upon consummation of the School Specialty
Distribution, the number of School Specialty Options granted to officers,
directors and employees of the Company in respect of U.S. Office Products
Options and their exercise price will be determined according to the formula set
by U.S. Office Products.
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 25, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(1)(2) FISCAL YEAR(3) PRICE(2) DATE 5% 10%
- -------------------------------------- ------------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding.................... 150,000 52.7% $ 15.17 4/28/07 $1,431,049 $3,626,561
Ronald E. Suchodolski................. 20,000 7.0% 18.00 12/12/07 226,400 573,600
Richard H. Nagel...................... 20,000 7.0% 18.00 12/12/07 226,400 573,600
Donald Ray Pate, Jr................... -- -- -- -- -- --
Douglas Moskonas...................... 20,000 7.0% 18.00 12/12/07 226,400 573,600
</TABLE>
- ------------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant, beginning one year from the date
of grant in cumulative yearly amounts of 25% of the shares and expire ten
years from the date of grant. The options become fully exercisable upon a
change in control, as defined in the Incentive Plan.
(2) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of School Specialty Common Stock in the Offering
Trading Price of U.S. Office Products' Common
Stock Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
Initial Public Offering Price of
School Specialty Common Stock in
the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events, such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the School Specialty
Distribution and the exercise price of such option. The intrinsic value of
the School Specialty Options will be no greater than the intrinsic value of
the U.S. Office Products Options before the Distributions, and the ratio of
exercise price to market price will be not less than the ratio before the
Distributions.
(3) Total options granted refers to options to acquire U.S. Office Products
Common Stock given to all employees of the Educational Supplies and Products
Division of U.S. Office Products during fiscal 1998.
(4) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998 AND FISCAL YEAR
END 1998 OPTION VALUES.
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. All options were granted
by U.S. Office Products as options to acquire U.S. Office Products Common Stock
and are expected to be replaced with options to acquire shares of School
Specialty Common Stock in connection with the Distribution. See "--Replacement
of Outstanding U.S.
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<PAGE>
Office Products Options." Upon consummation of the School Specialty
Distribution, the number of School Specialty Options granted to officers,
directors and employees of the Company in respect of U.S. Office Products
Options and their exercise prices will be determined according to the formula
set by U.S. Office Products.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998
AND FISCAL YEAR ENDED 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER UNEXERCISED
OPTIONS VALUE OF UNEXERCISED IN-THE-
HELD AT APRIL 25, 1998(#)(1) MONEY (3) OPTIONS AT FISCAL
SHARES YEAR END($)(1)(3)(4)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding................... -- $ -- -- 150,000 $ -- $ 63,938
Ronald E. Suchodolski................ -- -- -- 20,000 -- --
Richard H. Nagel..................... -- -- -- 20,000 -- --
Donald Ray Pate, Jr.................. -- -- -- -- -- --
Douglas Moskonas..................... -- -- -- 35,000 -- --
</TABLE>
- ------------------------
(1) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of School Specialty Common Stock in the Offering
Trading Price of U.S. Office Products' Common
Stock Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
Initial Public Offering Price of
School Specialty Common Stock in
the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Speciality Distribution" will be the average closing price of
U.S. Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of the business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the School Specialty
Distribution and the exercise price of such option. The intrinsic value of
the adjusted options will be no greater than the intrinsic value of the
options before the Distributions and the ratio of exercise price to market
price will be not less than the ratio before the Distributions.
(2) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of U.S. Office
Products Common Stock on the date of exercise.
(3) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(4) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products' Common Stock at April 24, 1998.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS' OPTIONS
All or substantially all vested and unvested options ("U.S. Office Products
Options") to acquire U.S. Office Products' Common Stock that are held by School
Specialty employees on the Distribution Date will be replaced with School
Specialty Options. As of the Distribution Date, 492,833 U.S. Office Products
Options were held by employees of School Specialty. The exercise price and
number of School Specialty Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products' common
stock around the time of the Distributions and the public offering price of the
Company Common Stock in the Offering. For those reasons, the number of School
Specialty Options into which the U.S. Office Products Options will convert is
not yet determinable. The following formulas will be used to adjust the number
and exercise price of U.S. Office Products Options. Such formulas will adjust
solely for
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<PAGE>
the Distributions and not for other events such as the Tender Offer. The
formulas will not affect when the options vest or when employees can exercise
the options.
The exercise price of U.S. Office Products Options will be adjusted by
applying the following formulas:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price of
School Specialty Common Stock in
the Offering
Trading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products'
Common Stock Pre-School Specialty
Distribution
Initial Public Offering Price of
School Specialty Common Stock in the
Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products' common stock for the lesser of (a) ten business days preceding
the Distributions, or (b) the business days falling between the expiration of
the Tender Offer and the completion of the Distributions. The foregoing formula
adjustments are intended to preserve for the holder of U.S. Office Products
Options the intrinsic value per option, measured as the difference between the
market value of one share of U.S. Office Products Common Stock at the time of
the School Special Distribution and the exercise price of such option. The
intrinsic value of the adjusted options will be no greater than the intrinsic
value of the options immediately before the Distribution and the ratio of
exercise price to market price will be not less than the ratio immediately
before the Distributions.
1998 STOCK INCENTIVE PLAN
The Company expects to adopt the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company to attract, retain and reward highly motivated and qualified
employees. The maximum percentage of shares of Company Common Stock that may be
issued with respect to awards granted under the Plan is 20% of the outstanding
Common Stock of the Company determined immediately after the grant of the award.
The maximum number of shares that may be issued with respect to awards granted
under the Plan to an individual in a calendar year may not exceed 1.2 million
shares. The Plan will be administered by the Compensation Committee of the Board
of Directors. All employees of the Company and its subsidiaries, as well as
non-employee directors of the Company, are eligible to receive awards under the
Plan. The Plan authorizes the Compensation Committee to make awards of stock
options, restricted stock, and other stock-based awards. The Compensation
Committee will determine the prices (which may not be less than the fair market
value on the date of award), vesting schedules, expiration dates and other
material conditions under which such awards may be exercised.
Mr. Ledecky will receive a stock option for Company Common Stock from School
Specialty, pursuant to the Plan, as of the Distribution Date. The option is
intended to compensate Mr. Ledecky for his services to School Specialty as an
employee. The option will cover 7.5% of the outstanding Company Common Stock
determined as of the Distribution Date, without regard to the Offering. The
option will have a per share exercise price equal to the initial public offering
price of the Company Common Stock. The estimated value of this option depends
upon the initial public offering price of the School Specialty Common Stock.
Based on an assumed initial public offering price of $15 (which is equal to the
mid-point of the price range set forth in the preliminary prospectus for the
Offering) at an assumed trading volatility of 35.0%, the estimated value of the
option is $2.5 million, net of taxes at an assumed 40% rate. It is expected that
Mr. Ledecky's option will become fully vested when granted but will not be
exercisable until the 12-month anniversary of the Distribution Date. Mr.
Ledecky's option from the Company will be exercisable immediately if Mr. Ledecky
dies before the option expires or, if and to the extent that, School Specialty
accelerates the exercise schedule of options for substantially all management
options. All
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<PAGE>
unexercised portions of the option will expire ten years after its date of grant
or, if applicable, as of the date Mr. Ledecky violates his non-competition
agreement with School Specialty.
The Company expects that Daniel P. Spalding will also receive an option (the
"Spalding Option") pursuant to the Plan for 1.9% of the outstanding Common Stock
as of the Distribution Date. The Spalding Option is anticipated to have the same
terms as Mr. Ledecky's option, including an exercise price equal to the initial
public offering price of the Common Stock. The estimated value of this option
depends upon the initial public offering price of the School Specialty Common
Stock. Based on an assumed initial public offering price of $15 (which is equal
to the mid-point of the price range set forth in the preliminary prospectus for
the Offering) at an assumed trading volatility of 35.0%, the estimated value of
the option is $0.6 million, net of taxes at an assumed 40% rate. In addition,
management currently expects to recommend option grants to certain executive
officers of the Company for approximately 5.6% of the Common Stock concurrent
with or following the Offering and the School Specialty Distribution, also at an
exercise price equal to the initial public offering price.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
School Specialty expects to grant non-employee directors 15,000 options to
purchase School Specialty Common Stock upon their initial election as members of
the Board of Directors and thereafter, options to acquire 5,000 shares for each
additional year of service. Non-employee directors will be paid an annual
retainer of $20,000 and $1,000 for each additional special meeting attended and
will also be reimbursed for all out-of-pocket expenses related to their service
as directors.
Jonathan J. Ledecky entered into a services agreement, as amended (the
"Ledecky Services Agreement") with U.S. Office Products on January 13, 1998,
effective on the Distribution Date and contingent on the consummation of the
Distributions, which agreement is expected to be amended as of June 5, 1998. The
Ledecky Services Agreement will expire on September 30, 1998 if none of the
Distributions has occurred by that date. If the Ledecky Services Agreement
becomes effective, it will replace his employment agreement with U.S. Office
Products, as amended November 4, 1997. The principal terms of this agreement, as
amended, are summarized herein.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products' Board and will provide high-level
acquisition negotiation services and strategic business advice. Under the
agreement, Mr. Ledecky will remain an employee of U.S. Office Products, at an
annual salary of $48,000 through June 30, 2001. As a continuing employee of U.S.
Office Products, Mr. Ledecky will also retain his existing U.S. Office Products'
Options despite his reduction in services to U.S. Office Products. U.S. Office
Products can terminate Mr. Ledecky's employment only for "cause" where cause
consists of (i) his conviction of or guilty or nolo contendere plea to a felony
demonstrably and materially injurious to U.S. Office Products or (ii) his
violation of the noncompetition provision as it relates to U.S. Office Products.
If Mr. Ledecky resigns or is terminated, he will cease to vest in his U.S.
Office Products Options and will have 90 days to exercise any vested options.
The Company will enter into an employment agreement with Mr. Ledecky,
effective as of June 10, 1998 that implements its assigned portion of the
Ledecky Services Agreement. Under the employment agreement, Mr. Ledecky will
report to the Board of Directors and senior management of the Company. In such
capacity, Mr. Ledecky will provide high-level acquisition negotiation services
and strategic business advice. The Company can require Mr. Ledecky's performance
of such services, consistent with his other contractual obligations to
Consolidation Capital Corporation, U.S. Office Products and the other Spin-Off
Companies. As an employee, Mr. Ledecky will also be subject to the generally
applicable personnel policies of the Company and will be eligible for such
benefit plans in accordance with their terms. The Company will pay Mr. Ledecky
an annual salary of $48,000, for up to two years. The Company may terminate Mr.
Ledecky's employment with "cause" (as defined as in the Ledecky Services
Agreement).
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<PAGE>
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the end of a specified
restricted period, which, for School Specialty, means the later of June 10, 2000
or one year after Mr. Ledecky leaves School Specialty's employ. These provisions
generally restrict Mr. Ledecky from, among other things, investing in or working
for or on behalf of any business selling any products or services in direct
competition with U.S. Office Products or the Spin-Off Companies (collectively,
the "U.S. Office Products Companies"), within 100 miles of any location where
the relevant U.S. Office Products Company regularly maintains an office. (For
this purpose, "products or services" are those that U.S. Office Products offered
on January 13, 1998.) Notwithstanding this prohibition, Mr. Ledecky may serve in
a policy making role (but not engage in direct personal competition) with
respect to the following businesses: (i) certain businesses acquired by
Consolidation Capital Corporation that are directly competitive with Aztec
Technology Partners, Inc. if those businesses (A) relate to computer
installation and servicing, (B) information technology, or (C)
telecommunications, and if, when acquired, the businesses met certain revenue
limits and had their principal place of business in the same metropolitan area
as that of the acquiring electrical contracting and services business; (ii)
businesses selling, supplying, or distributing janitorial or sanitary products
or services; (iii) businesses managing or servicing office equipment (other than
computers); (iv) businesses providing internet access services; (v) UniCapital
Corporation's leasing businesses (which include equipment leasing); or (vi) U.S.
Marketing Services' shelf stocking and merchandising and point-of-purchase
display creation businesses. The Ledecky Services Agreement prohibits Mr.
Ledecky from trying to hire away managerial employees of the U.S. Office
Products Companies or from calling upon customers of the U.S. Office Products
Companies to solicit or sell products or services in direct competition with the
U.S. Office Products Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by the U.S. Office Products Companies. U.S. Office Products will assign
to the Company the ability to enforce the non-competition provisions described
above as to its own business without regard to the offering, which will then
constitute part of Mr. Ledecky's employment agreement with the Company.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
School Specialty has entered into employment agreements with the following
three of its Named Officers that will continue after the School Specialty
Distribution: Daniel P. Spalding (Chairman and Chief Executive Officer), Donald
Ray Pate, Jr. (Executive Vice President and President of Re-Print), and Richard
H. Nagel (Executive Vice President and President of Sax Arts & Crafts). After
the School Specialty Distribution, the Company intends to enter into an
employment agreement with David J. Vander Zanden who became President and Chief
Operating Officer of the Company in March 1998.
Daniel P. Spalding, Chief Executive Officer of School Specialty, entered
into an employment contract with Old School on April 29, 1996. The contract has
an initial term of four years but, unless terminated, is automatically extended
at the end of each of the last three years of the initial term for another year.
Mr. Spalding receives a base salary of at least $180,000 and participates in an
incentive bonus plan which provides for an annual bonus up to 100% of base
salary upon the attainment of profit and revenue objectives. Following the
termination of his employment for any reason, Mr. Spalding has agreed not to
compete with School Specialty for a period equal to the longer of two years or,
in the case of early termination, the years remaining on his contract. If Mr.
Spalding is terminated without cause, as defined in the contract, he is entitled
to his entire base salary for the years remaining on the contract. In addition,
Mr. Spalding may terminate his contract for good cause (e.g., a material adverse
change in his position or responsibilities or any material breach on the part of
School Specialty) or within five days of a change in control of School
Specialty. The contract defines a change of control to mean: (i) the acquisition
of beneficial ownership of 50% or more of voting securities of School Specialty
by any person other than U.S. Office Products; (ii) a loss of majority status by
the combination of members of U.S. Office Products' Board at the time of its
initial public offering and any Board members installed by a two-thirds vote of
the then-present initial Directors or any Directors subsequently installed by
them; (iii) any reorganization of
63
<PAGE>
U.S. Office Products unless 75% of the beneficial ownership of U.S. Office
Products voting securities remains in the same hands; or (iv) U.S. Office
Products or more than 49% of its assets are liquidated. Following the completion
of the Offering, the Company expects to enter into an amendment to Mr.
Spalding's agreement in respect of the change of control provisions to reflect
the Company's public status.
Donald Ray Pate, Jr., serves as President of Re-Print and entered into an
employment contract with Re-Print on July 26, 1996 to serve as its President.
The contract runs for four years but provides for two automatic one-year
extensions unless Re-Print gives 60 days written notice of its intent not to
renew. Mr. Pate's annual base salary is $125,000, and he participates in an
executive compensation program developed by U.S. Office Products. Following the
termination of his employment for any reason, Mr. Pate has agreed not to compete
with Re-Print for the longer of two years or until the end of the contractual
term. If Mr. Pate is terminated without cause, he is entitled to receive his
base salary for three months or until the end of the initial contractual term,
whichever period is greater.
Richard H. Nagel, President of Sax Arts & Crafts, entered into a four-year
employment contract with Sax Arts & Crafts on June 27, 1997 to serve as its
President. Mr. Nagel's annual base salary is at least $125,000, and he
participates in School Specialty's management bonus program. Following the
termination of his employment for any reason, Mr. Nagel has agreed not to
compete with Sax Arts & Crafts for one year. If Mr. Nagel is terminated without
cause, he is entitled to receive his base salary for one year or until the end
of the contractual term, whichever period is lesser.
David J. Vander Zanden became President and Chief Operating Officer in March
1998. After the School Specialty Distribution, School Specialty expects to enter
into an employment contract with Mr. Vander Zanden with an initial term of two
years, with automatic two-year extensions unless School Specialty or Mr. Vander
Zanden gives 90 days written notice of either party's intent not to renew.
School Specialty expects that Mr. Vander Zanden's employment contract will
provide for a base salary of $225,000 and participation in an incentive bonus
plan based upon the attainment of profit and revenue objectives. School
Specialty also expects that Mr. Vander Zanden's employment contract will contain
a covenant not to compete upon termination of the agreement, and provide Mr.
Vander Zanden the right to terminate the agreement upon a change of control in
School Specialty, with change of control to be defined in the agreement. School
Specialty also expects to grant options to Mr. Vander Zanden on or shortly after
the Distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The School Specialty Board will create a Compensation Committee prior to the
Offering. The Compensation Committee will be charged with determining the
compensation of all executive officers. Until the Compensation Committee of the
School Specialty Board is created, decisions regarding compensation of the
executive officers will be made by the School Specialty Board. No member of the
School Specialty Board has ever been an officer of School Specialty or any of
its subsidiaries, except that Mr. Spalding is the Chief Executive Officer of
School Specialty. In addition, Mr. Ledecky was the Chief Executive Officer of
U.S. Office Products until November 5, 1997 and will be the Chairman of U.S.
Office Products until the Distribution Date.
64
<PAGE>
CERTAIN TRANSACTIONS
On April 29, 1996, U.S. Office Products acquired Old School in a business
combination accounted for under the pooling-of-interests method in which
2,307,693 shares of U.S. Office Products Common Stock were issued as
consideration. Current officers of School Specialty who received shares of U.S.
Office Products Common Stock in the transaction include Daniel P. Spalding
(309,766 shares, and an additional 30,018 through an IRA for his benefit),
Michael J. Killoren (27,018 shares), and Donald J. Noskowiak (27,018 shares). In
addition, John S. Spalding (Daniel P. Spalding's father) received 661 shares and
an additional 60,034 through an IRA for his benefit, the Patricia M. Spalding
Revocable Trust received 70,923 shares, Joanne Lee Killoren received 60,304
shares, Donald Killoren (Michael J. Killoren's father) received 60,778 shares
and Leo C. McKenna received 278,005 shares. The other parties to the foregoing
transactions had no relationship to the Company or U.S. Office Products Company
at the time such transactions were entered into, and accordingly, the Company
believes that these transactions are as favorable as could be negotiated with
third parties.
U.S. Office Products acquired Re-Print on July 26, 1996 in a business
combination accounted for under the pooling-of-interests method in which it
issued 1,950,000 shares of U.S. Office Products Common Stock as consideration.
In that transaction, Donald Ray Pate, Jr., President of Re-Print, received
1,076,028 shares of U.S. Office Products Common Stock for his interest in
Re-Print. Other shareholders related to Mr. Pate who received shares of U.S.
Office Products Common Stock in the merger were Celita Pate Carmichael (30,240
shares), Phillip S. Pate (85,351 shares), Richard K. Pate (73,921 shares), and
Mary K. Pate (116,505 shares). The other parties to the foregoing transactions
had no relationship to the Company or U.S. Office Products Company at the time
such transactions were entered into, and accordingly, the Company believes that
these transactions are as favorable as could be negotiated with third parties.
On March 20, 1998, School Specialty acquired substantially all of the assets
of the catalog division of Education Access, Inc., a debtor in possession under
Chapter 11 of the United States Bankruptcy Code. In this transaction, the
secured creditors of Education Access received all of the consideration paid by
School Specialty. Lillian R. Kellogg, President of School Specialty's Education
Access Division, owns approximately 40% of the capital stock of Education
Access. This transaction was the subject of arm's length negotiation between
School Specialty and the secured creditors of Education Access, Inc.
School Specialty's main office and warehouse facility, a 120,000 square foot
building located in Appleton, Wisconsin, is leased from Bluemound Corporation.
John S. Spalding, a former member of the Board of Old School and the father of
Daniel P. Spalding, Chairman of the Board and Chief Executive Officer of School
Specialty, holds a one-third stake in Bluemound. Donald Killoren, father of
Michael J. Killoren, an officer of School Specialty, also holds a one-third
stake in Bluemound. The lease provides for annual payments of $196,000 through
December 31, 2001. The Company believes that the terms of this transaction are
as favorable as could be negotiated with third parties.
For a discussion of matters related to the spin-off of the Company from U.S.
Office Products, see "The School Specialty Distribution".
For a discussion of transactions between the Company and Mr. Ledecky, see
"Management of School Specialty--Director Compensation and Other Arrangements".
65
<PAGE>
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY
The following table sets forth the number and percentage of School Specialty
Common Stock beneficially owned by the following persons, after giving effect to
the School Specialty Distribution, the Offering and the sale of 250,000 shares
of School Specialty Common Stock to Messrs. Spalding, Vander Zanden and Pate,
based on their beneficial ownership of U.S. Office Products common stock on
April 1, 1998 (assuming that each person (other than Mr. Pate) tendered his pro
rata share of the 37,037,037 shares of U.S. Office Products common stock
tendered for as part of its Strategic Restructuring Plan and that the
Underwriters' overallotment option is not exercised): (i) all persons known by
School Specialty to own beneficially more than 5% of U.S. Office Products Common
Stock, (ii) each director and each Named Officer who is a stockholder, and (iii)
all directors and executive officers as a group. All persons listed below have
sole voting and investment power with respect to their shares, unless otherwise
indicated. Except as otherwise indicated, the business address of each of the
following is 1000 North Bluemound Drive, Appleton, Wisconsin 54914.
<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------------ ------------------------------
PERCENT OF PERCENT OF
NUMBER OF SHARES NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
- -------------------------------------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Daniel P. Spalding...................................... 17,248(1) * 150,581 1.0%
Ronald Suchodolski......................................
Jonathan J. Ledecky..................................... 209,089(2) 1.7% 209,089 1.4
Richard H. Nagel........................................
Donald Ray Pate, Jr..................................... 92,657(3) * 159,324 1.1
Douglas Moskonas........................................ 646(1) * 646 *
Leo C. McKenna.......................................... 1,127 * 1,127 *
David J. Vander Zanden..................................
Rochelle Lamm Wallach...................................
All current executive officers
and directors as a group (13 persons)................. 323,444 2.6 573,444 2.5
5% STOCKHOLDERS
FMR Corp.(4)............................................ 1,356,629 11.0 1,356,629 9.2
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(4)............. 711,526 5.8 111,526 4.9
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Does not include shares underlying U.S. Office Products Options which are
exercisable within 60 days following the School Specialty Distribution. The
number of such shares will be adjusted as described under "Management of
School Specialty--Replacement of U.S. Office Products' Options."
(2) Does not include shares underlying Mr. Ledecky's options described under
"Management of School Specialty--Director Compensation and Other
Arrangements," none of which are exercisable within the next twelve months.
(3) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of his shares of U.S. Office Products Common Stock.
(4) Based upon a Schedule 13G filed for U.S Office Products with the Securities
and Exchange Commission.
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<PAGE>
(5) In respect of U.S. Office Products Options, the option exercise price will
be adjusted by applying the following formula:
<TABLE>
<S> <C> <C>
Initial Public Offering Price of School Specialty Common Stock in the
Exercise Price (New) = Exercise Price X Offering
(Old) Trading Price of U.S. Office Products' Common Stock Pre-School Specialty
Distribution
</TABLE>
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
<TABLE>
<C> <C> <S>
Trading Price of U.S. Office Products' Common Stock Pre-School Specialty
Distribution
Option Shares (New) = Option Shares (Old) X Initial Public Offering Price of School Specialty Common Stock in the
Offering
</TABLE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products common stock and the exercise price of such option. The
intrinsic value of the School Specialty Options will be no greater than the
intrinsic value of the U.S. Office Products Options before the
Distributions, and the ratio of exercise price to market price will be not
less than the ratio before the Distributions.
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<PAGE>
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK
GENERAL
Set forth below is a summary of the terms of School Specialty's Capital
Stock. At the time of the Distribution and the Offering, School Specialty's
authorized capital stock will consist of 150,000,000 shares of School Specialty
Common Stock, par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). At the time of the
Distribution and the Offering, School Specialty is expected to have outstanding
approximately 12,299,593 shares of School Specialty Common Stock and no shares
of Preferred Stock.
COMMON STOCK
The holders of School Specialty Common Stock are entitled to one vote for
each share on all matters voted upon by stockholders, including the election of
directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of School Specialty Common Stock are entitled to such dividends as may
be declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." The holders of School Specialty
Common Stock are entitled to share ratably in the net assets of School Specialty
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. The
holders of School Specialty Common Stock have no preemptive rights to purchase
shares of stock of School Specialty. Shares of School Specialty Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of School Specialty. All of the shares of School Specialty Common
Stock to be distributed pursuant to the Distribution will be fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the School Specialty
Board of Directors as shares of one or more classes or series. Subject to the
provisions of School Specialty's Certificate of Incorporation and limitations
prescribed by law, the School Specialty Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series, and to provide for
or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of the Preferred Stock, in each case
without any further action or vote by the stockholders. School Specialty has no
current plans to issue any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
School Specialty Board of Directors to render more difficult or to discourage an
attempt to obtain control of School Specialty by means of a tender offer, proxy
contest, merger or otherwise, and thereby to protect the continuity of School
Specialty's management. The issuance of shares of the Preferred Stock pursuant
to the School Specialty Board of Directors' authority described above may
adversely affect the rights of the holders of School Specialty Common Stock. For
example, Preferred Stock issued by School Specialty may rank prior to School
Specialty Common Stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
School Specialty Common Stock. Accordingly, the issuance of shares of Preferred
Stock may discourage bids for School Specialty Common Stock or may otherwise
adversely affect the market price of School Specialty Common Stock.
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<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
School Specialty is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. School Specialty has not adopted such an
amendment to its Certificate of Incorporation or By-laws. Under the Company's
Certificate of Incorporation, the affirmative vote of a majority of the
directors is required to approve an interested stockholder transaction except
for certain statutory business combinations governed by Section 203, which
require the affirmative vote of 66 2/3% of the directors to approve such
transactions.
PROVISIONS OF SCHOOL SPECIALTY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AFFECTING CHANGE OF CONTROL
The Board of Directors of School Specialty has adopted certain amendments to
the Certificate of Incorporation or Bylaws that may provide the School Specialty
Board with more negotiating leverage by delaying or making more difficult
unsolicited acquisitions or changes of control of School Specialty. It is
believed that such provisions will enable School Specialty to develop its
business in a manner that will foster its long-term growth without disruption
caused by the threat of a takeover not deemed by the School Specialty Board to
be in the best interests of School Specialty and its stockholders. Such
provisions could have the effect of discouraging third parties from making
proposals involving an unsolicited acquisition or change of control of School
Specialty, although such proposals, if made, might be considered desirable by a
majority of School Specialty's stockholders. Such provisions may also have the
effect of making it more difficult for third parties to cause the replacement of
the management of School Specialty without concurrence of the School Specialty
Board. These provisions include: (i) the availability of capital stock for
issuance from time to time at the discretion of the School Specialty Board (see
"--Preferred Stock" above); (ii) the classification of the School Specialty
Board into three classes, each of which serves for a term of three years; (iii)
limitation on stockholders calling a special meeting of stockholders; (iv)
prohibition on stockholders acting by written consent in lieu of a meeting; (v)
requirements for advance notice for raising business or making nominations at
stockholders' meetings; and (vi) the requirement of a supermajority vote to
amend School Specialty's Bylaws.
69
<PAGE>
CLASSIFIED BOARD
School Specialty's Certificate of Incorporation includes provisions dividing
the School Specialty Board's membership into three classes, each of which serves
until the third succeeding annual meeting with one class being elected at each
annual meeting of stockholders. Under Delaware law, each class will be as nearly
equal in number as possible. As a result, at least two annual meetings of
stockholders may be required for School Specialty's stockholders to change a
majority of the members of the School Specialty Board. School Specialty believes
that a classified board of directors will assure continuity and stability of
School Specialty's management and policies, without diminishing accountability
to stockholders. School Specialty's classified Board will ensure that a majority
of directors at any given time will have experience in the business and
competitive affairs of School Specialty.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation and Bylaws provide that stockholder action
can be taken only at an annual or special meeting and cannot be taken by written
consent in lieu of a meeting. The Certificate of Incorporation and Bylaws also
provide that special meetings of the stockholders can be called only by the
Chairman of the Board, or by holders of at least 33 1/3% of the outstanding
shares of School Specialty stock entitled to vote generally for the election of
directors.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The Bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the School Specialty Board, or by a
stockholder who has given to the Secretary of School Specialty timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. The chairman of such meeting has the authority to make the
determination of whether business has been properly brought before such meeting.
Only persons who are nominated by, or at the direction of, the School Specialty
Board, or who are nominated by a stockholder who has given timely written
notice, in proper form, to the Secretary prior to a meeting at which directors
are to be elected will be eligible for election as directors of School
Specialty. These provisions are intended to establish orderly procedures for the
conduct of School Specialty's business and to allow the Board of Directors
adequate time to evaluate and respond to stockholder initiatives. They may have
the effect of impeding the ability of a stockholder to present proposals or make
limitations in a change of control context if the requisite notice provision
cannot be satisfied.
AMENDMENT OF BYLAWS
The Certificate of Incorporation requires a vote of at least 66 2/3% of the
outstanding School Specialty common Stock for the stockholders to amend the
Bylaws. This super-majority requirement could make it more difficult for
stockholders to compel Board action by the School Specialty Board by amending
the Bylaws to require actions not presently permitted by the Bylaws.
RIGHTS PLAN
Immediately after the School Specialty Distribution, School Specialty
intends to adopt a shareholder rights plan or "poison pill." As with the
Certificate of Incorporation and Bylaw provisions discussed above, if such a
plan is adopted, it could render more difficult or discourage an attempt to
obtain control of School Specialty. However, such a plan might also provide the
School Specialty Board with more negotiating leverage by delaying or making more
difficult unsolicited acquisition of changes of control of School Specialty.
70
<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to School Specialty's Certificate of Incorporation and under
Delaware law, directors of School Specialty are not liable to School Specialty
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company's By-laws provide that the Company will, to the
fullest extent permitted under Delaware law, indemnify its officers and
directors against any damages arising out of their actions as officers or
directors of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the School Specialty Common Stock will
be American Stock Transfer & Trust Company.
71
<PAGE>
EXPERTS
The consolidated financial statements of School Specialty as of April 30,
1996 and April 26, 1997, for the four months ended April 30, 1996, and for the
year ended April 30, 1997, included in this Information Statement/Prospectus,
have been so included in reliance on the January 13, 1998 (except for Note 1 and
the last paragraph of Note 3, which are as of May 14, 1998) report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of School Specialty for the years
ended December 31, 1995 and December 31, 1994 included in this Information
Statement/Prospectus, except as they relate to The Re-Print Corporation for the
years ended December 31, 1995 and December 31, 1994, have been audited by Ernst
& Young, independent accountants, and insofar as they relate to The Re-Print
Corporation for such periods, by BDO Seidman, LLP, independent accountants,
whose report dated February 8, 1996 thereon appears herein. Such consolidated
financial statements have been so included in reliance on the reports of such
independent accountants given on the authority of such firms as experts in
auditing and accounting.
The consolidated financial statements of American Academic Suppliers Holding
Corporation and Subsidiary as of December 31, 1995 and December 31, 1996 and for
the years then ended included in this Information Statement/Prospectus have been
so included in reliance on the February 24, 1997 report of Altschuler, Melvoin
and Glasser LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995 and December 25, 1996, and for the three years in the period
ended December 25, 1996, included in this Information Statement/Prospectus, have
been so included in reliance on the February 3, 1998 report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
LEGAL MATTERS
The validity of shares of School Specialty Common Stock and certain tax
matters relating to the Distributions will be passed upon on behalf of School
Specialty and U.S. Office Products by Wilmer, Cutler & Pickering, Washington,
D.C.
72
<PAGE>
SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SCHOOL SPECIALTY, INC.
Historical Financial Statements
Report of Price Waterhouse LLP, Independent Accountants................................................ F-2
Report of Ernst & Young LLP, Independent Auditors...................................................... F-3
Report of BDO Seidman, LLP, Independent Auditors....................................................... F-4
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)....... F-5
Consolidated Statement of Operations for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited).......................................................... F-6
Consolidated Statement of Stockholder's (Deficit) Equity for the years ended December 31, 1994 and
1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 (unaudited).................................................................... F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited).......................................................... F-8
Notes to Consolidated Financial Statements............................................................. F-10
Pro Forma Financial Statements
Introduction to Pro Forma Financial Information........................................................ F-26
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited).................................... F-28
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited).......... F-29
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited).......... F-30
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997 (unaudited)............ F-31
Notes to Pro Forma Combined Financial Statements....................................................... F-32
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent Accountants................................... F-34
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited).......... F-35
Consolidated Statement of Operations for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited).............................................. F-36
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited)............................................... F-37
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited).............................................. F-38
Notes to the Consolidated Financial Statements........................................................... F-39
SAX ARTS & CRAFTS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-44
Balance Sheets as of December 16, 1995, and December 25, 1996 and June 29, 1997 (unaudited).............. F-45
Statements of Operations for the years ended December 17, 1994, December 16, 1995 and December 25, 1996
and the six months ended June 30, 1996 (unaudited) and June 29, 1997 (unaudited)....................... F-46
Statements of Shareholders' Equity for the years ended December 17, 1994, December 16, 1995 and December
25, 1996 and the six months ended June 29, 1997 (unaudited)............................................ F-47
Statements of Cash Flows for the years ended December 17, 1994, December 16, 1995 and December 25, 1996
and the six months ended June 30, 1996 (unaudited) and June 29, 1997 (unaudited)....................... F-48
Notes to Financial Statements............................................................................ F-49
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF SCHOOL SPECIALTY, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of School
Specialty, Inc. (the "Company") and its subsidiaries at April 30, 1996 and April
26, 1997, and the results of their operations and their cash flows for the four
months ended April 30, 1996 and the fiscal year ended April 26, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 13, 1998, except for Note 1 and the last
paragraph of Note 3, which are as of May 14, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
SCHOOL SPECIALTY, INC.
We have audited the accompanying consolidated statements of operations,
consolidated statement of stockholder's (deficit) equity and cash flows of
School Specialty, Inc. (the Company) for the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Re-Print Corporation, a wholly owned subsidiary, which statements reflect total
revenues of $30,798,000 and $24,140,000 for the years ended December 31, 1995
and 1994, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Re-Print Corporation, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the results of the Company's operations and its cash flows for the years
December 31, 1995 and 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for the years then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
F-4
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 46 $ $
Accounts receivable, less allowance for doubtful accounts of $202, $471 and
$724, respectively......................................................... 13,129 17,232 41,530
Inventories.................................................................. 20,276 24,461 32,946
Prepaid expenses and other current assets.................................... 5,556 10,331 8,997
--------- --------- -----------
Total current assets..................................................... 39,007 52,024 83,473
Property and equipment, net.................................................... 7,647 14,478 20,489
Intangible assets, net......................................................... 7,142 20,824 94,651
Other assets................................................................... 777 359 2,594
--------- --------- -----------
Total assets............................................................. $ 54,573 $ 87,685 $ 201,207
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Short-term debt.............................................................. $ 25,887 $ 262 $ 272
Short-term payable to U.S. Office Products................................... 26,692 16,873
Accounts payable............................................................. 11,933 9,091 11,951
Accrued compensation......................................................... 785 860 5,502
Other accrued liabilities.................................................... 4,065 659 5,262
--------- --------- -----------
Total current liabilities................................................ 42,670 37,564 39,860
Long-term debt................................................................. 15,031 566 385
Long-term payable to U.S. Office Products...................................... 33,226 62,470
Deferred income taxes.......................................................... 1,139
--------- --------- -----------
Total liabilities........................................................ 58,840 71,356 102,715
--------- --------- -----------
Commitments and contingencies
Stockholder's (deficit) equity:
Divisional equity............................................................ 7,487 19,985 93,313
Retained (deficit) earnings.................................................. (11,754) (3,656) 5,179
--------- --------- -----------
Total stockholder's (deficit) equity..................................... (4,267) 16,329 98,492
--------- --------- -----------
Total liabilities and stockholder's (deficit) equity..................... $ 54,573 $ 87,685 $ 201,207
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOUR FISCAL FOR THE NINE
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------------------- ------------- ------------- ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................ $ 119,510 $ 150,482 $ 28,616 $ 191,746 $ 159,977 $ 247,880
Cost of revenues.................... 87,750 105,757 20,201 136,577 114,380 176,501
------------ ------------ ------------- ------------- ----------- -----------
Gross profit.................. 31,760 44,725 8,415 55,169 45,597 71,379
Selling, general and administrative
expenses.......................... 27,281 39,869 10,307 43,462 33,396 50,999
Non-recurring acquisition costs..... 1,122 1,792 1,792
Restructuring costs................. 2,532 194
------------ ------------ ------------- ------------- ----------- -----------
Operating income (loss)....... 4,479 2,324 (3,014) 9,721 10,409 20,380
Other (income) expense:
Interest expense................ 3,007 5,536 1,461 4,197 3,358 4,100
Interest income................. (6) (101) (109)
Other........................... (86) (18) 67 (196) (204) 441
------------ ------------ ------------- ------------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes....... 1,558 (3,194) (4,536) 5,720 7,356 15,948
Provision for (benefit from) income
taxes............................. 218 173 139 (2,412) 3,750 7,113
------------ ------------ ------------- ------------- ----------- -----------
Net income (loss)................... $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606 $ 8,835
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Weighted average shares outstanding:
Basic............................. 5,062 6,562 8,611 10,003 9,553 12,751
Diluted........................... 5,078 6,669 8,789 10,196 9,758 13,020
Net income (loss) per share:
Basic............................. $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38 $ 0.69
Diluted........................... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37 $ 0.68
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDER'S
DIVISIONAL (DEFICIT) (DEFICIT)
EQUITY EARNINGS EQUITY
----------- ---------- ------------
<S> <C> <C> <C>
Balance at December 31, 1993................................................ $ 5,247 $ (4,780) $ 467
Issuance of Pooled Company common stock for cash.......................... 80 80
Cash dividends declared at Pooled Companies............................... (60) (60)
Net income................................................................ 1,340 1,340
----------- ---------- ------------
Balance at December 31, 1994................................................ 5,327 (3,500) 1,827
Transactions of Pooled Companies:
Issuance of warrants.................................................... 672 672
Issuance of Pooled Company common stock for cash........................ 500 500
Repurchase of treasury stock............................................ (92) (92)
Cash dividends declared and paid........................................ (160) (160)
Net loss.................................................................. (3,367) (3,367)
----------- ---------- ------------
Balance at December 31, 1995................................................ 6,407 (7,027) (620)
Transactions of Pooled Companies:
Exercise of warrants.................................................... 1,080 1,080
Cash dividends declared and paid........................................ (52) (52)
Net loss.................................................................. (4,675) (4,675)
----------- ---------- ------------
Balance at April 30, 1996................................................... 7,487 (11,754) (4,267)
Transactions of Pooled Companies:
Exercise of warrants and stock options.................................. 1,979 1,979
Retirement of treasury stock............................................ 34 (34)
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 10,485 10,485
Net income................................................................ 8,132 8,132
----------- ---------- ------------
Balance at April 26, 1997................................................... 19,985 (3,656) 16,329
Unaudited data:
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 3,566 3,566
Capital contribution by U.S. Office Products.............................. 69,762 69,762
Net income................................................................ 8,835 8,835
----------- ---------- ------------
Balance at January 24, 1998 (unaudited)..................................... $ 93,313 $ 5,179 $ 98,492
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOUR FOR THE NINE
MONTHS FISCAL MONTHS
FOR THE YEAR ENDED ENDED YEAR ENDED ENDED
---------------------------- ------------ ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................... $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 1,719 2,927 674 2,106 1,570
Non-recurring acquisition costs............. 1,122 1,792 1,792
Other....................................... 231 277 118 115 73
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable..................... (2,226) 2,666 3,727 1,277 (629)
Inventory............................... 4,365 (2,523) (4,376) 2,737 9,816
Prepaid expenses and other current
assets................................ (989) (338) (443) (2,361) (1,509)
Accounts payable........................ (4,367) 2,642 3,459 (6,969) (12,376)
Accrued liabilities..................... (341) 2,544 (784) (5,911) 1,866
------------- ------------- ------------ ------------- -----------
Net cash provided by (used in)
operating activities.............. (268) 4,828 (1,178) 918 4,209
------------- ------------- ------------ ------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (2,106) (5,389) (7,734) (7,609)
Payments of non-recurring acquisition costs..... (1,122) (1,792) (1,725)
Additions to property and equipment............. (630) (881) (120) (7,216) (5,317)
Other........................................... (120) 178 414
------------- ------------- ------------ ------------- -----------
Net cash used in investing
activities........................ (2,856) (6,092) (828) (16,742) (14,651)
------------- ------------- ------------ ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 80 500 1,080 1,979 1,979
Proceeds from issuance of long-term debt........ 1,850 1,715 750 1,160
Payments of long-term debt...................... (2,023) (1,488) (194) (16,962) (17,164)
Proceeds from (payments of) short-term debt,
net........................................... 3,295 655 1,263 (29,908) (29,775)
Advances from U.S. Office Products Company...... 59,919 55,029
Capital contribution by U.S. Office Products....
Payments of dividends at Pooled Companies....... (134) (138)
Purchase of treasury stock at Pooled Company.... (92)
------------- ------------- ------------ ------------- -----------
Net cash provided by financing
activities........................ 3,202 1,156 2,011 15,778 11,229
------------- ------------- ------------ ------------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 78 (108) 5 (46) 787
Cash and cash equivalents at beginning of
period.......................................... 71 149 41 46 46
------------- ------------- ------------ ------------- -----------
Cash and cash equivalents at end of period........ $ 149 $ 41 $ 46 $ $ 833
------------- ------------- ------------ ------------- -----------
------------- ------------- ------------ ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid............................... $ 2,850 $ 5,564 $ 1,461 $ 456 $ 630
Income taxes paid (refunded)................ $ 236 $ 9 $ (3) $ (132) $ (139)
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 8,835
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 3,382
Non-recurring acquisition costs.............
Other....................................... 43
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable..................... (6,450)
Inventory............................... 9,590
Prepaid expenses and other current
assets................................ 3,844
Accounts payable........................ (6,593)
Accrued liabilities..................... 2,741
-----------
Net cash provided by (used in)
operating activities.............. 15,392
-----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (92,076)
Payments of non-recurring acquisition costs.....
Additions to property and equipment............. (4,095)
Other........................................... (366)
-----------
Net cash used in investing
activities........................ (96,537)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock..........
Proceeds from issuance of long-term debt........
Payments of long-term debt...................... (6,200)
Proceeds from (payments of) short-term debt,
net........................................... (1,841)
Advances from U.S. Office Products Company...... 19,424
Capital contribution by U.S. Office Products.... 69,762
Payments of dividends at Pooled Companies.......
Purchase of treasury stock at Pooled Company....
-----------
Net cash provided by financing
activities........................ 81,145
-----------
Net increase (decrease) in cash and cash
equivalents.....................................
Cash and cash equivalents at beginning of
period..........................................
-----------
Cash and cash equivalents at end of period........ $
-----------
-----------
Supplemental disclosures of cash flow information:
Interest paid............................... $ 27
Income taxes paid (refunded)................ $
</TABLE>
F-8
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method in the years ended December
31, 1994 and 1995, the fiscal year ended April 26, 1997, and the nine months
ended January 25, 1997 and January 24, 1998. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:
<TABLE>
<CAPTION>
FOR THE
NINE
FOR THE MONTHS
FOR THE YEAR ENDED FOR THE FOUR FISCAL ENDED
---------------------------- MONTHS ENDED YEAR ENDED -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable............................... $ 8,112 $ 1,589 $ $ 5,381 $ 5,381
Inventories....................................... 9,743 1,823 6,922 6,922
Prepaid expenses and other current assets......... 823 502 2,371 2,371
Property and equipment............................ 2,211 4,536 1,155 1,155
Intangible assets................................. 3,268 14,248 13,994
Other assets...................................... 1,488 156 29 29
Short-term debt................................... (6,785) (191) (4,283) (4,283)
Accounts payable.................................. (6,447) (274) (4,012) (4,012)
Accrued liabilities............................... (1,661) (225) (1,846) (1,717)
Long-term debt.................................... (5,378) (5,795) (1,746) (1,746)
------------- ------------- ------------- ------------- -----------
Net assets acquired................. $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ $ $ $ 10,485 $ 10,485
Cash paid, net of cash acquired................... 2,106 5,389 7,734 7,609
------------- ------------- ------------- ------------- -----------
Total............................... $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Accounts receivable............................... $ 17,848
Inventories....................................... 18,075
Prepaid expenses and other current assets......... 2,431
Property and equipment............................ 6,667
Intangible assets................................. 74,741
Other assets...................................... 210
Short-term debt................................... (1,850)
Accounts payable.................................. (9,410)
Accrued liabilities............................... (7,050)
Long-term debt.................................... (6,020)
-----------
Net assets acquired................. $ 95,642
-----------
-----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ 3,566
Cash paid, net of cash acquired................... 92,076
-----------
Total............................... $ 95,642
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
School Specialty, Inc. (the "Company") is a Delaware corporation which is a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Educational Supplies and Products Division (the "Education
Division") as an independent publicly owned company. This transaction is
expected to be effected through the distribution of shares of the Company to
U.S. Office Products' shareholders effective on or about June 9, 1998 (the
"Distribution"). Prior to the Distribution, U.S. Office Products plans to
contribute its equity interests in certain wholly-owned subsidiaries associated
with the Education Division to the Company. U.S. Office Products and the Company
will enter into a number of agreements to facilitate the Distribution and the
transition of the Company to an independent business enterprise. Additionally,
concurrently with the Distribution, the Company anticipates selling 2.1 million
shares (2.4 million shares if the over-allotment is sold) in an initial public
offering ("IPO").
The Education Division was created by U.S. Office Products in May 1996 in
connection with the acquisition of School Specialty, Inc., a Wisconsin
corporation ("Old School"). This business combination and the acquisition in
July 1996 of The Re-Print Corp. ("Re-Print") were accounted for under the
pooling-of-interests method (Old School and Re-Print are herein referred to as
the "Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. The Company's statement of income
includes all of the related costs of doing business, including an allocation of
certain general corporate expenses of U.S. Office Products which were not
directly related to these businesses including certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing, human resources as well as other general overhead
costs. These allocations were based on a variety of factors, dependent upon the
nature of the costs being allocated, including revenues, number and size of
acquisitions and number of employees. Management believes these allocations were
made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 9 for further discussion of interest expense.
F-10
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April. A four-month fiscal transition period from January
1, 1996 through April 30, 1996 has been presented for the Company to conform its
fiscal year-end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
F-11
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method and non-compete agreements.
Substantially all goodwill is amortized on a straight line basis over an
estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Other intangible assets are being amortized over
their estimated useful lives ranging from one to four years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of selling, general and administrative expenses.
DEFERRED CATALOG COSTS
Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one to two years. Amortization
expense related to deferred catalog costs is
F-12
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in the consolidated statement of income as a component of selling,
general and administrative expenses. Such amortization expense for the year
ended December 31, 1994 and 1995, the four months ended April 30, 1996, the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$3,755, $4,395, $832, $3,621 and $4,646 (unaudited), respectively.
INTERNALLY DEVELOPED SOFTWARE
Internal costs related to internally developed software, such as internal
salaries and supplies, are expensed as incurred as a component of selling,
general and administrative expenses. External costs related to internally
developed software, such as fees for outside programmers and consultants, are
capitalized and expensed over the expected useful life of the software, normally
three to five years.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals, and various regulatory
fees. Generally accepted accounting principles require the Company to expense
all acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
NET INCOME PER SHARE
Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The difference between the
weighted-average number of common shares used for the calculation of basic EPS
and the weighted average number of shares of common shares used for the diluted
EPS is comprised of the dilutive effect of outstanding common stock options.
However, a portion of the Company's employee stock options outstanding during
the periods presented were not included in the computation of diluted EPS as
they were anti-dilutive.
F-13
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company will issue approximately 12.3 million shares
of its common stock to U.S. Office Products, which will then distribute such
shares to its shareholders in the ratio of one share of Company common stock for
every nine shares of U.S. Office Products common stock held by each shareholder.
The share data reflected in the accompanying financial statements represents the
historical share data for U.S. Office Products for the period or as of the date
indicated, retroactively adjusted to give effect to the one for nine
distribution ratio.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 4,257,693 shares of U.S. Office Products
common stock to acquire the Pooled Companies. The Pooled Companies and the
number of shares issued are as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
- ------------------------------------------------------------------------------- -------------
<S> <C>
School Specialty, Inc.......................................................... 2,307,693
Re-Print....................................................................... 1,950,000
-------------
Total shares issued........................................................ 4,257,693
-------------
-------------
</TABLE>
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies reported on years
ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
F-14
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1994
Revenues................................................................... $ $ 119,510 $ 119,510
Net income................................................................. $ $ 1,340 $ 1,340
For the year ended December 31, 1995
Revenues................................................................... $ $ 150,482 $ 150,482
Net income (loss).......................................................... $ $ (3,367) $ (3,367)
For the four months ended April 30, 1996
Revenues................................................................... $ $ 28,616 $ 28,616
Net income (loss).......................................................... $ $ (4,675) $ (4,675)
For the year ended April 26, 1997
Revenues................................................................... $ 181,420 $ 10,326 $ 191,746
Net income................................................................. $ 7,791 $ 341 $ 8,132
For the nine months ended January 25, 1997 (unaudited):
Revenues................................................................... $ 149,651 $ 10,326 $ 159,977
Net income................................................................. $ 3,265 $ 341 $ 3,606
For the nine months ended January 24, 1998 (unaudited):
Revenues................................................................... $ 247,880 $ $ 247,880
Net income................................................................. $ 8,835 $ $ 8,835
</TABLE>
PURCHASE METHOD
In 1994, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $2,106. The
total assets related to the acquisition were $22,377. The results of the
acquisition have been included in the Company's results from its date of
acquisition.
In 1995, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $5,389. The
total assets related to the acquisition were $11,874, including goodwill of
$3,268. The results of the acquisition have been included in the Company's
results from its date of acquisition.
In fiscal 1997, the Company made six acquisitions accounted for under the
purchase method for an aggregate purchase price of $18,219, consisting of $7,734
of cash and U.S. Office Products common stock with a market value of $10,485.
The total assets related to these six acquisitions were $30,106, including
goodwill of $14,248. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and the fiscal year ended April 26,
1997 and includes the Company's
F-15
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
consolidated financial statements, which give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented, and the results
of the companies acquired in purchase acquisitions through April 27, 1997 as if
all such purchase acquisitions had been made at the beginning of 1995. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation of
$1,200 and $124 for the year ended December 31, 1995 and the fiscal year ended
April 26, 1997, respectively, and the inclusion of a federal income tax
provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
------------------------
<S> <C> <C>
DECEMBER 31, APRIL 26,
1995 1997
------------ ----------
Revenues............................................................................... $ 206,329 $ 206,566
Net income (loss)...................................................................... (1,199) 2,939
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of 1995 or the results
which may occur in the future.
NOTE 5--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
--------------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at April 30 1996.................................... $ 641 $ 469 $ 1,422 $ 2,532
Additions................................................. 194 194
Utilizations.............................................. (641) (469) (1,465) (2,575)
----- ----- ------------ ---------
Balance at April 26, 1997................................... 151 151
Utilizations.............................................. (151) (151)
----- ----- ------------ ---------
Balance at January 24, 1998 (unaudited)..................... $ $ $ $
----- ----- ------------ ---------
----- ----- ------------ ---------
</TABLE>
NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ---------
<S> <C> <C>
Deferred catalog costs....................................................................... $ 4,387 $ 5,740
Deferred income taxes........................................................................ 1,184
Other........................................................................................ 1,169 3,407
----------- ---------
Total prepaid expenses and other current assets............................................ $ 5,556 $ 10,331
----------- ---------
----------- ---------
</TABLE>
F-16
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS (CONTINUED)
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods. These deferred catalog
costs will be expensed in the periods the catalogs are used.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Land........................................................................................ $ 58 $ 729
Buildings................................................................................... 2,042 6,488
Furniture and fixtures...................................................................... 882 6,502
Warehouse Equipment......................................................................... 8,767 3,163
Leasehold improvements...................................................................... 631 2,185
--------- ---------
12,380 19,067
Less: Accumulated depreciation.............................................................. (4,733) (4,589)
--------- ---------
Net property and equipment.................................................................. $ 7,647 $ 14,478
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996 and the fiscal year ended April 26, 1997 was
$888, $1,645, $470 and $1,540, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill....................................................................... $ 8,312 $ 22,128 $ 96,770
Other.......................................................................... 1,647 2,020 2,487
--------- --------- -----------
9,959 24,148 99,257
Less: Accumulated amortization................................................. (2,817) (3,324) (4,606)
--------- --------- -----------
Net intangible assets..................................................... $ 7,142 $ 20,824 $ 94,651
--------- --------- -----------
--------- --------- -----------
</TABLE>
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
nine months ended January 24, 1998 was $757, $1,098, $204, $566 and $1,411
(unaudited), respectively.
F-17
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Credit facilities with banks, average interest rates ranging from 10% to 10.75% at April 30,
1996...................................................................................... $ 21,898 $
Subordinated debt, interest at 8% at April 30, 1996......................................... 1,000
Other....................................................................................... 441 30
Current maturities of long-term debt........................................................ 2,548 232
--------- ---------
Total short-term debt....................................................................... $ 25,887 $ 262
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Subordinated notes, at 12.5% at April 30, 1996.............................................. $ 13,325 $
Note payable to former shareholder, interest at 10% at April 30, 1996....................... 2,717
Other....................................................................................... 953 483
Capital lease obligations................................................................... 584 315
--------- ---------
17,579 798
Less: Current maturities of long-term debt.................................................. (2,548) (232)
--------- ---------
Total long-term debt.................................................................... $ 15,031 $ 566
--------- ---------
--------- ---------
</TABLE>
The agreement related to the subordinated notes provided for the bank and
its agents to receive 12,551 and 14,941 detachable warrants for Pooled Company
common stock in June 1994 and January 1995, respectively. The warrants were
valued at $45 per share with such amount deducted from the face value of the
subordinated notes. In conjunction with the acquisition of the Pooled Company by
U.S. Office Products, the outstanding subordinated debt balance was paid in full
and all of the outstanding warrants were exercised and subsequently converted to
U.S. Office Products common stock.
F-18
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998............................................................................... $ 232
1999............................................................................... 216
2000............................................................................... 204
2001............................................................................... 41
2002............................................................................... 36
Thereafter......................................................................... 68
---------
Total maturities of long-term debt............................................... $ 797
---------
---------
</TABLE>
PAYABLE TO U.S. OFFICE PRODUCTS
The short-term payable to U.S. Office Products was incurred by the Company
primarily as a result of U.S. Office Products repaying short-term debt
outstanding of the businesses acquired by U.S. Office Products at or soon after
the respective dates of acquisition and through the centralized cash management
system, which involves daily advances or sweeps of cash to keep the cash balance
at or near zero on a daily basis.
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. An
analysis of the activity in this account is as follows:
<TABLE>
<S> <C>
Balance at April 30, 1996......................................................... $
Payments of long-term debt of acquired companies.................................. 21,379
Funding of acquisitions and payment of acquisition costs.......................... 8,203
Allocated corporate expenses...................................................... 2,221
Normal operating costs paid by U.S. Office Products............................... 1,423
---------
Balance at April 26, 1997......................................................... 33,226
Unaudited data:
Payments of long-term debt of acquired companies.................................. 822
Funding of acquisitions and payment of acquisition costs.......................... 24,646
Allocated corporate expenses...................................................... 3,089
Normal operating costs paid by U.S. Office Products............................... 687
---------
Balance at January 24, 1998 (unaudited)........................................... $ 62,470
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$27,269 and $47,767 (unaudited), respectively.
Interest has been allocated to the Company based upon the Company's average
outstanding payable (short and long term) balance with U.S. Office Products at
U.S. Office Products' weighted average interest rate during such period. The
Company's financial statements include allocations of interest expense from
F-19
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
U.S. Office Products totaling $3,879 and $4,057 (unaudited) during the year
ended April 26, 1997 and the nine months ended Janaury 24, 1998, respectively.
NOTE 10--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
--------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal............................................. $ (165) $ (66) $ $ 71
State............................................... 149 99
------ ------------ ------------- -------------
(16) (66) 170
------ ------------ ------------- -------------
Deferred income tax expense (benefit)................. 234 239 139 (2,582)
------ ------------ ------------- -------------
Total provision for (benefit from) income taxes... $ 218 $ 173 $ 139 $ (2,412)
------ ------------ ------------- -------------
------ ------------ ------------- -------------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ (349) $ 265
Allowance for doubtful accounts............................................................ 106 193
Net operating loss carryforward............................................................ 3,820 3,069
Accrued liabilities........................................................................ 332 421
Prepaid catalog advertising/restructuring.................................................. (205) (1,893)
--------- ---------
Total current deferred tax assets........................................................ 3,704 2,055
--------- ---------
Long-term deferred tax assets (liabilities):
Property and equipment..................................................................... (126) (289)
Intangible assets.......................................................................... 622 258
--------- ---------
Total long-term deferred tax assets (liabilities)........................................ 496 (31)
--------- ---------
Subtotal................................................................................. 4,200 2,024
--------- ---------
Valuation allowance........................................................................ (5,339)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (1,139) $ 2,024
--------- ---------
--------- ---------
</TABLE>
At April 30, 1996, the valuation allowance had been recorded, related to
deferred tax assets of a Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of this Pooled Company
during fiscal 1997, the valuation allowance was reversed, resulting in a benefit
from income taxes.
F-20
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate........................... 34.0% 34.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit
for fiscal 1997..................................... 9.6 1.0
Net operating loss utilized........................... (33.0)
Net benefit for current year net operating loss....... (34.0) (32.8)
Reversal of valuation allowance....................... (84.8)
Nondeductible goodwill................................ (2.2) 1.6
Nondeductible acquisition costs....................... 5.0
Tax on separate company income not offset against
other company's loss................................ (5.4) (3.0)
Other................................................. 3.4
----- ----- ----- -----
Effective income tax rate............................. 14.0% (5.4)% (3.0 )% (42.2 )%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998......................................................................................... $ 232 $ 871
1999......................................................................................... 118 806
2000......................................................................................... 6 599
2001......................................................................................... 517
2002......................................................................................... 496
Thereafter................................................................................... 1,057
----- -----------
Total minimum lease payments................................................................. 356 $ 4,346
-----
-----------
-----------
Less: Amounts representing interest (42)
-----
Present value of net minimum lease payments.................................................. $ 314
-----
-----
</TABLE>
Rent expense for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996 and the fiscal year ended April 26, 1997 was $1,486,
$1,947, $600 and $1,817, respectively.
F-21
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
Under the Distribution Agreement, the Company is required, on or prior to
the Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off $83.3 million of
U.S. Office Products' debt. See additional discussion in Note 16.
On or before the date of the Distribution, School Specialty, U.S. Office
Products and the other Spin-Off Companies will enter into the Distribution
Agreement, the Tax Allocation Agreement, and the Employee Benefits Agreement and
the Spin-Off Companies will enter into the Tax Indemnification Agreement and may
enter into other agreements, including agreements relating to referral of
customers to one another. These agreements are expected to provide, among other
things, for U.S. Office Products and School Specialty to indemnify each other
from tax and other liabilities relating to their respective businesses prior to
and following the Distribution. Certain of the obligations of School Specialty
and the other Spin-Off Companies to indemnify U.S. Office Products are joint and
several. Therefore, if one of the other spin-off companies fails to satisfy its
indemnification obligations to U.S. Office Products when such a loss occurs,
School Specialty may be required to reimburse U.S. Office Products for all or a
portion of the losses that otherwise would have been allocated to other spin-off
companies. In addition, the agreements will allocate liabilities, including
general corporate and securities liabilities of U.S. Office Products not
specifically related to the school supplies business, between U.S. Office
Products and the Company and the other Spin-Off Companies. The terms of the
agreements that will govern the relationship between School Specialty and U.S.
Office Products will be established by U.S. Office Products in consultation with
School Specialty's management prior to the Distribution while School Specialty
is a wholly-owned subsidiary of U.S. Office Products.
NOTE 13--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the
F-22
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
employees. The subsidiaries paid all general and administrative expenses of the
plans and in some cases made matching contributions on behalf of the employees.
For the years ended December 31, 1994 and 1995 and the four months ended April
30, 1996, the subsidiaries incurred expenses totaling $175, $105 and $6,
respectively, related to these plans.
NOTE 14--STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS
During the nine months ended January 24, 1998, U.S. Office Products
contributed $69,762 of capital to the Company. The contribution reflects the
forgiveness of intercompany debt by U.S. Office Products, as it was agreed that
the Company would be allocated only $80,000 of debt plus the amount of any
additional debt incurred after January 12, 1998 in connection with the
acquisition of entities that will become subsidiaries of School Specialty.
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Compensation Plan covering employees of
U.S. Office Products. The Company expects to adopt an employee stock option plan
at approximately the time of the Distribution. The Company expects to replace
the options to purchase shares of common stock of U.S. Office Products held by
employees with options to purchase shares of common stock of the Company. U.S.
Office Products granted 249,600 options to Company employees under the Plan
during fiscal 1997; and the Company accounted for these options in accordance
with APB Opinion No. 25. Accordingly, because the exercise prices of the options
have equaled the market price on the date of grant, no compensation expense was
recognized for the options granted. Had compensation expense been recognized
based upon the fair value of the stock options on the grant date under the
methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and basic net income per share for the
year ended April 26, 1997 would have been reduced by $749 and $0.01,
respectively.
Under a services agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products has agreed that Jonathan J. Ledecky will
receive a stock option for School Specialty Common Stock from School Specialty
as of the date of the Distribution. The U.S. Office Products Board intends the
option to be compensation for Mr. Ledecky's services as a director of the
Company, and certain services as an employee of the Company. The option will
cover 7.5% of the outstanding Company common stock determined as of the date of
the Distribution, with no anti-dilution provisions in the event of issuance of
additional shares of common stock (other than with respect to stock splits or
reverse stock splits). The option will have a per share exercise price equal to
the IPO price.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant options covering 7.5% of the outstanding shares
of the Company's common stock, immediately following the Distribution and prior
to the IPO to certain executive management personnel (excluding the 7.5% granted
to Mr. Ledecky). The options granted will be granted under the 1998 Stock
Incentive Plan (the "Plan") and will have a per share exercise price equal to
the IPO price, with other terms to be determined by the Company's Board of
Directors. Total options available for grant under the Plan will be 20.0% of the
outstanding shares of the
F-23
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
Company's common stock immediately following the Distribution and the IPO,
including the options to be granted to Mr. Ledecky on that date.
The Company will be required to disclose in the footnotes of the financial
statements the impact of the compensation expense associated with these options
on a pro forma basis in accordance with FAS 123.
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995 and the fiscal year ended April 26, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
Revenues................................................ $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit............................................ 4,960 11,130 20,795 7,840 44,725
Operating income (loss)................................. (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)....................................... (3,711) (252) 4,309 (3,713) (3,367)
<CAPTION>
YEAR ENDED APRIL 26, 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit............................................ 18,110 19,823 7,664 9,572 55,169
Operating income (loss)................................. 5,197 6,732 (1,520) (688) 9,721
Net income (loss)....................................... 1,981 2,692 (1,067) 4,526 8,132
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 24, 1998
--------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD TOTAL
--------- ---------- --------- ----------
Revenues........................................................... $ 87,029 $ 111,460 $ 49,391 $ 247,880
Gross profit....................................................... 26,090 33,619 11,670 71,379
Operating income (loss)............................................ 11,872 12,155 (3,647) 20,380
Net income (loss).................................................. 5,804 5,965 (2,934) 8,835
</TABLE>
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED)
DISTRIBUTION AND ACQUISITIONS PRO FORMA
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed eight business combinations accounted for
under the purchase method for an aggregate purchase price of $98,892, consisting
of $95,326 of cash and U.S. Office Products Common Stock with a market value of
$3,566. The total assets related to these eight acquisitions were $123,222,
including goodwill of $77,541. The results of operations for the nine months
ended January 24, 1998 include the results of the acquired companies from their
respective dates of acquisition.
F-24
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisitions described above and the six
acquisitions accounted for under the purchase method completed in fiscal 1997
(see Note 4) had been consummated as of the beginning of fiscal 1997. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets and adjustments in executive compensation of
$124 for the fiscal year ended April 26, 1997 and the nine months ended January
25, 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------------
ENDED JANUARY 25, JANUARY 24,
APRIL 26, 1997 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues.................................................... $ 350,760 $ 292,244 $ 318,667
Net income.................................................. 11,714 7,809 9,991
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
The Distribution Agreement allocates a specified amount of U.S. Office
Products' debt outstanding under its credit facilities to each Spin-Off Company
and requires each Spin-Off Company, on or prior to the Distribution, to obtain
credit facilities, to borrow funds under such facilities and to use the proceeds
of such borrowings to pay off the U.S. Office Products' debt so allocated plus
any additional debt incurred by U.S. Office Products after January 12, 1998 (the
date of the Investment Agreement) in connection with the acquisition of an
entity that has become or will become a subsidiary of such Spin-Off Company.
Under the Distribution Agreement, $80,000 of U.S. Office Products' debt has been
allocated to School Specialty, and since January 12, 1998, U.S. Office Products
has incurred an additional $3,300 of debt in connection with School Specialty's
acquisition of Education Access. Prior to the Distribution, School Specialty
will enter into the credit facility and will borrow $83,300 under the facility
to pay off debt of U.S. Office Products.
PROPOSED CREDIT FACILITY
The Company has received a committment letter for a secured $250,000
revolving credit facility from NationsBank, N.A. as administrative agent.
NationsBanc Montgomery Securities LLC, one of the Underwriters and an affiliate
of NationsBank, N.A., is the Arranger and Syndication Agent. The credit facility
will terminate five years from the Distribution Date. Interest on borrowings
under the credit facility will accrue interest at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base rate, plus a margin of 0%
to .25% for up to the first 6 months under the agreement. Thereafter, interest
will accrue at a rate of (i) LIBOR plus a range of .625% to 1.625% (depending on
the Company's leverage ratio of funded debt to EBITDA), or (ii) the lender's
base rate plus a range of .125% to .250%. Indebtedness will be secured by
substantially all of the assets of the Company. The credit facility will be
subject to terms and conditions typical of facilities of such size and will
include certain financial covenants. The Company will borrow under the credit
facility to repay the U.S. Office Products' debt which it is obligated under the
Distribution Agreement to repay. The balance of the credit facility will be
available for working capital, capital expenditures and acquisitions, subject to
compliance with financial covenants.
F-25
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the refinancing
of all amounts payable to U.S. Office Products and acquisitions completed
through May 1, 1998 and the Distribution. The pro forma offering adjustments
further adjust such pro forma financial statements to give effect to the
Offering and the sale of 250,000 shares of Common Stock to Messrs. Spalding,
Vander Zanden and Pate and the use of the proceeds therefrom to repay a portion
of the debt incurred to refinance the amounts payable to U.S. Office Products.
The pro forma combined balance sheet gives effect to (i) the refinancing of
all amounts payable to U.S. Office Products, (ii) the acquisition completed
after January 24, 1998, and (iii) the Distribution as if such transaction had
occurred as of the Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the acquisitions of six individually insignificant
companies in business combinations accounted for under the purchase method
completed during the fiscal year ended April 26, 1997 (the "Fiscal 1997 Purchase
Acquisitions"); and (iii) the acquisitions of Childcraft Education Corp., Sax
Arts & Crafts, Inc. ("Sax Arts & Crafts"), American Academic and four other
individually insignificant companies in business combinations accounted for
under the purchase method completed during the fiscal year ending April 25, 1998
(the "Fiscal 1998 Purchase Acquisitions"), as if all such transactions had
occurred on May 1, 1996. The pro forma combined statement of income for the year
ended April 26, 1997 includes (i) the audited financial information of the
Company for the year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition; and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to the refinancing of all amounts payable to U.S. Office
Products and the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on April 27, 1997. The pro forma combined statement of income for
the nine months ended January 24, 1998 includes the unaudited financial
information of the Company for the nine months ended January 24, 1998 and the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through the earlier of their respective dates of
acquisition or January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the Fiscal 1997 Purchase Acquisitions; and (iii) the
Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred on
May 1, 1996. The pro forma combined statement of income for the nine months
ended January 25, 1997 includes (i) the unaudited financial information of the
Company for the nine months ended January 25, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through the earlier of their respective dates of acquisition or January 25,
1997; and (iii) the unaudited financial information of the Fiscal 1998 Purchase
Acquisitions for the period from May 1, 1996 through January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of School Specialty, Inc., a Wisconsin corporation, and The
Re-Print Corporation, which were acquired by the Education Division during the
fiscal year ended April 26, 1997 in business combinations accounted for under
the pooling-of-interests method of accounting.
F-26
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs and interest expense incurred by
U.S. Office Products. The allocated costs include expenses such as: certain
corporate executives' salaries, accounting and legal fees, departmental costs
for accounting, finance, legal, purchasing, marketing and human resources, as
well as other general overhead costs. These corporate overheads have been
allocated to the Company using one of several factors, dependent on the nature
of the costs being allocated, including, revenues, number and size of
acquisitions and number of employees. Interest expense has been allocated to the
Company based upon the Company's average outstanding intercompany balance with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.
In the first quarter of fiscal 1999, the Company will record a compensation
charge of approximately $263,000, representing the difference between the amount
which Messrs. Spalding, Vander Zanden and Pate will pay for the 250,000 shares
of Common Stock to be purchased directly from the Company and the amount which
they would have paid for such shares if the purchase price per share had been
the initial public offering price of the shares offered in the Offering. Because
this charge is non-recurring, it has not been reflected in the pro forma
statements of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-27
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
SCHOOL JANUARY 24, 1998 PRO FORMA
SPECIALTY, PURCHASE PRO FORMA OFFERING PRO FORMA
INC. ACQUISTION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- ----------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ $ $ $ $ 31,631(d) $
(31,631)(d)
Accounts receivable, net........... 41,530 41,530 41,530
Inventory.......................... 32,946 100 33,046 33,046
Prepaid and other current assets... 8,997 8,997 8,997
------------- ------- ----------- --------- ----------- -----------
Total current assets........... 83,473 100 83,573 83,573
Property and equipment, net.......... 20,489 350 20,839 20,839
Intangible assets, net............... 94,651 2,800(a) 97,451 97,451
Other assets......................... 2,594 2,594 2,594
------------- ------- ----------- --------- ----------- -----------
Total assets................... $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
------------- ------- ----------- --------- ----------- -----------
------------- ------- ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt.................... $ 272 $ $ $ 272 $ $ 272
Short-term Payable to U.S. Office
Products......................... 16,873 (16,873)(b)
Accounts payable................... 11,951 11,951 11,951
Accrued compensation............... 5,502 5,502 5,502
Other accrued liabilities.......... 5,262 5,262 5,262
------------- ------- ----------- --------- ----------- -----------
Total current liabilities...... 39,860 (16,873) 22,987 22,987
Long-term debt....................... 385 82,593(b) 82,978 (31,631)(d) 51,347
Long-term Payable to U.S. Office
Products........................... 62,470 3,250(a)
(65,720)(b)
------------- ------- ----------- --------- ----------- -----------
Total liabilities.............. 102,715 3,250 105,965 (31,631) 74,334
Stockholder's equity:
Common Stock....................... 13(c) 13 2(d) 15
Additional paid-in capital......... 93,300(c) 93,300 31,629(d) 124,929
Divisional equity.................. 93,313 (93,313)(c)
Retained earnings.................. 5,179 5,179 5,179
Equity in Purchased Company........ 450 (450)(a)
------------- ------- ----------- --------- ----------- -----------
Total stockholder's equity..... 98,492 450 (450) 98,492 31,631 130,123
------------- ------- ----------- --------- ----------- -----------
Total liabilities and
stockholder's equity......... $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
------------- ------- ----------- --------- ----------- -----------
------------- ------- ----------- --------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-28
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SCHOOL SAX FISCAL 1998 PRO FORMA
SPECIALTY, ARTS & AMERICAN PURCHASE PRO FORMA OFFERING
INC. CRAFTS ACADEMIC ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS
------------- --------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 247,880 $ 5,421 $ 36,423 $ 28,943 $ $ 318,667 $
Cost of revenues..................... 176,501 3,467 26,203 21,314 227,485
------------- --------- ----------- ----------- ----------- --------- -----------
Gross profit..................... 71,379 1,954 10,220 7,629 91,182
Selling, general and administrative
expenses........................... 49,588 1,451 6,968 6,425 224(f) 64,656
Amortization expense................. 1,411 556(g) 1,967
------------- --------- ----------- ----------- ----------- --------- -----------
Operating income................. 20,380 503 3,252 1,204 (780) 24,559
Other (income) expense:
Interest expense................... 4,100 18 441 38 938(h) 5,535 (1,898)(j)
Interest income.................... (109) (3) (4) 116(h)
Other.............................. 441 24 57 522
------------- --------- ----------- ----------- ----------- --------- -----------
Income before provision for income
taxes.............................. 15,948 488 2,787 1,113 (1,834) 18,502 1,898
Provision for income taxes........... 7,113 189 892 141 176(i) 8,511 759
------------- --------- ----------- ----------- ----------- --------- -----------
Net income........................... $ 8,835 $ 299 $ 1,895 $ 972 $ (2,010) $ 9,991 $ 1,139
------------- --------- ----------- ----------- ----------- --------- -----------
------------- --------- ----------- ----------- ----------- --------- -----------
Weighted average shares:
Basic.............................. 12,751 12,300(k)
Diluted............................ 13,020 12,300(k)
Net income per share:
Basic.............................. $ 0.69 $ 0.81
Diluted............................ $ 0.68 $ 0.81
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues............................. $ 318,667
Cost of revenues..................... 227,485
-----------
Gross profit..................... 91,182
Selling, general and administrative
expenses........................... 64,656
Amortization expense................. 1,967
-----------
Operating income................. 24,559
Other (income) expense:
Interest expense................... 3,637
Interest income....................
Other.............................. 522
-----------
Income before provision for income
taxes.............................. 20,400
Provision for income taxes........... 9,270
-----------
Net income........................... $ 11,130
-----------
-----------
Weighted average shares:
Basic.............................. 14,675(l)
Diluted............................ 14,675(l)
Net income per share:
Basic.............................. $ 0.76
Diluted............................ $ 0.76
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-29
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
------------- --------- ----------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 159,977 $ 28,717 $ 34,024 $ 54,706 $ 14,820 $ $ 292,244
Cost of revenues............ 114,380 16,663 24,784 36,510 11,368 203,705
------------- --------- ----------- ------------- ------------- ------------- ---------
Gross profit................ 45,597 12,054 9,240 18,196 3,452 88,539
Selling, general and
administrative expenses... 33,000 7,504 6,702 13,773 3,312 (124)(e) 64,997
830(f)
Amortization expense........ 396 1,533(g) 1,929
Non-recurring acquisition
costs..................... 1,792 1,792
------------- --------- ----------- ------------- ------------- ------------- ---------
Operating income............ 10,409 4,550 2,538 4,423 140 (2,239) 19,821
Other (income) expense:
Interest expense............ 3,358 400 641 206 176 754(h) 5,535
Interest income............. (101) (37) 138(h)
Other....................... (204) (27) 67 (10) (174)
------------- --------- ----------- ------------- ------------- ------------- ---------
Income before provision for
income taxes.............. 7,356 4,177 1,897 4,187 (26) (3,131) 14,460
Provision for income
taxes..................... 3,750 1,620 395 111 775(i) 6,651
------------- --------- ----------- ------------- ------------- ------------- ---------
Net income (loss)........... $ 3,606 $ 2,557 $ 1,897 $ 3,792 $ (137) $ (3,906) $ 7,809
------------- --------- ----------- ------------- ------------- ------------- ---------
------------- --------- ----------- ------------- ------------- ------------- ---------
Weighted average shares:
Basic................... 9,553 12,300(k)
Diluted................. 9,758 12,300(k)
Net income per share:
Basic................... $ 0.38 $ 0.63
Diluted................. $ 0.37 $ 0.63
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS COMBINED
----------- -----------
<S> <C> <C>
Revenues.................... $ $ 292,244
Cost of revenues............ 203,705
----------- -----------
Gross profit................ 88,539
Selling, general and
administrative expenses... 64,997
Amortization expense........ 1,929
Non-recurring acquisition
costs..................... 1,792
----------- -----------
Operating income............ 19,821
Other (income) expense:
Interest expense............ (1,898)(j) 3,637
Interest income.............
Other....................... (174)
----------- -----------
Income before provision for
income taxes.............. 1,898 16,358
Provision for income
taxes..................... 759 7,410
----------- -----------
Net income (loss)........... $ 1,139 $ 8,948
----------- -----------
----------- -----------
Weighted average shares:
Basic................... 14,675(l)
Diluted................. 14,675(l)
Net income per share:
Basic................... $ 0.61
Diluted................. $ 0.61
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-30
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
-------------- --------- ----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 191,746 $ 34,542 $ 40,563 $ 69,089 $ 14,820 $ $ 350,760
Cost of revenues.............. 136,577 20,067 29,608 46,776 11,368 244,396
-------------- --------- ----------- ------------- ------------- ------------- -----------
Gross profit.............. 55,169 14,475 10,955 22,313 3,452 106,364
Selling, general and
administrative expenses..... 42,896 9,698 8,102 18,056 3,312 (124)(e) 82,956
1,016(f)
Amortization expense.......... 566 1,908(g) 2,474
Non-recurring acquisition
costs....................... 1,792 1,792
Restructuring costs........... 194 194
-------------- --------- ----------- ------------- ------------- ------------- -----------
Operating income.......... 9,721 4,777 2,853 4,257 140 (2,800) 18,948
Other (income) expense:
Interest expense............ 4,197 474 850 234 176 1,369(h) 7,300
Interest income............. (45) 45(h)
Other....................... (196) (33) 81 (10) (158)
-------------- --------- ----------- ------------- ------------- ------------- -----------
Income (loss) before provision
for income taxes............ 5,720 4,336 2,003 3,987 (26) (4,214) 11,806
Provision for income taxes.... (2,412) 1,664 34 618 111 77(i) 92
-------------- --------- ----------- ------------- ------------- ------------- -----------
Net income (loss)............. $ 8,132 $ 2,672 $ 1,969 $ 3,369 $ (137) $ (4,291) $ 11,714
-------------- --------- ----------- ------------- ------------- ------------- -----------
-------------- --------- ----------- ------------- ------------- ------------- -----------
Weighted average shares
outstanding:
Basic..................... 10,003 12,300(k)
Diluted................... 10,196 12,300(k)
Net income per share:
Basic..................... $ 0.81 $ 0.95
Diluted................... $ 0.80 $ 0.95
<CAPTION>
PRO
FORMA PRO
OFFERING FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues...................... $ $ 350,760
Cost of revenues.............. 244,396
------------- -----------
Gross profit.............. 106,364
Selling, general and
administrative expenses..... 82,956
Amortization expense.......... 2,474
Non-recurring acquisition
costs....................... 1,792
Restructuring costs........... 194
------------- -----------
Operating income.......... 18,948
Other (income) expense:
Interest expense............ (2,530)(j) 4,770
Interest income.............
Other....................... (158)
------------- -----------
Income (loss) before provision
for income taxes............ 2,530 14,336
Provision for income taxes.... 1,012 1,104
------------- -----------
Net income (loss)............. $ 1,518 $ 13,232
------------- -----------
------------- -----------
Weighted average shares
outstanding:
Basic..................... 14,675(l)
Diluted................... 14,675(l)
Net income per share:
Basic..................... $ 0.90
Diluted................... $ 0.90
</TABLE>
See accompanying notes for pro forma combined financial statements.
F-31
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with acquisition
of Education Access for $3,250 of cash provided by U.S. Office Products. The
portion of the consideration assigned to goodwill ($2,800) in the
transaction accounted for under the purchase method represents the excess of
the cost over the fair market value of the net assets acquired. The Company
amortizes goodwill over a period of 40 years. The recoverability of the
unamortized goodwill will be assessed on an ongoing basis by comparing
anticipated undiscounted future cash flows from operations to net book
value.
(b) Adjustment to reflect the refinancing of the payable to U.S. Office Products
with the proceeds received from expected borrowings under the revolving
credit facility with a third party.
(c) Adjustment to reflect the reclassification of divisional equity to common
stock and additional paid in capital as a result of the Distribution. The
Distribution will result in the issuance of 12,300 shares of common stock.
(d) Adjustment to reflect $31,631 of net proceeds from the sale of 2,375 shares
of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of the proceeds to repay long-term debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(e) Adjustment to reflect reductions in executive compensation as a result of
the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for
the foreseeable future and are not reasonably likely to affect the operating
performance of the Company.
(f) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded entity, rather than as a division of U.S.
Office Products.
(g) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997 and
Fiscal 1998 Purchase Acquisitions for the periods prior to the respective
dates of acquisition. The Company has recorded goodwill amortization in the
historical financial statements from the respective dates of acquisition
forward. The goodwill is being amortized over an estimated life of 40 years.
(h) Adjustment to reflect the increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero as
the Company generally expects to use available cash to repay debt. Pro forma
interest expense will fluctuate $65 on an annual basis for each 0.125%
change in interest rates.
(i) Adjustment to calculate the provision for income taxes on the combined pro
forma results. The difference between the effective tax rate of 46% and the
statutory tax rate of 35% for the nine months ended January 25, 1997 and
January 24, 1998 relates primarily to state income taxes and non-deductible
goodwill. The difference between the effective pro forma tax rate and the
statutory tax rate for the fiscal year ended April 26, 1997 relates
primarily to state taxes and nondeductible goodwill, offset by the reversal
of a $5.3 million deferred tax valuation allowance.
F-32
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Offering and sale of shares to
Messrs. Spalding, Vander Zanden and Pate of $31,631 to repay long-term debt
at an interest rate of 8%.
(k) The approximately 12,300 weighted average shares outstanding used to
calculate pro forma earnings per share is calculated based upon
approximately 110,700 shares of U.S. Office Products common stock expected
to be outstanding on the date of the School Specialty Distribution divided
by nine, which is the Distribution Ratio. The shares of U.S. Office Products
common stock expected to be outstanding on the date of the School Specialty
Distribution are based upon (a) approximately 133,800 shares currently
outstanding, plus (b) approximately 8,900 shares expected to be issued on
conversion of U.S. Office Products convertible debt, plus (c) approximately
5,000 shares expected to be issued on exercise of outstanding U.S. Office
Products stock options, minus (d) approximately 37,000 shares expected to be
accepted in U.S. Office Products' equity self-tender which is part of the
Strategic Restructuring Plan.
(l) The approximately 14,675 weighted average shares outstanding used to
calculate pro forma as adjusted earnings per share is based upon the
approximately 12,300 shares of common stock to be issued as a result of the
School Specialty Distribution and 2,125 shares to be sold in the Offering
and 250 shares to be sold to Messrs. Spalding, Vander Zanden and Pate.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Academic Suppliers Holding Corporation
We have audited the accompanying consolidated balance sheets of AMERICAN
ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Academic Suppliers Holding Corporation and Subsidiary as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
February 24, 1997
F-34
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash.............................................................. $ 7,228 $ 21,507 $ 9,841
Trade accounts receivable (net of allowance for doubtful accounts
of $25,000)..................................................... 4,525,451 3,656,546 13,476,228
Inventories (Note 1).............................................. 1,805,731 1,599,140 2,398,435
Other current assets and prepaid expenses......................... 127,673 173,549 269,234
------------- ------------- -------------
6,466,083 5,450,742 16,153,738
------------- ------------- -------------
Property, Plant and Equipment (less accumulated depreciation--
Notes 1 and 2).................................................... 3,081,784 2,949,000 2,845,858
------------- ------------- -------------
Other Assets:
Excess of cost over the fair value of net assets acquired (less
accumulated amortization of $320,322 $433,022, $509,311,
respectively--Note 1)........................................... 4,187,938 4,075,238 4,030,878
Deferred financing costs (less accumulated amortization of
$21,729, $42,729, and $50,965 respectively--Note 1)............. 40,544 19,544 0
Deposits.......................................................... 37,581 64,211 0
------------- ------------- -------------
4,266,063 4,158,993 4,030,878
------------- ------------- -------------
$ 13,813,930 $ 12,558,735 $ 23,030,474
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 1,476,312 $ 1,636,969 $ 4,281,450
Current portion of long-term debt (Note 4)........................ 168,673 3,135 10,772,516
Other current liabilities and accrued expenses (Notes 3 and 9).... 1,968,780 736,374 2,391,544
------------- ------------- -------------
3,613,765 2,376,478 17,445,510
------------- ------------- -------------
Long-term Liabilities:
Long-term debt (Note 4)........................................... 7,712,187 6,407,152 0
------------- ------------- -------------
Shareholders' Equity:
Common stock, (10,000 shares of $.01 par value authorized; 1,209,
1,232 and 1,232 shares issued and outstanding at December 31,
1995, 1996, and September 30, 1997, respectively--Note 8)....... 12 12 12
Additional paid-in capital........................................ 5,528,073 5,648,073 5,648,073
Retained earnings (Accumulated deficit)........................... (1,463,356) (296,229) 1,513,630
------------- ------------- -------------
4,064,729 5,351,856 7,161,715
Excess of Purchase Price over Predecessor Basis (Note 1).......... (1,576,751) (1,576,751) (1,576,751)
------------- ------------- -------------
2,487,978 3,775,105 5,584,964
------------- ------------- -------------
$ 13,813,930 $ 12,558,735 $ 23,030,474
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales........................................... $ 38,596,316 $ 39,290,879 $ 32,578,366 $ 38,497,843
Cost of Goods Sold.................................. 27,050,924 26,667,961 21,985,703 25,916,417
------------- ------------- ------------- -------------
Gross Profit........................................ 11,545,392 12,622,918 10,592,663 12,581,426
Selling, General and Administrative Expenses........ 9,522,851 9,995,206 7,229,895 8,932,382
------------- ------------- ------------- -------------
Income from Operations.............................. 2,022,541 2,627,712 3,362,768 3,649,044
------------- ------------- ------------- -------------
Other Expense:
Interest.......................................... 1,002,199 856,223 660,753 543,089
Guarantee fees (Note 4)........................... 305,384 148,996 148,996 0
Executive severance (Note 9)...................... 168,750 0 0 0
Amortization of intangibles (Note 1).............. 133,700 133,700 100,275 120,516
Management fee (Note 8)........................... 112,000 182,000 121,500 198,000
Other............................................. 104,574 128,908 81,115 126,523
------------- ------------- ------------- -------------
1,826,607 1,449,827 1,112,639 988,128
------------- ------------- ------------- -------------
Income before Income Taxes.......................... 195,934 1,177,885 2,250,129 2,660,916
Income Tax Provision--Current....................... 26,000 10,758 8,069 851,057
------------- ------------- ------------- -------------
Net Income.......................................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
EXCESS OF
RETAINED PURCHASE
SHARES ADDITIONAL EARNINGS PRICE OVER TOTAL
ISSUED AND PAID-IN (ACCUMULATED PREDECESSOR SHAREHOLDERS'
OUTSTANDING PAR VALUE CAPITAL DEFICIT) BASIS EQUITY
--------------- ------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994................ 1,209 $ 12 $5,528,073 $(1,633,290) ($1,576,751) $ 2,318,044
Net Income, Year Ended December 31, 1995... 169,934 169,934
----- --- ----------- ------------ ----------- -------------
Balances, December 31, 1995................ 1,209 12 5,528,073 (1,463,356) (1,576,751) 2,487,978
Issuance of Common Stock (Note 8).......... 23 120,000 120,000
Net Income, Year Ended December 31, 1996... 1,167,127 1,167,127
----- --- ----------- ------------ ----------- -------------
Balances, December 31, 1996................ 1,232 12 5,648,073 (296,229) (1,576,751) 3,775,105
Unaudited data:
Net Income, Nine Months Ended
September 30, 1997....................... 1,809,859 1,809,859
----- --- ----------- ------------ ----------- -------------
Balances, September 30, 1997 (unaudited)... 1,232 $ 12 $5,648,073 $1,513,630 ($1,576,751) $ 5,584,964
----- --- ----------- ------------ ----------- -------------
----- --- ----------- ------------ ----------- -------------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-37
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 404,222 381,791 281,842 292,031
Change in assets and liabilities:
Accounts receivable (net)....................... 643,826 868,905 (6,575,016) (9,819,682)
Inventories..................................... 172,680 206,591 (523,208) (799,296)
Other assets.................................... (56,950) (72,506) (95,646) (89,177)
Accounts payable................................ (140,915) 160,657 2,010,499 2,643,464
Other liabilities and accrued expenses.......... 968,782 (1,232,406) (1,530,288) 1,652,036
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities... 2,161,579 1,480,159 (4,189,757) (4,310,765)
------------- ------------- ------------- -------------
Cash Flows Used in Investing Activities:
Purchases of property and equipment................. (197,298) (115,307) (108,329) (67,282)
------------- ------------- ------------- -------------
Cash Flows from Financing Activities:
Repayment of revolving line of credit (net)......... (1,929,681) (1,305,935) 4,227,957 5,766,671
Repayment of term loans and mortgage................ (96,046) (107,306) (81,277) (1,400,290)
Principal payment on capital lease obligation....... (1,305) (3,496)
Repayment of promissory note payable to
shareholder....................................... 0 (53,836)
Proceeds from sale of common stock.................. 0 120,000 120,000
------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities........................................ (2,027,032) (1,350,573) 4,266,680 4,366,381
------------- ------------- ------------- -------------
Net Increase (Decrease) in Cash....................... (62,751) 14,279 (31,406) (11,666)
Cash, Beginning of Year............................... 69,979 7,228 7,228 21,507
------------- ------------- ------------- -------------
Cash, End of Year..................................... $ 7,228 $ 21,507 (24,178) 9,841
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest.......................................... $ 977,000 $ 864,134 $ 660,753 $ 543,089
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income taxes...................................... $ 4,900 $ 11,046 $ 0 $ 85,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental Schedule of Noncash Operating, Investing
and Financing Activities: Acquisition of equipment
financed through capital lease obligation........... $ 8,953 $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Conversion of portion of accrued guaranteed fees to a
note payable (Note 4)............................... $ 53,836 $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES:
American Academic Suppliers Holding Corporation ("AASHC") and its wholly
owned subsidiary, American Academic Suppliers, Inc. ("AASI") (collectively
referred to as the "Company"), is a direct distributor of school supplies,
supplementary educational materials, furniture, and equipment to educational
institutions, school systems and administrative offices located throughout the
United States. Operations are conducted from owned and leased premises located
in Cary, Illinois and from leased premises located in Mt. Laurel, New Jersey
(Note 7).
On February 28, 1993, AASHC acquired all of the outstanding common stock of
AASI for $8,000,000. The acquisition was accounted for using the purchase method
of accounting. Since the former shareholders of AASI acquired an equity interest
in AASHC, the purchase price allocation has been adjusted by $1,576,751 to
reflect the excess of the purchase price over the predecessor basis in the net
assets acquired which, under generally accepted accounting principles, may not
be recognized as an asset. Such excess of purchase price over predecessor basis
was recorded as a reduction of the excess of cost over the fair value of net
assets acquired and as a decrease in shareholders' equity as of the date of
acquisition.
The Company primarily sells its products to separate schools or school
systems. As such, the majority of trade accounts receivable relate primarily to
these customers. Management believes that the recorded allowance for doubtful
accounts is adequate to cover potential losses associated with these customers.
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of September 30, 1997 and the
results of its operations and its cash flows for the nine months ended September
30, 1996 and 1997, as presented in the accompanying unaudited interim financial
statements.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
A summary of significant accounting policies is as follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of AASHC and its wholly owned subsidiary, AASI. All
intercompany accounts and balances have been eliminated in the
consolidation.
INVENTORIES--Inventories are valued at the lower of cost or market, with
cost determined under the first-in, first-out ("FIFO") basis.
DEPRECIATION AND AMORTIZATION--Depreciation of property, plant and
equipment is computed under both accelerated and straight-line methods
for financial reporting purposes, based on the estimated useful lives of
the assets. For income tax reporting purposes, provisions for
depreciation are computed principally under accelerated methods, as
permitted by the Internal Revenue Code.
The excess of cost over fair value of net assets acquired is being
amortized under the straight-line method over a period of 40 years.
F-39
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Costs incurred in connection with obtaining long-term financing are
amortized, on a straight-line basis, over the term of the financing
commitment.
INCOME TAXES--The Company accounts for income taxes under the provisions
of Financial Accounting Standard No. 109. Under this standard, deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
NOTE 2--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at December 31, 1995 and 1996, stated at
acquisition cost, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land.............................................................. $ 415,000 $ 415,000
Buildings......................................................... 2,333,828 2,335,258
Warehouse equipment............................................... 603,590 638,976
Office furniture and equipment.................................... 249,060 255,613
Computer equipment................................................ 173,285 245,223
------------ ------------
Total owned assets............................................ 3,774,763 3,890,070
Equipment capitalized under lease obligation...................... 8,953 8,953
------------ ------------
3,783,716 3,899,023
Less accumulated depreciation..................................... (701,932) (950,023)
------------ ------------
$ 3,081,784 $ 2,949,000
------------ ------------
------------ ------------
</TABLE>
Depreciation of property, plant, and equipment, for the years ended December
31, 1995 and 1996, amounted to approximately $270,500 and $248,000,
respectively.
NOTE 3--OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES:
Other current liabilities and accrued expenses, at December 31, 1995 and
1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ----------
<S> <C> <C>
Compensation and commissions........................................ $ 1,037,714 $ 390,037
Guarantor's fee (Note 4)............................................ 305,383 0
Severance pay (Note 9).............................................. 170,442 0
Real estate taxes................................................... 77,253 80,385
Interest............................................................ 67,971 60,060
Other............................................................... 310,017 205,892
------------ ----------
$ 1,968,780 $ 736,374
------------ ----------
------------ ----------
</TABLE>
F-40
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT:
Long-term debt, at December 31, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Borrowings from Harris Trust and Savings Bank ("Harris") pursuant to a Credit
Agreement ("Agreement") (see below):
Revolving credit loan borrowings.................................................. $ 5,787,922 $ 4,481,987
Term loan borrowings.............................................................. 521,422 467,231
Mortgage note payable to Harris Bank Barrington, N.A. (secured by real estate occupied
by the Company; payable in monthly installments, inclusive of interest at prime plus
1 1/2%, of $16,600; final maturity on December 16, 1999. Fully paid subsequent to
year-end)........................................................................... 1,510,032 1,456,917
Promissory note payable to Pfingsten Executive Fund, L.P. (bearing interest at 10% per
annum; paid in full during 1996).................................................... 53,836 0
Capitalized lease obligation (payable in monthly installments of $291, inclusive of
interest at 10%; final maturity June 7, 1998)....................................... 7,648 4,152
------------ ------------
7,880,860 6,410,287
Less current portion.................................................................. 168,673 3,135
------------ ------------
Long-term portion, due in 1998........................................................ $ 7,712,187 $ 6,407,152
------------ ------------
------------ ------------
</TABLE>
At December 31, 1996, the Harris Agreement provided maximum aggregate
borrowings of $12,077,500. Interest on outstanding borrowings was payable
monthly, at the prime rate (8.25% at December 31, 1996) plus 1%. The Company had
availability under the Agreement of $1,100,000 at December 31, 1996. Pfingsten
Executive Fund, L.P. (the Company's majority shareholder) had guaranteed
$1,500,000 of the borrowings (reduced from $3,000,000 effective December 31,
1995) under the Agreement. Guarantee fees are charged to the Company at 10% per
annum, which amounted to $305,384 and $148,996 for the years ended December 31,
1995 and 1996. The guarantees were released by Harris on October 31, 1996.
On February 4, 1997, the Agreement with Harris was amended ("Amended
Agreement") to provide maximum aggregate borrowings of $16,800,000 from June 1
through October 31, and $11,800,000 at all other times. Revolving credit loan
borrowings, under the Amended Agreement which expires March 31, 1998, are
limited to a computed "Borrowing Base" amount and bear interest at the Company's
option at the prime rate or LIBOR plus 1.75%. The Amended Agreement requires the
Company to pay .25% per annum on the average daily unused portion of the
Revolving Credit Commitment and to pay a prepayment penalty in certain
situations.
The Amended Agreement contains covenants restricting certain corporate acts,
such as restricting dividend and management fee payments, and requiring the
maintenance of net worth levels and a financial ratio.
Borrowings under the agreement with Harris are secured by all of the
Company's assets.
On February 4, 1997, the Company repaid the mortgage note and term loan from
borrowings under the revolving credit loan.
F-41
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT: (CONTINUED)
Borrowings under the revolving credit, term loan and mortgage note at
December 31, 1996 have been reported as long-term liabilities at December 31,
1996 as a result of the Amended Agreement and repayment of the mortgage note and
term loan.
NOTE 5--INCOME TAXES:
AASHC and its wholly owned subsidiary file a consolidated federal income tax
return.
The primary differences between the statutory and effective tax rates for
1995 and 1996 relate to the use of net operating loss carryforwards not
previously recognized.
Gross deferred income tax assets consist primarily of (a) net operating loss
carryforwards, (b) accrued expenses not paid within two and one-half months
after the end of the Company's year which are deductible for tax reporting
purposes when paid, and (c) uniform capitalization rules (for additional
inventory costs) reflected for tax reporting purposes only. The gross deferred
income tax liability consists of the variation in the book and tax bases of
property, plant and equipment.
At December 31, 1995 and 1996, the Company's net deferred income tax asset
and related valuation allowance consisted of:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Gross deferred tax asset.............................................. $ 828,000 $ 262,000
Less valuation allowance.............................................. 517,000 84,000
---------- ----------
Deferred tax asset, net of valuation allowance........................ 311,000 178,000
Less deferred tax liability........................................... 311,000 178,000
---------- ----------
$ 0 $ 0
---------- ----------
---------- ----------
</TABLE>
The valuation allowance decreased by $112,799 and $433,000 during 1995 and
1996, respectively.
At December 31, 1996, the Company has available, as a carryforward to future
years, a federal net operating loss carryforward of approximately $560,000,
expiring in 2008 and 2009.
NOTE 6--EMPLOYEE BENEFIT PLAN:
The Company is a participant in a Pfingsten Partners, L.P. master employee
benefit plan. The plan, established under the provisions of Section 401(k) of
the Internal Revenue Code provides, among other things, for the Company to make
discretionary contributions. Such employer contributions to the plan, for the
years ended December 31, 1995 and 1996, amounted to $43,427 and $24,534,
respectively.
Certain professionals of Pfingsten Partners, L.P. (Note 8) serve as the
trustees of the plan.
NOTE 7--LEASES:
The Company leases an office building and a warehouse under various
operating agreements which expire in 1998. The office building lease is
renewable at the Company's option for 36 additional months with an escalated
monthly payment. Rent expense incurred under these leases, for the years ended
December 31, 1995 and 1996, totalled approximately $253,000 and $251,000,
respectively.
F-42
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LEASES: (CONTINUED)
Future minimum lease payments under the aforementioned operating leases, at
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 258,000
1998.............................................................. 73,000
---------
$ 331,000
---------
---------
</TABLE>
NOTE 8--SHAREHOLDERS' EQUITY AND RELATED-PARTY TRANSACTIONS:
During the year ended December 31, 1996, the Company issued 23 shares of
common stock to certain officers for $120,000 in cash.
For the years ended December 31, 1995 and 1996, the Company incurred
$112,000 and 182,000, respectively, in fees pursuant to a management agreement
with Pfingsten Partners, L.P., which entity is an affiliate of the Company's
majority shareholder, Pfingsten Executive Fund, L.P.
During the years ended December 31, 1995 and 1996, approximately $15,300 and
$6,900, respectively, in consulting services were paid by Pfingsten Partners,
L.P., on behalf of the Company, and charged to the Company. Additionally, at
December 31, 1995, $12,000 was owed to a shareholder of the Company for services
rendered during 1995.
See Notes 3 and 4 for additional related-party transactions.
NOTE 9--SEVERANCE AGREEMENTS:
During December 1995, the Company terminated its employment agreement with
its president and recognized a $168,750 charge to operations to cover the cost
associated with this termination. The related amount owed pertaining to the
aforementioned charge, as well as a 1993 termination, at December 31, 1995, was
$170,442. There were no outstanding amounts at December 31, 1996.
NOTE 10--SUBSEQUENT EVENT (UNAUDITED):
Effective December 15, 1997, the Company and its stockholders entered into a
definitive agreement with U.S. Office Products Company ("U.S. Office Products")
pursuant to which U.S. Office Products acquired all outstanding shares of the
Company's common stock in exchange for cash.
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Sax Arts and Crafts, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Sax Arts and Crafts, Inc. at
December 16, 1995 and December 25, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 25, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the accounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 3, 1998
F-44
<PAGE>
SAX ARTS AND CRAFTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25, JUNE 29,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.............................................................. $ 102,900 $ 114,492 $ 109,544
Accounts receivable--trade, less allowance for doubtful accounts
of $31,860, $49,860 and $37,448, respectively................... 4,656,651 4,383,464 4,114,798
Inventories....................................................... 5,591,557 5,441,664 7,145,216
Prepaid expenses and other current assets......................... 856,943 429,741 747,466
------------- ------------- -------------
Total current assets............................................ 11,208,051 10,369,361 12,117,024
Net property, plant and equipment................................... 1,034,648 820,827 658,356
Other assets........................................................ 42,477 26,506 26,506
------------- ------------- -------------
Total assets.................................................... $ 12,285,176 $ 11,216,694 $ 12,801,886
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable--trade........................................... $ 4,210,593 $ 1,947,833 $ 3,403,006
Affiliate payable, net............................................ 3,212,473 1,806,645 3,130,496
Accrued income taxes.............................................. 1,802,399 1,814,139 401,063
Other accrued expenses............................................ 684,089 806,241 856,057
------------- ------------- -------------
Total current liabilities....................................... 9,909,554 6,374,858 7,790,622
Deferred income taxes............................................... 42,256 16,202 16,202
Other liabilities................................................... 69,195 69,197 92,000
------------- ------------- -------------
Total liabilities............................................... 10,021,005 6,460,257 7,898,824
Shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding....................................................... 1,000 1,000 1,000
Capital surplus--additional paid-in capital....................... 1,507,597 1,507,597 1,507,597
Retained earnings................................................. 755,574 3,247,840 3,394,465
------------- ------------- -------------
Total shareholder's equity...................................... 2,264,171 4,756,437 4,903,062
------------- ------------- -------------
Total liabilities and shareholder's equity...................... $ 12,285,176 $ 11,216,694 $ 12,801,886
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 29,169,879 $ 33,239,883 $ 34,350,947 $ 11,125,967 $ 13,009,456
Cost of sales............................... 16,369,453 19,029,918 20,078,806 6,562,838 8,286,522
------------- ------------- ------------- ------------- -------------
Gross profit............................ 12,800,426 14,209,965 14,272,141 4,563,129 4,722,934
Selling, administrative and other
expenses.................................. 8,401,463 9,169,667 9,734,256 4,379,178 4,427,608
------------- ------------- ------------- ------------- -------------
Operating earnings...................... 4,398,963 5,040,298 4,537,885 183,951 295,326
Other income (expense), net................. (510,508) (545,302) (476,886) (222,759) (52,971)
------------- ------------- ------------- ------------- -------------
Earnings before income taxes................ 3,888,455 4,494,996 4,060,999 (38,808) 242,355
Income taxes................................ 1,502,315 1,738,191 1,568,733 (14,351) 95,730
------------- ------------- ------------- ------------- -------------
Net earnings (loss)......................... $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 18, 1993..................... 1,000 $ 1,000 $ 1,507,597 $ 512,629 $ 2,021,226
Dividends.................................... (2,400,000) (2,400,000)
Net income................................... 2,386,140 2,386,140
---------- --------- ------------ ------------- --------------
Balance, December 17, 1994..................... 1,000 1,000 1,507,597 498,769 2,007,366
Dividends.................................... (2,500,000) (2,500,000)
Net income................................... 2,756,805 2,756,805
---------- --------- ------------ ------------- --------------
Balance, December 16, 1995..................... 1,000 1,000 1,507,597 755,574 2,264,171
Net income................................... 2,492,266 2,492,266
---------- --------- ------------ ------------- --------------
Balance, December 25, 1996..................... 1,000 1,000 1,507,597 3,247,840 4,756,437
Net income (unaudited)....................... 146,625 146,625
---------- --------- ------------ ------------- --------------
Balance, June 29, 1997 (unaudited)............. 1,000 $ 1,000 $ 1,507,597 $ 3,394,465 $ 4,903,062
---------- --------- ------------ ------------- --------------
---------- --------- ------------ ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................. $2,386,140 $2,756,805 $2,492,266 $ (24,457) $ 146,625
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities:
Depreciation and amortization................ 327,489 340,556 371,516 178,529 153,891
Deferred income taxes........................ 599 (30,302) (26,054) -- --
Gain on disposal of fixed assets............. (5,350) (21,505) (6,578) (6,205) (23,234)
Impact on cash flow from changes in working
capital:
Accounts receivable...................... (185,934) (734,239) 273,187 1,403,353 268,666
Inventory................................ (659,936) 144 149,893 (2,287,194) (1,703,552)
Other current assets..................... (632,521) (56,442) 427,202 (109,614) (317,726)
Accounts payable......................... 155,519 2,590,011 (2,262,760) (2,172,326) 1,455,174
Affiliates payable....................... 942,481 (2,521,286) (1,405,828) 2,927,060 1,323,851
Accrued expenses......................... (212,673) 656,493 133,894 27,125 (1,340,457)
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in)
operating activities............... 2,115,814 2,980,235 146,738 (63,729) (36,762)
------------ ------------ ------------ ---------- ----------
Cash flows from investing activities:
Purchased property, plant and equipment.......... (196,752) (473,305) (157,695) (9,789) (27,006)
Proceeds from sales of assets.................... 5,350 21,505 6,578 11,450 58,820
Increase in other assets......................... -- -- 15,971 15,971 --
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in)
investing activities............... (191,402) (451,800) (135,146) 17,632 31,814
------------ ------------ ------------ ---------- ----------
Cash flows from financing activities:
Dividend payment................................. (2,400,000) (2,500,000) -- -- --
------------ ------------ ------------ ---------- ----------
Net cash used in financing
activities......................... (2,400,000) (2,500,000) -- -- --
------------ ------------ ------------ ---------- ----------
Net increase (decrease) in cash.................... (475,588) 28,435 11,592 (46,097) (4,948)
Cash at beginning of period........................ 550,053 74,465 102,900 102,900 114,492
------------ ------------ ------------ ---------- ----------
Cash at end of period.............................. $ 74,465 $ 102,900 $ 114,492 $ 56,803 $ 109,544
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 91,585 $ 390 $ -- $ -- $ 23
Cash paid for taxes............................ $1,540,000 $1,480,000 $1,780,000 $ 141,000 $ 95,000
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Sax Arts and Crafts, Inc. (the "Company") is a national mail order
distributor of art and craft supplies to schools and educational institutions.
Sax Arts and Crafts, Inc. is a wholly-owned subsidiary of Day-Timers, Inc. (the
"Parent"). The Parent is owned by ACCO World Corporation ("ACCO"), which is a
wholly-owned subsidiary of Fortune Brands International ("Fortune Brands"). On
June 30, 1997, the Company and its shareholder entered into a definitive
agreement with U.S. Office Products Company ("U.S. Office Products") pursuant to
which the Company was acquired by U.S. Office Products. All outstanding shares
of the Company were exchanged for cash.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the third Saturday in December. Fiscal
year 1994 ended on December 17, 1994 and fiscal year 1995 ended on December 16,
1995. In 1996, the Company's fiscal year end was changed to December 25, 1996 in
order to comply with the closing date of the Parent. As a result, fiscal 1996
has 53 weeks.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of June 29, 1997 and the results of
its operations and its cash flows for the six months ended June 30, 1996 and
June 29, 1997, as presented in the accompanying unaudited interim financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product as obligations
subsequent to delivery are not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company provides products to a wide range of customers who primarily operate in
the education sector. The Company does not believe it is exposed to any undue
concentration of credit risk based on the strong credit history of the Company's
customer base.
F-49
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is part of a consolidated tax group with its Parent. For
purposes of these financial statements, income taxes have been provided as if
the Company filed a separate tax return. Income taxes are calculated in
accordance with the liability method of accounting for income taxes as provided
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred taxes are provided on temporary differences between book and
tax basis of assets and liabilities which will have a future impact on taxable
income.
3. INVENTORIES
Inventories are recorded at cost (not in excess of market value) as
determined by the weighted average cost method. Inventories are comprised as
follows:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Finished goods....................................................................... $5,647,290 $5,493,859
Less--Reserves....................................................................... 55,733 52,195
------------ ------------
Total inventory.................................................................. $5,591,557 $5,441,664
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Buildings and improvements........................................................... $ 129,302 $ 120,045
Automobiles.......................................................................... 251,382 245,403
Machinery and equipment.............................................................. 1,463,156 1,482,480
Computer hardware and software....................................................... 806,755 982,415
Construction in progress............................................................. 157,534 58,544
------------ ------------
Total cost....................................................................... 2,808,129 2,888,887
Less--Accumulated depreciation....................................................... (1,773,481) (2,068,060)
------------ ------------
Net property, plant and equipment.................................................... $1,034,648 $ 820,827
------------ ------------
------------ ------------
</TABLE>
Depreciation is generally computed on a straight-line method over the
estimated useful lives of the assets including assets acquired by capital
leases. Accelerated depreciation is used for income tax purposes where
permitted. Depreciation expense recorded for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 was $327,489, $340,556 and $371,516,
respectively.
F-50
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current portion:
Federal............................................................. $1,292,616 $1,522,247 $1,372,728
State............................................................... 209,100 246,246 222,059
------------ ------------ ------------
1,501,716 1,768,493 1,594,787
------------ ------------ ------------
Deferred portion:
Federal............................................................. 516 (26,083) (22,426)
State............................................................... 83 (4,219) (3,628)
------------ ------------ ------------
599 (30,302) (26,054)
------------ ------------ ------------
Income tax provision.................................................. $1,502,315 $1,738,191 $1,568,733
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Accruals............................................................................. $ 58,944 $ 64,186
Asset reserves....................................................................... 12,585 19,693
Inventories.......................................................................... 17,370 15,610
Pension.............................................................................. 41,828 39,066
------------ ------------
Gross deferred tax assets........................................................ 130,727 138,555
Depreciation......................................................................... (172,983) (154,757)
------------ ------------
Gross deferred tax liabilities................................................... (172,983) (154,757)
------------ ------------
Net deferred tax liability....................................................... $ (42,256) $ (16,202)
------------ ------------
------------ ------------
</TABLE>
The effective rate for income taxes differs from the statutory rate as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
U.S. federal statutory tax rate....................................... 34.0% 34.0% 34.0%
Non-deductible expenses............................................... 0.1 0.2 0.1
State income taxes, net of federal benefit............................ 5.5 5.5 5.5
Other................................................................. (1.0) (1.0) (1.0)
--- --- ---
38.6% 38.7% 38.6%
--- --- ---
--- --- ---
</TABLE>
F-51
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS
The affiliates payable component on the balance sheet represents the net
balance payable to the Parent and its affiliates. Interest is charged to the
Company on the outstanding balance. An analysis of the activity in this account
is as follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period....................................... $ (4,791,279) $ (5,733,759) $ (3,212,473)
Cost allocations and direct charges from Parent...................... (59,981) (24,414) (73,569)
Interest charged by Parent........................................... (421,370) (602,674) (528,324)
Intercompany sales................................................... -- 273,106 471,794
Cash transfers....................................................... (461,129) 2,875,268 1,535,927
------------- ------------- -------------
Balance at end of period............................................. $ (5,733,759) $ (3,212,473) $ (1,806,645)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company has the following affiliated receivables and payables:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------- -------------
<S> <C> <C>
Receivable from:
Day-Timers Canada................................................................. $ 11,054 $ 186,581
Fortune Brands.................................................................... -- 648,932
------------- -------------
Total........................................................................... $ 11,054 $ 835,513
------------- -------------
------------- -------------
Payable to:
ACCO.............................................................................. $ (2,089,941) $ (2,618,265)
Parent............................................................................ (21,202) (23,893)
Fortune Brands.................................................................... (1,112,384) --
------------- -------------
Total........................................................................... $ (3,223,527) $ (2,642,158)
------------- -------------
------------- -------------
</TABLE>
Services provided to the Company by the Parent and its affiliates include
expenses incurred and paid by the Parent on the Company's behalf and charges for
accounting and payroll functions provided by the Parent. The primary components
of cost allocations and direct charges from the Parent and affiliates are as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Payroll and accounting function....................................... $ 38,950
Employee benefits..................................................... $ 34,922
Insurance............................................................. 21,009 $ 21,202 29,222
Bank charges.......................................................... 4,050 3,212 5,397
------------ ------------ ------------
$ 59,981 $ 24,414 $ 73,569
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-52
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS
<TABLE>
<CAPTION>
DECEMBER 25,
FISCAL YEAR 1996
- ---------------------------------------------------------------------------- ------------
<S> <C>
1997........................................................................ $ 506,847
1998........................................................................ 417,091
1999........................................................................ 334,447
2000........................................................................ 319,545
2001 and thereafter......................................................... 399,431
------------
Total minimum lease payments.............................................. $1,977,361
------------
------------
</TABLE>
Rental expense for all operating leases charged against earnings amounted to
$553,198, $546,603 and $559,830 for the years ended December 17, 1994, December
16, 1995 and December 25, 1996, respectively.
8. RETIREMENT PLAN
Nonunion employees of the Company participate in a noncontributory defined
benefit plan established by the Parent. Benefits for the plan are based
primarily on years of service and employees' average monthly earnings. The
Parent's funding policy is consistent with the funding requirements of federal
law and regulations. Plan assets consist principally of listed equity
securities. Participants are fully vested in the plan after completing five
years of service.
As of the most recent actuarial valuation, the total pension costs for the
Parent for the year ended December 25, 1996 consisted of the following:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
------------
<S> <C>
Service cost--benefits earned during the period............................. $ 1,479,787
Interest cost on projected benefit obligation............................... 1,640,620
Expected return on plan assets.............................................. (1,783,635)
Amortization of unrecognized prior service cost............................. (6,752)
All other cost components................................................... 40,302
------------
Net pension costs........................................................... $ 1,370,322
------------
------------
</TABLE>
The net pension costs of the plan for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 allocated to the Company by the Parent
were $86,000, $94,000 and $108,000, respectively.
F-53
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLAN (CONTINUED)
As of the most recent actuarial valuation, the funded status of the plan for
the Parent as of December 25, 1996 is as follows:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
-------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits.......................................................... $ 17,629,613
Non-vested benefit....................................................... 1,458,142
-------------
Accumulated benefit obligation............................................. 19,087,755
Effect of projected future compensation increases.......................... 5,300,546
-------------
Projected benefit obligation............................................... 24,388,301
Plan assets at fair value.................................................. 22,052,322
-------------
Projected benefit obligation in excess of plan assets...................... (2,335,979)
Unrecognized prior service cost............................................ (32,672)
Unrecognized net gain...................................................... (60,338)
-------------
Accrued pension costs...................................................... $ (2,428,989)
-------------
-------------
</TABLE>
The accrued pension costs at December 16, 1995 and December 31, 1996
attributed to the Company were $183,000 and $177,000, respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for the
Company's plan participants and the net assets will be distributed for their
benefit.
9. OTHER POSTRETIREMENT PLAN
The Parent provides health care and life insurance benefits for eligible
retired employees and their eligible dependents. The cost of these benefits was
determined by application of actuarial assumptions and healthcare trend rates.
Based on the actuarial valuations performed for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, the total net periodic
postretirement costs (benefit) allocated by the Parent to the Company were
$10,000, $2,000 and $(1,000), respectively.
The accrued other postretirement costs as of the years ended December 16,
1995 and December 25, 1996 attributed to the Company were $141,000 and $129,000,
respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for the
Company's plan participants and the net assets will be distributed for their
benefit.
F-54
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses payable by School
Specialty in connection with the issuance and distribution of the securities.
All of such expenses except the Securities and Exchange Commission registration
fee are estimated:
<TABLE>
<S> <C>
SEC Registration........................................................ $ 9,768
Nasdaq Listing Fee...................................................... $ 47,500
Legal Fees and Expenses................................................. $ 500,000
Accounting Fees and Expenses............................................ $ 500,000
Printing Fees and Expenses.............................................. $ 350,000
Miscellaneous........................................................... $ 17,732
---------
Total............................................................... $1,500,000
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of School Specialty's Certificate of Incorporation provides
that School Specialty shall indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of School Specialty's Certificate of Incorporation states that
directors of School Specialty will not be liable to School Specialty or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to School Specialty or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, which makes directors liable for unlawful dividends or unlawful stock
repurchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
Article IV of School Specialty's Bylaws provides that School Specialty shall
indemnify its officers and directors (and those serving at the request of School
Specialty as an officer or director of another corporation, partnership, joint
venture, trust or other enterprise), and may indemnify its employees and
II-1
<PAGE>
agents (and those serving at the request of School Specialty as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred, if such officer,
director, employee or agent acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of School Specialty, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In a derivative action, indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such officer, director, employee or agent in the defense or
settlement of such action or suit, and no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to School Specialty unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Unless the Board of Directors of School Specialty otherwise determines in a
specific case, expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by School Specialty in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the officer or director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by School Specialty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Chicago, Illinois, on June 3, 1998.
<TABLE>
<S> <C> <C>
SCHOOL SPECIALTY, INC.
By: /s/ DANIEL P. SPALDING
-----------------------------------------
Name: Daniel P. Spalding
Title: Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ --------------------------- -------------------
/s/ DANIEL P. SPALDING Chief Executive Officer June 3, 1998
- ------------------------------ (Principal Executive
Daniel P. Spalding Officer); Director
/s/ DONALD J. NOSKOWIAK Chief Financial Officer June 3, 1998
- ------------------------------ (Principal Financial and
Donald J. Noskowiak Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
1.1*** Underwriting Agreement
3.1* Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
4.1* Form of certificate representing shares of Common Stock
5*** Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8*** Tax opinion of Wilmer, Cutler & Pickering
10.1** Form of Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Consulting, Inc., Navigant International, Inc., and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.3** Tax Indemnification Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc., and School Specialty, Inc.
10.4** Employee Benefits Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc., and School Specialty, Inc.
10.5** Employment Agreement dated April 29, 1996, between Daniel P. Spalding and School Specialty, Inc.
10.6** Employment Agreement dated July 26, 1996, between Donald Ray Pate, Jr. and The Re-Print Corp.
10.7** Employment Agreement dated June 27, 1997, between Richard H. Nagel and Sax Arts & Crafts, Inc.
10.8*** Agreement dated as of January 13, 1998 between U.S. Office Products and Jonathan J. Ledecky.
10.9* Form of Employment Agreement between David Vander Zanden and School Specialty, Inc.
10.10*** Form of Employment Agreement between School Specialty, Inc. and Jonathan J. Ledecky
10.11*** Amendment No. 1 to Agreement dated as of January 13, 1998 between U.S. Office Products and Jonathan J.
Ledecky
10.12* Form of 1998 Stock Incentive Plan
10.13* Form of Credit Agreement
21* Subsidiaries of Registrant
23.1*** Consent of Wilmer, Cutler & Pickering contained in Exhibits 5 and 8 hereto
23.2* Consent of Price Waterhouse, LLP
23.3* Consent of Ernst & Young, LLP
23.4* Consent of BDO Siedman, LLP
23.5* Consent of Altschuler, Melvoin and Glasser LLP
23.6* Consent of Price Waterhouse, LLP
23.7** Consent of David J. Vander Zanden to be named as director
23.8** Consent of Jonathan J. Ledecky to be named as director
23.9** Consent of Leo C. McKenna to be named as director
23.10** Consent of Rochelle Lamm Wallach to be named as director
27** Financial data schedule
99.1** Valuation and Qualifying Accounts and Reserves Schedule
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
*** To be filed by amendment.
II-4
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EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SCHOOL SPECIALTY, INC.
SCHOOL SPECIALTY, INC., a corporation duly organized and existing under the
General Corporation Law of the State of Delaware, does hereby certify as
follows:
FIRST: The name of the Corporation is School Specialty, Inc.
SECOND: The Corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on February 12, 1998.
THIRD: This Restated Certificate of Incorporation restates, integrates and
further amends the Certificate of Incorporation of the Corporation, and was duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware. This Restated Certificate of
Incorporation was unanimously consented to and authorized by the holders of the
issued and outstanding stock entitled to vote by written consent given in
accordance with the provisions of Section 228, and was duly adopted by written
consent of the sole director of the Corporation in accordance with the
provisions of Section 141 of the General Corporation Law of Delaware. The
Restated Certificate of Incorporation, as adopted, follows:
* * * * * * * * * * * *
ARTICLE ONE
The name of the Corporation is: School Specialty, Inc.
ARTICLE TWO
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE FOUR
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is One Hundred Fifty-One Million (151,000,000)
shares, of which One Million (1,000,000) shares, designated as Preferred Stock,
shall have a par value of One Tenth of One Cent ($.001) per share (the
"Preferred Stock"), and One Hundred Fifty Million (150,000,000) shares,
designated as Common Stock, shall have a par value of One Tenth of One Cent
($.001) per share (the "Common Stock").
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of this Certificate of Incorporation and the limitations prescribed by law, the
Board of Directors is expressly authorized by adopting resolutions to issue the
shares, fix the number of shares and change the number of shares constituting
any series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(and
<PAGE>
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), a redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, without any further action or vote by the
stockholders.
COMMON STOCK
1. DIVIDENDS.
Subject to the preferred rights of the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with respect to
any such class or series of Preferred Stock, the holders of the Common Stock
shall be entitled to receive, as and when declared by the Board of Directors out
of the funds of the Corporation legally available therefor, such dividends
(payable in cash, stock or otherwise) as the Board of Directors may from time to
time determine, payable to stockholders of record on such dates, not exceeding
60 days preceding the dividend payment dates, as shall be fixed for such purpose
by the Board of Directors in advance of payment of each particular dividend.
2. LIQUIDATION.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after the distribution or payment
to the holders of shares of any class or series of Preferred Stock as provided
by the Board of Directors with respect to any such class or series of Preferred
Stock, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among and paid to the holders of Common Stock
ratably in proportion to the number of shares of Common Stock held by them
respectively.
3. VOTING RIGHTS.
Except as otherwise required by law or as provided by the Board of Directors
with respect to any class or series of Preferred Stock, the entire voting power
and all voting rights shall be vested exclusively in the Common Stock. Each
holder of shares of Common Stock shall be entitled to one vote for each share
standing in his name on the books of the Corporation.
ARTICLE FIVE
1. BOARD OF DIRECTORS.
The number of directors of the Corporation shall consist of not less than
one, the exact number to be fixed exclusively by the Board of Directors from
time to time pursuant to a resolution adopted by the affirmative vote of a
majority of the entire Board of Directors. No director need be a stockholder.
Effective upon the distribution of shares of the Corporation to stockholders of
U.S. Office Products Company (the "Distribution"), the directors shall be
divided into three classes designated as Class I, Class II, and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the Distribution, the term of office of the
Class I directors shall expire and Class I directors shall be elected for a full
term of three years. At the second annual meeting of stockholders following the
Distribution, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the Distribution, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors whose terms expire at such annual meeting. Notwithstanding
the foregoing provisions of this Article, each director shall hold office until
his or her successor has been duly elected and qualified or until his or her
death, resignation or removal. At each annual meeting of stockholders at which a
quorum is present, the persons receiving a plurality of the votes cast shall be
directors. No director or class of directors may be removed from office by a
vote of the stockholders at any time except
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for cause. Election of directors need not be by written ballot unless the
By-laws of the Corporation so provide.
2. VACANCIES.
Any vacancy on the Board of Directors resulting from death, retirement,
resignation, disqualification or removal from office or other cause, as well as
any vacancy resulting from an increase in the number of directors which occurs
between annual meetings of the stockholders at which directors are elected,
shall be filled only by the affirmative vote of the remaining directors then in
office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been elected and
qualified. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of one or more classes
or series of Preferred Stock shall have the right, voting separately, as a class
or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to ARTICLE FOUR applicable thereto, and each director so elected shall
not be subject to the provisions of this ARTICLE FIVE unless otherwise provided
therein.
3. POWER TO MAKE, ALTER AND REPEAL BY-LAWS.
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, alter and repeal the By-laws
of the Corporation. The By-laws may be altered or amended or new By-laws adopted
by the affirmative vote of the holders of at least 66 2/3% of the total
outstanding stock of the Corporation entitled to vote at any annual meeting or
at any special meeting, provided, in the case of any special meeting, that
notice of such proposed alteration, amendment, repeal or adoption is included in
the notice of the meeting.
4. MEETINGS OF STOCKHOLDERS.
Special meetings of the stockholders of the Corporation may be called, for
any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the
Chief Executive Officer, (iii) the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board of Directors for adoption), or
(iv) the holders of at least 33 1/3% of the total outstanding stock of the
Corporation then entitled to vote generally in the election of directors, on
such date, and at such time as the Board of Directors shall fix. Advance notice
of stockholder nominations for the election of directors and of business to be
brought before any meeting of the stockholders shall be given in the manner
provided in the By-laws of the Corporation.
ARTICLE SIX
The Corporation reserves the right to amend, alter, change or repeal any
provision in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute. Notwithstanding any other provisions of this Certificate
of Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of Preferred Stock, the affirmative vote of the
holders of at least 66 2/3% of the total outstanding stock of the Corporation
entitled to vote at any annual meeting or at any special meeting shall be
required to alter, amend or repeal Articles Six, Seven or Eight. Any repeal or
modification of Articles Seven or Eight shall be prospective and shall not
affect the rights under such Articles in effect at the time of the alleged
occurrence of any act or omission to act giving rise to liability or
indemnification.
3
<PAGE>
ARTICLE SEVEN
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as the same may be amended and supplemented,
indemnify each director and officer of the Corporation from and against any and
all of the expenses, liabilities or other matters referred to in or covered by
said section and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, agreement, vote of stockholders, vote of disinterested directors or
otherwise, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such persons and the Corporation may purchase and maintain
insurance on behalf of any director or officer to the extent permitted by
Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
Whenever a compromise or arrangement is proposed between the Corporation and
its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
[The Remainder Of This Page Is Blank]
4
<PAGE>
IN WITNESS WHEREOF, I, the undersigned do make, file and record this
Restated Certificate of Incorporation, and do certify that the facts stated
herein are true, as of this 3rd day of June, 1998.
/s/ DANIEL P. SPALDING
--------------------------------------
Daniel P. Spalding
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
SCHOOL SPECIALTY, INC.
ARTICLE I
Stockholders
SECTION 1. ANNUAL MEETING; SPECIAL NOTICE REQUIREMENTS. The annual meeting
of the stockholders of the Corporation shall be held on such date, at such time
and at such place within or without the State of Delaware as may be designated
by the Board of Directors, for the purpose of electing Directors and for the
transaction of such other business as may be properly brought before the
meeting. For nominations or other business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the secretary of the Corporation and such business must be
a proper subject for stockholder action under the Delaware General Corporation
Law (the "DGCL"). To be timely, a stockholder's notice shall be delivered to the
secretary of the Corporation at the principal executive office of the
Corporation not less than sixty days nor more than ninety days prior to the
first anniversary of the preceding year's annual meeting provided, however, that
in the event that the date of the annual meeting is advanced by more than 30
days, or delayed by more than 30 days, from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the ninetieth day
prior to such annual meeting and not later than either the close of business on
(a) the tenth day following the day on which notice of the date of such meeting
was mailed or (b) the tenth day following the day on which public announcement
of the date of such meeting is first made, whichever first occurs in (a) or (b).
Such stockholder's notice shall set forth (x) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), including such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected; (y) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (z) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (ii)
the class and number of shares of the Corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.
SECTION 2. SPECIAL MEETINGS; SPECIAL NOTICE REQUIREMENTS. Special meetings
shall be called in the manner provided in the Certificate of Incorporation. Only
such business shall be conducted at a special meeting of stockholders as shall
have been brought before the meeting pursuant to the Corporation's notice of
meeting and in accordance with these By-Laws. For nominations or other business
to be properly brought before a special meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation and such business must be a proper subject for stockholder
action under the DGCL. To be timely, a stockholder's notice shall be delivered
to the secretary of the Corporation at the principal executive office of the
Corporation not less than sixty days nor more than ninety days prior to the
special meeting, or the tenth day following the day on which public announcement
of the date of such special meeting is first made. Such stockholder's notice
shall set forth (x) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for
1
<PAGE>
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (y) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made, and (z) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
SECTION 3. NOTICE OF MEETINGS. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his address as it appears on the records of the Corporation. The
notice shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
SECTION 5. ADJOURNED MEETINGS. Whether or not a quorum shall be present in
person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. ORGANIZATION. The Chairman of the Board or, in his absence, the
President or any Vice President shall call all meetings of the stockholders to
order, and shall act as Chairman of such meetings. In the absence of the
Chairman of the Board, the President and all of the Vice Presidents, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting shall elect
a Chairman.
The Secretary of the Corporation shall act as Secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as Secretary of the meeting. It shall be the duty of the
secretary to prepare and make, at least ten days before every meeting of
2
<PAGE>
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. VOTING. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. When
directed by the presiding officer or upon the demand of any stockholder, the
vote upon any matter before a meeting of stockholders shall be by ballot. Except
as otherwise provided by-law or by the Certificate of Incorporation, Directors
shall be elected by a plurality of the votes cast at a meeting of stockholders
by the stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes.
SECTION 8. INSPECTORS. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by two or more Inspectors who may
be appointed by the Board of Directors before the meeting, or if not so
appointed, shall be appointed by the presiding officer at the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the rights
of the holders of any series of preferred stock or any other series or class of
stock (excluding common stock) set forth in the Certificate of Incorporation to
elect additional directors under specified circumstances or to consent to
specific actions taken by the Corporation, any action required or permitted to
be taken by the stockholders of the Corporation must be taken at an annual or
special meeting of the stockholders and may not be taken by any consent in
writing by such stockholders.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be fixed from time to time by
resolution passed by a majority of the Board of Directors. The Directors shall,
except as hereinafter otherwise provided for filling vacancies, be elected at
the annual meeting of stockholders, and shall hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
3
<PAGE>
SECTION 2. REMOVAL, VACANCIES AND ADDITIONAL DIRECTORS. The stockholders
may, at any special meeting the notice of which shall state that it is called
for that purpose, remove any Director for cause and fill the vacancy; provided
that whenever any Director shall have been elected by the holders of any class
of stock of the Corporation voting separately as a class under the provisions of
the Certificate of Incorporation, such Director may be removed and the vacancy
filled only by the holders of that class of stock voting separately as a class.
Vacancies caused by any such removal and not filled by the stockholders at the
meeting at which such removal shall have been made, or any vacancy caused by the
death or resignation of any Director or for any other reason, and any newly
created directorship resulting from any increase in the authorized number of
Directors, may be filled by the affirmative vote of a majority of the Directors
then in office, although less than a quorum, and any Director so elected to fill
any such vacancy or newly created directorship shall hold office until his
successor is elected and qualified or until his earlier resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. PLACE OF MEETING. The Board of Directors may hold its meetings
in such place or places in the State of Delaware or outside the State of
Delaware as the Board from time to time shall determine.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman of the Board, the
President or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two days before the meeting or by causing
the same to be transmitted by telegraph, cable or wireless at least one day
before the meeting to each Director. Unless otherwise indicated in the notice
thereof, any and all business other than an amendment of these By-Laws may be
transacted at any special meeting, and an amendment of these By-Laws may be
acted upon if the notice of the meeting shall have stated that the amendment of
these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
SECTION 6. QUORUM. Subject to the provisions of Section 2 of this Article
II, a majority of the members of the Board of Directors in office (but in no
case less than one-third of the total number of Directors nor less than two
Directors) shall constitute a quorum for the transaction of business and the
vote of the majority of the Directors present at any meeting of the Board of
Directors at which a quorum is present shall be the act of the Board of
Directors. If at any meeting of the Board there is less than a quorum present, a
majority of those present may adjourn the meeting from time to time.
SECTION 7. ORGANIZATION. The Chairman of the Board shall preside at all
meetings of the Board of Directors. In the absence of the Chairman of the Board,
an acting Chairman shall be elected from the Directors present to preside at
such meeting. The Secretary of the Corporation shall act as Secretary of all
meetings of the Directors; but in the absence of the Secretary, the Chairman may
appoint any person to act as Secretary of the meeting.
SECTION 8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the
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<PAGE>
Directors of the Corporation. The Board may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided by resolution passed by a majority of the
whole Board, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and the affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending these By-Laws; and unless such
resolution, these By-laws, or the Certificate of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
SECTION 9. CONFERENCE TELEPHONE MEETINGS. Unless otherwise restricted by
the Certificate of Incorporation or by these By-Laws, the members of the Board
of Directors or any committee designated by the Board, may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. CONSENT OF DIRECTORS OR COMMITTEE IN LIEU OF MEETING. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the, Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman
of the Board, a President, one or more Vice Presidents, a Secretary and a
Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 7 of this Article III.
The Chairman of the Board, the President, one or more Vice Presidents, the
Secretary and the Treasurer shall be elected by the Board of Directors at its
first meeting after each annual meeting of the stockholders. The failure to hold
such election shall not of itself terminate the term of office of any officer.
All officers shall hold office at the pleasure of the Board of Directors. Any
officer may resign at any time upon written notice to the Corporation. Officers
may, but need not, be Directors. Any number of officers may be held by the same
person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to his contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
Any vacancy caused by the death of any officer, his resignation, his
removal, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.
5
<PAGE>
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of
the Board shall be subject to the control of the Board of Directors, and shall
have such powers and shall perform such duties as may be assigned to him from
time to time by these By-Laws or by the Board of Directors. In addition, he
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors and shall have such other powers and perform such other
duties as may from time to time be assigned to him by these By-Laws or by the
Board of Directors. All actions heretofore taken by the Chairman of the Board in
the name or on behalf of the Corporation, including the execution and delivery
in the name and on behalf of the Corporation of agreements, bonds, contracts,
deeds, mortgages, certificates for shares of stock of the Corporation and other
instruments, documents and certificates are in all respects ratified, approved,
confirmed and adopted as of the date of such action, execution or delivery, with
the same effect as if expressly authorized by the By-laws of the Corporation on
the date thereof.
SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. Unless otherwise specified
by the Board of Directors, the President shall be the Chief Executive Officer of
the Corporation and, subject to the control of the Board of Directors, shall
have general charge and control of all the Corporation's business and affairs,
and shall have all powers and perform all duties incident to the office of
President. In the absence of the Chairman of the Board, he shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors and
shall have such other powers and perform such other duties as may from time to
time be assigned to him by these By-Laws or by the Board of Directors.
SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice President
shall have all powers and shall perform all duties incident to the office of
Vice President and shall have such other powers and perform such other duties as
may from time to time be assigned to him by these By-Laws or by the Board of
Directors or the President.
SECTION 5. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose; he shall attend
to the giving or serving of all notices of the Corporation; he shall have
custody of the corporate seal of the Corporation and shall affix the same to
such documents and other papers as the Board of Directors or the President shall
authorize and direct; he shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours; and shall have all powers and
shall perform all duties incident to the office of Secretary and shall also have
such other powers and shall perform such other duties as may from time to time
be assigned to him by these By-Laws or by the Board of Directors or the
President.
SECTION 6. THE POWERS AND DUTIES OF THE TREASURER. The Treasurer shall
have custody of, and when proper shall pay out, disburse or otherwise dispose
of, all funds and securities of the Corporation which may have come into his
hands; he may endorse on behalf of the Corporation for collection checks, notes
and other obligations and shall deposit the same to the credit of the
Corporation in such bank or banks or depositary or depositaries as the Board of
Directors may designate; he shall sign all receipts and vouchers for payments
made to the Corporation; he shall enter or cause to be entered regularly in the
books of the Corporation kept for the purpose full and accurate accounts of all
moneys received or paid or otherwise disposed of by him and whenever required by
the Board of Directors or the President shall render statements of such
accounts; he shall, at all reasonable times, exhibit his books and accounts to
any Director of the Corporation upon application at the office of the
Corporation during business hours; and he shall have all powers and he shall
perform all duties incident to the office of Treasurer and shall also have such
other powers and shall perform such other duties as may from time to time be
assigned to him by these By-Laws or by the Board of Directors or the President.
6
<PAGE>
SECTION 7. ADDITIONAL OFFICERS. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
SECTION 8. GIVING OF BOND BY OFFICERS. All officers of the Corporation, if
required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 9. VOTING UPON STOCKS. Unless otherwise ordered by the Board of
Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meeting shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
SECTION 10. COMPENSATION OF OFFICERS. The officers of the Corporation
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. NATURE OF INDEMNITY. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was or has
agreed to become a Director or officer of the Corporation, or is or was serving
or has agreed to serve at the request of the Corporation as a Director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or omitted in
such capacity, and may indemnify any person who was or is a party or is
threatened to be made a party to such an action, suit or proceeding by reason of
the fact that he is or was or has agreed to become an employee or agent of the
Corporation, or is; or was serving or has agreed to serve at the request of the
Corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that in the case of
an action or suit by or in the right of the Corporation to procure a Judgment in
its favor (1) such indemnification shall be limited to expenses (including
attorneys' fees) actually and reasonably incurred by such person in the defense
or settlement of such action or suit, and (2) no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
7
<PAGE>
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 2. SUCCESSFUL DEFENSE. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
SECTION 3. DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification of a Director or officer the Corporation under Section 1 of this
Article IV (unless ordered by a court) shall be made by the Corporation unless a
determination is made that indemnification of the Director or officer is not
proper in the circumstances because he has not met the applicable standard of
conduct set forth in Section 1. Any indemnification of an employee or agent of
the Corporation under Section 1 (unless ordered by a court) may be made by the
Corporation upon a determination that indemnification of the employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Section 1. Any such determination shall be made (1) by the
Board of Directors by a majority vote of a quorum consisting of Directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum its
not obtainable, or, even if obtainable a quorum of disinterested Directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
SECTION 4. ADVANCE PAYMENT OF EXPENSES. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IV.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate. The
Board of Directors may authorize the Corporation's legal counsel to represent
such Director, officer, employee or agent in any action, suit or proceeding,
whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 5. SURVIVAL: PRESERVATION OF OTHER RIGHTS. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
8
<PAGE>
SECTION 6. SEVERABILITY. Article IV or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
SECTION 7. SUBROGATION. In the event of payment of indemnification to a
person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
SECTION 8. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable
under this Article IV to make any payment in connection with any claim made
against a person described in Section 1 of this Article IV to the extent such
person has otherwise received payment (under any insurance policy, by-law or
otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE V
STOCK-SEAL-FISCAL YEAR
SECTION 1. CERTIFICATES FOR SHARES OF STOCK. The certificates for shares
of stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the Chairman of the Board, the President or
a Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be issued and delivered as through the person or
persons who signed such certificate or certificates had not ceased to be such
officer or officers of the corporation.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such shares and the date of issue thereof shall be entered on
the books of the corporation.
Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. LOST, STOLEN OR DESTROYED CERTIFICATES. Whenever a person
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he shall file in the office of the Corporation
an affidavit setting forth, to the best of his knowledge and belief, the time,
place and circumstances of the loss, theft or destruction, and, if required by
the Board of Directors, a bond of indemnity or other indemnification sufficient
in the opinion of the Board of Directors to indemnify the Corporation and its
agents against any claim that may be made against it or them on account of the
alleged loss, theft or destruction of any such certificate or the issuance of a
new certificate in replacement therefor. Thereupon the Corporation may cause to
be issued to such person a new certificate in replacement for the certificate
alleged to have been lost, stolen or destroyed. Upon the stub of every new
certificate so issued shall be noted the fact of such issue and the number, date
and the name of the registered owner of the lost, stolen or descried certificate
in lieu of which the new certificate is issued.
9
<PAGE>
SECTION 3. TRANSFER OF SHARES. Shares of stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof, in person or
by his attorney duly authorized in writing, upon surrender and cancellation of
certificates for the number of shares of stock to be transferred, except as
provided in Section 2 of this Article.
SECTION 4. REGULATIONS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment, of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock; or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is delivered to the Corporation and the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any dividends
declared upon the stock of the Corporation shall be payable on such date or
dates as the Board of Directors shall determine. If the date fixed for the
payment of any dividend shall in any year fall upon a legal holiday, then the
dividend payable on such date shall be paid on the next day not a legal holiday.
SECTION 7. CORPORATE SEAL. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be kept in the
custody of the Secretary. A duplicate of the seal may be kept and be used by any
officer of the Corporation designated by the Board of Directors, the Chairman of
the Board or the President.
SECTION 8. FISCAL YEAR. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
MISCELLANEOUS PROVISIONS.
SECTION 1. CHECKS, NOTES, ETC. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of
10
<PAGE>
Directors, countersigned by such officers of the Corporation and/or other
persons as the Board of Directors from time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. LOANS. No loans and no renewals of any loans shall be
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other evidences of indebtedness of the Corporation. When authorized so to do,
any officer of the Corporation may pledge, hypothecate or transfer, as security
for the payment of any and all loans, advances, indebtedness and liabilities of
the corporation, any and all stocks, securities and other personal property at
any time held by the Corporation, and to that end may endorse, assign and
deliver the same. Such authority may be general or confined to specific
instances.
SECTION 3. CONTRACTS. Except as other wise provided in these By-Laws or by
law or as otherwise directed by the Board of Directors, the Chairman of the
Board, the President or any Vice President shall be authorized to execute and
deliver, in the name and on behalf of the corporation, all agreements, bonds,
contracts, deeds, mortgages, and other instruments, either for the Corporation's
own account or in a fiduciary or other capacity, and the seal of the
corporation, if appropriate, shall be affixed thereto by any of such officers or
the Secretary or an Assistant Secretary. The Board of Directors, the Chairman of
the Board, the President or any Vice President designated by the Board of
Directors, the Chairman of the Board or the President may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto. The
grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. WAIVERS OF NOTICE. Whenever any notice whatever is required to
be given by law, by the Certificate of Incorporation or by these By-Laws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
SECTION 5. OFFICES OUTSIDE OF DELAWARE. Except as otherwise required by
the laws of the State of Delaware, the Corporation may have an office or offices
and keep its books, documents and papers outside of the State of Delaware at
such place or places as from time to time may be determined by the Board of
Directors or the Chairman of the Board.
ARTICLE VII
AMENDMENTS
These By-Laws and any amendment thereof may be altered, amended or repealed,
or new By-Laws may be adopted, by the Board of Directors at any regular or
special meeting by the affirmative vote of a majority of all of the members of
the Board, provided in the case of any special meeting at which all of the
members of the Board are not present, that the notice of such meeting shall have
stated that the amendment of these By-Laws was one of the purposes of the
meeting; but these By-Laws and any amendment thereof may be altered, amended or
repealed or new By-Laws may be adopted by the holders of 66 2/3% of the total
outstanding stock of the Corporation entitled to vote at any annual meeting or
at any special meeting, provided, in the case of any special meeting, that
notice of such proposed alteration, amendment, repeal or adoption is included in
the notice of the meeting.
11
<PAGE>
Exhibit 4.1
SCHOOL SPECIALTY, INC. CUSIP 807863 10 5
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE OF
SCHOOL SPECIALTY, INC.
(the Corporation ) transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon the surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all of the terms and conditions contained in the
Certificate of Incorporation of the Corporation and all amendments thereto.
This Certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
Treasurer
Chairman and President
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- Custodian
---------------- ------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
----------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated
---------------------
------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<TABLE>
<S> <C>
- -------------------------------------------------- --------------------------------------------------
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: BELINDA BECK: 215-830-2198
660 BLAIR MILL ROAD PROOF OF APRIL 13, 1998
HORSHAM, PA 19044 SCHOOL SPECIALITY, INC.
(215) 657-3480 H 56216back
- -------------------------------------------------- --------------------------------------------------
SALES: J. NAPOLITANO: 212-557-9100 OPERATOR: lr
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/NET/BANKNOTE/HOME 46 SCHOOL H56216 NEW
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Exhibit 10.2
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT, dated as of June __, 1998
("Agreement"), among U.S. Office Products Company, a Delaware corporation
("USOP"), Workflow Management, Inc., a Delaware corporation ("Workflow
Management"), School Specialty, Inc., a Delaware corporation ("School
Specialty"), Aztec Technology Partners, Inc., a Delaware corporation
("Aztec") and Navigant International, Inc., a Delaware corporation
("Navigant"). USOP, Workflow Management, School Specialty, Aztec and
Navigant are hereinafter jointly referred to as the "Companies." Workflow
Management, School Specialty, Aztec and Navigant are hereinafter jointly
referred to as the "Spin-Off Companies."
WITNESSETH
WHEREAS, USOP is the common parent of an affiliated group of
domestic corporations, including the Spin-Off Companies, which has elected to
file consolidated federal income Tax returns;
WHEREAS, USOP and the Spin-Off Companies entered into an agreement,
dated as of June __, 1998 (the "Distribution Agreement"), to, among other
things, provide for the distribution by USOP of all of the issued and
outstanding shares of common stock of the Spin-Off Companies to the holders
of record of shares of common stock of USOP (other than shares held in the
treasury of USOP); divest USOP of all businesses, operations and liabilities
relating to the businesses to be conducted by the Spin-Off Companies after
the Distributions; and allocate and assign responsibility for certain
liabilities among USOP, the Spin-Off Companies and their respective
Subsidiaries;
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Workflow Subsidiaries to be merged into Workflow Management or into a
Workflow Subsidiary; (ii) USOP will contribute to Workflow Management (x) all
its right, title and interest in and to all the shares of capital stock (or
other ownership interests) that it owns, directly or indirectly, of the
Workflow Subsidiaries other than shares of stock (or other ownership
interests) of the Workflow Subsidiaries that are already owned, directly or
indirectly, by Workflow Management or that are to be merged into Workflow
Management or into a Workflow Subsidiary and (y) certain other assets; and
(iii) Workflow Management will assume certain liabilities so that the
Workflow Group is consolidated under Workflow Management prior to the
Workflow Distribution (such mergers, contributions and assumptions of
liabilities, the "Workflow Contribution");
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WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain School Specialty Subsidiaries to be merged into School Specialty or
into a School Specialty Subsidiary; (ii) USOP will contribute to School
Specialty (x) all its right, title and interest in and to all the shares of
capital stock (or other ownership interests) that it owns, directly or
indirectly, of the School Specialty Subsidiaries other than shares of stock
(or other ownership interests) of the School Specialty Subsidiaries that are
already owned, directly or indirectly, by School Specialty or that are to be
merged into School Specialty or into a School Specialty Subsidiary and (y)
certain other assets and (iii) School Specialty will assume certain
liabilities so that the School Specialty Group is consolidated under School
Specialty prior to the School Specialty Distribution defined herein (such
mergers, contributions and assumptions of liabilities, the "School Specialty
Contribution");
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Aztec Subsidiaries to be merged into Aztec or into an Aztec
Subsidiary; (ii) USOP will contribute to Aztec (x) all its right, title and
interest in and to all the shares of capital stock (or other ownership
interests) that it owns, directly or indirectly, of the Aztec Subsidiaries
other than shares of stock (or other ownership interests) of the Aztec
Subsidiaries that are already owned, directly or indirectly, by Aztec or that
are to be merged into Aztec or into an Aztec Subsidiary and (y) certain other
assets; and (iii) Aztec will assume certain liabilities so that the
Technology Group is consolidated under Aztec prior to the Technology
Distribution defined herein (such mergers, contributions and assumptions of
liabilities, the "Technology Contribution");
WHEREAS, pursuant to the Distribution Agreement (i) USOP will cause
certain Navigant Subsidiaries to be merged into a Navigant Subsidiary; (ii)
USOP will contribute to Navigant (x) all its right, title and interest in and
to all the shares of capital stock (or other ownership interests) that it
owns, directly or indirectly, of the Navigant Subsidiaries other than shares
of stock (or other ownership interests) of the Navigant Subsidiaries that are
already owned, directly or indirectly, by Navigant or that are to be merged
into Navigant or into a Navigant Subsidiary and (y) certain other assets; and
(iii) Navigant will assume certain liabilities so that the Travel Group is
consolidated under Navigant prior to the Travel Distribution defined herein
(such mergers, contributions and assumptions of liabilities, the "Travel
Contribution");
WHEREAS, pursuant to the Distribution Agreement, USOP will
distribute all the shares of stock that it owns in each of Workflow
Management (the "Workflow Distribution"), School Specialty (the "School
Specialty Distribution"), Aztec (the "Technology Distribution") and Navigant
(the "Travel Distribution") to its shareholders (collectively, the
"Distributions") and, as a result of the Distributions, the Spin-Off
Companies and their Subsidiaries will not be included in the consolidated
federal income Tax return of USOP for the portion of the year following the
Distributions or in future years; and
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WHEREAS, the Companies desire to allocate the Tax burdens and
benefits of transactions which occurred on or prior to the Distribution Date,
and to provide for certain other Tax matters, including the assignment of
responsibility for the preparation and filing of Tax returns and the
prosecution and defense of any Tax controversies;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the Companies (each on its own behalf and on behalf of each of its
Subsidiaries) hereby agree as follows:
SECTION 1
Definitions
As used in this Agreement, the following terms shall have the following
meaning:
"Adverse Tax Act" shall mean, for any Person, (i) any action or
actions of such Person, or any omission or omissions by such Person of an
action or actions reasonably available to it, after the Distribution Date, or
(ii) a knowing or willful inaccuracy or inaccuracies of any representation
made by any Company by or on behalf of any member of such Company's Group to
USOP's outside tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions as of the Distribution Date, if such action(s) or
inaccuracy(ies) materially contribute to a Final Determination that any of
the Contributions or Distributions results in the recognition of gain to USOP
by virtue of any of the Contributions or Distributions failing to qualify
under sections 355 or 368 of the Code, including without limitation, by
reason of any stock or securities of any of the Spin-Off Companies failing to
qualify as "qualified property" within the meaning of section 355(c)(2) of
the Code, or otherwise.
"Agreement" shall mean this Tax Allocation Agreement.
"Allocable Federal Income Tax Liability" shall mean, for any Group,
the Separate Consolidated Federal Income Tax Liability of such Group, as
adjusted to reflect (i) any AMT (but only if there is a consolidated AMT),
(ii) any Taxes for which USOP is obligated to indemnify such Groups pursuant
to Section 10(b) of this Agreement, and (iii) any Taxes for which such
Group's Spin-Off Company is obligated to indemnify USOP pursuant to Section
3(d) of this Agreement.
"AMT" shall mean the alternative minimum tax imposed by Section 55
of the Code.
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"Aztec" shall have the meaning assigned to such term in the preamble
to this Agreement.
"Aztec Subsidiary" shall mean those entities that immediately after
the completion of the Distributions will be Subsidiaries of Aztec.
"Closing Date" shall have the meaning assigned to such term in the
Investment Agreement.
"Companies" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
any successor statute.
"Consolidated Returns" shall mean (i) the consolidated U.S. federal
income Tax return of USOP for the period ending on April 25, 1998 and (ii)
the consolidated U.S. federal income Tax return of USOP for the period
commencing on April 26, 1998 and including the Spin-Off Company Groups
through and including the Distribution Date and including the USOP Group
through and including April 24, 1999.
"Contributions" shall have the meaning assigned to such term in the
recitals to this Agreement.
"Controlled Return" shall mean (a) the Consolidated Returns, (b) any
Prior Period Consolidated Return and (c) any combined, affiliated or unitary
income Tax returns for any taxable period beginning on or prior to the
Distribution Date that includes USOP or any Retained Subsidiary.
"Distributing Tax Payor" shall have the meaning assigned to such
term in Section 10(a)(iii) of this Agreement.
"Distribution Agreement" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Distribution Date" shall mean the date on which the Distributions
are effective for U.S. federal income Tax purposes.
"Distributions" shall have the meaning assigned to such term in the
recitals to this Agreement.
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"Final Determination" shall mean the final resolution of liability
for any Tax for any taxable period, including any related interest or
penalties, by or as a result of: (i) a final and unappealable decision,
judgment, decree or other order of a court of competent jurisdiction; (ii) a
closing agreement or accepted offer in compromise under Section 7121 or 7122
of the Code, or comparable agreement under the laws of other jurisdictions,
which resolves the entire Tax liability for such Tax for such taxable period;
(iii) any allowance of a refund or credit in respect of an overpayment of
Tax, but only after the expiration of all periods during which such refund
may be recovered (including by way of offset) by the applicable Taxing
jurisdiction; or (iv) any other final disposition, including by reason of the
expiration of the applicable statute of limitations.
"FTC" shall mean the foreign tax credit pursuant to Section 27 of
the Code.
"Group" shall mean the USOP Group, Workflow Group, School Specialty
Group, Technology Group and/or Travel Group, as the context may require.
"Investment Agreement" shall mean the Investment Agreement dated as
of January 12, 1998 by and between USOP and CDR-PC Acquisition, L.L.C., a
Delaware limited liability company, as amended by Amendment No. 1 thereto,
dated as of February 3, 1998.
"IPO" shall mean, as to any Spin-Off Company, the initial public
offering of securities to be conducted by such company, which offering is
scheduled to occur on or about the Distribution Date.
"IRS" shall mean the Internal Revenue Service of the United States.
"Losses" shall mean any and all claims, demands, liabilities,
obligations, losses, costs, expenses, fines or damages (whether absolute,
accrued, conditional or otherwise, and whether or not resulting from third
party claims), including interest and penalties with respect thereto and
out-of-pocket expenses and reasonable attorneys' and accountants' fees and
expenses incurred in the investigation or defense of any of the same or in
asserting, preserving or enforcing any rights related thereto.
"Market Capitalization" shall mean, for any entity, the market
capitalization of such entity determined on the basis of the average closing
price for the common stock of such entity for the five-day period ending on
the tenth day after the Distribution Date.
"Navigant" shall have the meaning assigned to such term in the
preamble to this Agreement.
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"Navigant Subsidiary" shall mean those entities that immediately
after the completion of the Distributions will be Subsidiaries of Navigant.
"Person" shall mean any individual, partnership, joint venture,
corporation, limited liability company, trust, unincorporated organization,
government or department or agency of a government.
"Prime Rate" shall mean the 'prime rate' charged by Citibank, N.A.,
New York, New York, as such rate shall be changed from time to time,
compounded daily on the basis of a year of 365/366 days and actual days
elapsed.
"Prior Period Consolidated Return" shall mean any U.S. federal
consolidated income Tax return of USOP filed, or to be filed, for taxable
periods commencing prior to April 27, 1997.
"Retained Subsidiaries" shall mean all of the Subsidiaries of USOP
other than the Spin-Off Companies and the Spin-Off Company Subsidiaries.
"Restricted Transaction" shall mean for any Spin-Off Company (i) any
issuance of capital stock (including, without limitation, in connection with
any public offering or any acquisition by such Spin-Off Company, or in
connection with any merger or consolidation of another Person into such
Spin-Off Company or any Subsidiary of such Spin-Off Company, and including
any delivery of capital stock from the treasury of such Spin-Off Company),
other than an IPO or in connection with the exercise of any employee stock
option granted on or prior to the Distribution Date; (ii) any issuance of
securities convertible into, or exercisable or exchangeable for, capital
stock of such Spin-Off Company; or (iii) any merger or consolidation or other
business combination of such Spin-Off Company into another Person or any sale
or transfer of all or substantially all of such Spin-Off Company's assets to
another Person.
"School Specialty" shall have the meaning assigned to such term in
the preamble to this Agreement.
"School Specialty Contribution" shall have the meaning assigned to
such term in the recitals to this Agreement.
"School Specialty Distribution" shall have the meaning assigned to
such term in the recitals to this Agreement.
"School Specialty Group" shall mean School Specialty and each School
Specialty Subsidiary.
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"School Specialty Subsidiary" shall mean those entities that
immediately after the completion of the Distributions will be Subsidiaries of
School Specialty.
"Separate Consolidated Federal Income Tax Liability" shall mean, for
any Group and any taxable year or portion thereof during which it is included
in the Consolidated Returns or any Prior Period Consolidated Return, the U.S.
federal income Tax liability which such Group would have incurred if such
Group, on a stand-alone basis, had been an affiliated group eligible to file
a consolidated return for such taxable year or any portion thereof and had
filed such a return for such period, computed without regard to AMT.
"Spin-Off Companies" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Spin-Off Company Groups" shall mean the Workflow Group, the School
Specialty Group, the Technology Group and the Travel Group.
"Spin-Off Company Subsidiaries" shall mean the Workflow
Subsidiaries, the School Specialty Subsidiaries, the Aztec Subsidiaries and
the Navigant Subsidiaries.
"Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture or other entity (i) in which another Person
owns, directly or indirectly, ownership interests sufficient to elect a
majority of the Board of Directors (or Persons performing similar functions)
(irrespective of whether at the time any other class or classes of ownership
interests of such corporation, partnership, joint venture or other entity
shall or might have such voting power upon the occurrence of any contingency)
or (ii) of which another Person is a general partner or an entity performing
similar functions (e.g., a trustee or managing member).
"Tax" or "Taxes" shall mean all forms of taxation, whenever created
or imposed, and whether of the United States or elsewhere, and whether
imposed by a local, municipal, governmental, state, foreign, federal or other
body, and without limiting the generality of the foregoing, shall include
income, sales, use, ad valorem, gross receipts, license, value added,
franchise, transfer, recording, withholding, payroll, wage withholding,
employment, excise, occupation, unemployment insurance, social security,
business license, business organization stamp, environmental, premium and
property taxes, together with any related interest, penalties and additions
to any such tax, or additional amounts imposed by any Taxing Authority.
"Tax Administrator" shall mean Don Platt, the Chief Financial
Officer of USOP, or such other person as USOP shall appoint with the consent
of each of the Spin-Off Companies, which consent shall not be unreasonably
withheld or delayed.
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"Taxing Authority" shall mean any governmental or quasi-governmental
body, domestic or foreign, exercising any Taxing authority or Tax regulatory
authority.
"Tax Credits" shall include all credits against Tax pursuant to
Subtitle A, Chapter 1, Subchapter A, Part IV of the Code.
"Tax Item" shall mean any net operating loss, net capital loss,
deduction or credit (including, but not limited to, any FTC).
"Technology Contribution" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Technology Distribution" shall have the meaning assigned to such
term in the recitals to this Agreement.
"Technology Group" shall mean Aztec and each Aztec Subsidiary.
"Travel Contribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Travel Distribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Travel Group" shall mean Navigant and each Navigant Subsidiary.
"USOP" shall have the meaning assigned to such term in the preamble
to this Agreement.
"USOP Group" shall mean USOP and each Retained Subsidiary.
"USOP Stock Plan" shall mean any of the 1994 Amended and Restated
Long-Term Incentive Plan, the 1996 Non-Employee Directors' Stock Plan, the
1997A Stock Option Plan for Employees of Mail Boxes Etc., the 1997B Stock
Option Plan for Employees of Mail Boxes Etc. and the 1997 Stock Option Plan
for former Non-Employee Directors of Mail Boxes Etc. (and any underlying
original or predecessor plans).
"Workflow Contribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
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"Workflow Distribution" shall have the meaning assigned to such term
in the recitals to this Agreement.
"Workflow Group" shall mean Workflow Management and each Workflow
Subsidiary.
"Workflow Management" shall have the meaning assigned to such term
in the preamble to this Agreement.
"Workflow Subsidiary" shall mean those entities that immediately
after the completion of the Distributions will be Subsidiaries of Workflow
Management.
SECTION 2
Tax Returns to be Filed
(a) Consolidated Returns and Prior Period Consolidated Returns.
(i) Each of the Companies will join, and will cause each of
their respective Subsidiaries to join, in the Consolidated Returns to the
extent each is eligible to join in such return under the provisions of the
Code and the regulations thereunder. The Tax Administrator will cause the
Consolidated Returns to be timely prepared and filed, and will timely prepare
and file any consents and requests for extension of time within which to file
the Consolidated Returns or any related information or similar returns. The
Tax Administrator shall make the Consolidated Returns available to the Chief
Financial Officers of the Spin-Off Companies for their review prior to filing
and shall furnish them a copy of the return promptly after it is filed.
(ii) Each of the Spin-Off Companies agrees that it will cause
its respective Chief Financial Officer to furnish to the Tax Administrator on
a timely basis such information, schedules, analyses and any other items as
may be reasonably required to prepare the Consolidated Returns. Such
information, schedules, analyses and other items will be prepared in a manner
consistent with existing practice and in accordance with the work plan and
schedule to be agreed upon among the Tax Administrator and the Chief
Financial Officer of each of the Spin-Off Companies, acting reasonably, as
soon as practicable after the Distribution Date.
(iii) The Companies hereby agree to execute and deliver all
documentation reasonably required (including powers of attorney, if
requested) to enable the Tax Administrator to timely file, and to take all
actions necessary or incidental to the filing of, the Consolidated Returns
(including, without limitation, the execution of Treasury Form 1122), or
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any amendment of the Consolidated Returns or any Prior Period Consolidated
Return. The Tax Administrator shall decide in his sole discretion whether to
file an amended return, and no consent of any Company shall be required for
the filing of any such amended return.
(iv) Taxes with respect to the Consolidated Returns or any
Prior Period Consolidated Return shall be paid or caused to be paid by USOP,
which shall act as agent of the Spin-Off Companies and their includable
Subsidiaries in all Tax matters having to do with the Consolidated Returns or
any Prior Period Consolidated Return.
(b) Other Controlled Returns. The Tax Administrator shall cause
any other Controlled Returns and any amendment of any such Controlled Returns
to be timely prepared, filed and paid, utilizing procedures substantially
similar to those provided in Section 2(a) of this Agreement with respect to
the Consolidated Returns and Prior Period Consolidated Returns.
(c) Other Tax Returns. The Companies shall, and shall cause their
respective Subsidiaries to, timely prepare and file Tax returns for any
taxable period beginning prior to the Distribution Date (other than
Controlled Returns) in those jurisdictions in which they are required to do
so in a manner consistent with past practice. Taxes shown as payable on any
Tax return filed by one of the Companies pursuant to this Section 2(c) shall
be paid or caused to be paid by the Company responsible under this Section
2(c) for filing such return or causing such return to be filed. The Tax
Administrator shall have the right to approve any Tax returns filed pursuant
to this Section 2(c) prior to such filing if USOP could be liable for Taxes
due with respect to any such Tax returns under principles analogous to
Treasury regulation section 1.1502-6.
SECTION 3
Consolidated Returns Computations of Tax and Payments
(a) Computations of Tax and Payments for the Consolidated Return
year ending on April 25, 1998:
(i) On or before July 14, 1998, an interim Tax settlement
payment shall be made to or by USOP by or to each of the Spin-Off Companies,
as the case may be, equal to the difference between their respective Group's
Separate Consolidated Federal Income Tax Liability (as reasonably determined
by the Tax Administrator) and the net amounts previously paid with respect to
estimated Taxes by such Group for the Consolidated Return year ending on
April 25, 1998.
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(ii) Based on computations to be prepared by the affected
Spin-Off Company and approved by the Tax Administrator, an adjusting payment
equal to the difference between its Group's Allocable Federal Income Tax
Liability and the net amounts previously paid with respect to estimated Taxes
by such Group for the Consolidated Return year ending on April 25, 1998,
including payments pursuant to Sections 3(a)(i) of this Agreement, shall be
made to or by USOP by or to such Spin-Off Company, as the case may be, on or
before February 15, 1999 based on the Consolidated Return for the year ending
April 25, 1998 as filed.
(b) Computations of Tax and Payments for the Consolidated Return
year ending on April 24, 1999:
(i) On or before April 14, 1999, each of the Spin-Off
Companies agrees to make payments to USOP equal to the excess, if any, of its
Group's estimated Separate Consolidated Federal Income Tax Liability for the
Consolidated Return year ending on April 24, 1999 (as reasonably determined
by the Tax Administrator) over such Group's prior payments, including any
payments with respect to estimated Taxes for such Consolidated Return year,
and USOP agrees to make payments to each of the Spin-Off Companies equal to
the excess, if any, of their respective Group's prior payments with respect
to estimated Taxes for the Consolidated Return year ending on April 24, 1999
over such Group's estimated Separate Consolidated Federal Income Tax
Liability (as reasonably determined by the Tax Administrator) for the
Consolidated Return year ending on April 24, 1999.
(ii) On or before July 14, 1999, an interim Tax settlement
payment shall be made to or by USOP by or to each of the Spin-Off Companies,
as the case may be, equal to the difference between their respective Group's
Separate Consolidated Federal Income Tax Liability (as reasonably determined
by the Tax Administrator) and the net amounts previously paid with respect to
estimated Taxes by such Group for the Consolidated Return year ending on
April 24, 1999.
(iii) Based on computations to be prepared by the affected
Spin-Off Company and approved by the Tax Administrator, an adjusting payment
equal to the difference between its Group's Allocable Federal Income Tax
Liability and the net amounts previously paid by such Group with respect to
estimated Taxes for the Consolidated Return year ending on April 24, 1999,
including payments pursuant to Sections 3(b)(i) and 3(b)(ii) of this
Agreement, shall be made to or by USOP by or to such Spin-Off Company, as the
case may be, on or before February 15, 2000 based on the Consolidated Return
for the year ending April 24, 1999 as filed. Each of the Spin-Off Companies
shall increase or decrease, as the case may be, its Group's liability for
such adjusting payment by the amount of any AMT credit carryforward allocated
to its Group under the consolidated return regulations which exceeds or is
less than, as the case may be, the AMT calculated on a separate consolidated
basis.
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(c) Computations of Tax and Payments for Controlled Returns Other
than Consolidated Returns. Tax Payments shall be made to or by USOP by or to
each of the Spin-Off Companies, as the case may be, utilizing procedures
substantially similar to, and determining the amount payable by or to each
Group using, to the extent possible, methods substantially similar to, those
provided in Sections 3(a) and 3(b) of this Agreement with respect to any
Controlled Return other than a Consolidated Return for any period beginning
prior to the Distribution Date and ending on or after April 25, 1998.
(d) Intercompany Transactions. Each of the Spin-Off Companies
shall be liable for and shall indemnify, defend and hold USOP harmless from
and against any Losses with respect to Taxes attributable to any
"intercompany transaction" to the extent such Loss is attributable to any
"intercompany item" that such Spin-Off Company or any of its Subsidiaries is
required to take into account immediately prior to the Distributions pursuant
to Treasury Regulations section 1.1502-13.
SECTION 4
Special Rules
(a) If the Tax liability (including any interest relating thereto)
for either Consolidated Return exceeds or is less than the total of the five
Groups' Allocable Federal Income Tax Liability (including any interest
relating thereto), a payment shall be made to or by USOP by or to each of the
Spin-Off Companies equal to each of the Spin-Off Companies pro rata portion
of such excess or shortfall based on their respective Group's relative
Allocable Federal Income Tax Liability (including any interest relating
thereto) for such Consolidated Return; provided, that AMT in an amount equal
to any AMT credit carryforward from the Consolidated Returns allocated to a
Group shall be charged to and paid by such Group.
(b) A payment shall be made to or by USOP by or to each of the
Spin-Off Companies utilizing procedures substantially similar to those
provided in Sections 4(a) of this Agreement with respect to any Controlled
Return other than a Consolidated Return for any period beginning prior to the
Distribution Date and ending on or after April 25, 1998.
(c) Each of the Companies agrees that, unless it obtains consent
of the Tax Administrator, all members of its Group will waive the carryback
of any net operating loss from a Tax period beginning on or after the
Distribution Date to the Consolidated Returns or Prior Period Consolidated
Return.
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SECTION 5
Deductions Related to Exercise of Options
Notwithstanding anything to the contrary in Section 3 of this
Agreement, any Tax saving or other benefit attributable to any compensation
deduction arising from or in connection with the exercise by any employee of
any Company, or of any such Company's Subsidiaries (determined immediately
after the Distributions), of any option granted under any of the USOP Stock
Plans shall be apportioned to the entity whose shares were issued upon the
exercise of such option, provided that any compensation deduction arising
from or in connection with any such exercise on or prior to the Closing Date
by any employee of any Company or of any such Company's Subsidiaries
(determined immediately after the Closing Date) shall be apportioned to such
Company.
SECTION 6
Dispute Resolution
In the event of a disagreement between the Tax Administrator and any
or all of the Spin-Off Companies, all computations or recomputations of
federal or state and local income and franchise Tax liability, and all
computations or recomputations of any amount or any payment (including, but
not limited to, computations of the amount of the Tax liability, any loss or
credit or deduction, federal statutory Tax rate change for a year,
utilization of carryback items, interest, penalties, and adjustments) and all
determinations of the amount of payments or repayments, or determinations of
any other nature necessary to carry out the terms of this Agreement will be
reviewed by the national office of Ernst & Young, LLP (unless the disputing
parties unanimously agree on another accounting firm of national reputation),
with the costs of such review being shared equally by such disputing parties.
If any disagreement remains after any such review, including any
disagreement as to the construction, applicability or binding nature of this
Agreement, that disagreement shall be resolved by an arbitrator with the cost
of such arbitration being shared equally by such disputing parties; provided
that such arbitrator shall be a retired or former judge of the United States
Tax Court or such other qualified person as the relevant parties may agree to
designate; provided further, that, in the event that the relevant parties
agree to designate a qualified person (other than a retired or former judge
of the United States Tax Court), such other qualified person shall have had
substantial experience with regard to settling complex Tax disputes. The
decision of the arbitrator shall be binding on the parties.
If the procedures for resolving a dispute, controversy or claim
between the Companies or any of their respective Subsidiaries arising out of
or relating to this Agreement are not controlled by this Agreement, such
dispute, controversy or claim shall be resolved (and costs
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shall be apportioned) pursuant to the procedures set forth in Article IX of
the Distribution Agreement.
SECTION 7
Survival of Terms
The provisions of this Agreement shall survive the Distribution Date
and remain in full force until all periods of limitations, including any
extension or waiver periods, as well as the ten-year statute of limitations
with respect to FTC redeterminations, for the Controlled Return taxable
periods, have expired and no further carrybacks to such periods are possible
and for 30 days thereafter; provided that the provisions of this Agreement
shall remain in full force and effect with respect to any pending claim under
this Agreement until the final resolution of such claim.
SECTION 8
Parties to Cooperate
Each of the Companies shall, and shall cause their respective
Subsidiaries to, cooperate fully and to the extent reasonably requested by
any other Company in connection with the preparation and filing of any return
or the conduct of any audit, dispute, proceeding, suit or action concerning
any issues or any other matter contemplated hereunder. Such cooperation shall
include, without limitation, (i) the retention and provision on demand of
books, records, documentation or other information relating to any Tax matter
until the later of (x) the expiration of the applicable statute of limitation
(giving effect to any extension, waiver, or mitigation thereof) and (y) in
the event any claim has been made under this Agreement for which such
information is relevant, until a Final Determination with respect to such
claim, (ii) the provision of additional information with respect to, and
explanations of, Tax practices (including elections, accounting methods,
conventions and principles of taxation) and the provision of material
described in clause (i) of this Section 8; (iii) the execution of any
document that may be necessary or reasonably helpful in connection with the
filing of any Tax return by any member of one of the Groups, or in connection
with any audit, proceeding, suit or action addressed in the preceding
sentence; and (iv) the use by each of the Companies of its reasonable efforts
to obtain any documentation from a governmental authority or a third party
that may be necessary or helpful in connection with the foregoing. Each of
the Companies shall make its employees and facilities available on a mutually
convenient basis to facilitate such cooperation and shall retain as permanent
records all documentation necessary to enable it to determine any obligation
under this Agreement. The records described above will be made available to
representatives of any of the Companies within a reasonable time upon request
and may be photocopied on an as needed basis. The requesting Company shall
pay the reasonable out of pocket costs incurred by any
14
<PAGE>
Company, or Subsidiary thereof, in cooperating with the requesting Company
pursuant to this Section 8.
SECTION 9
Notices
Any notice, request, instruction or other communication to be given
hereunder by any party to another shall be in writing and shall be deemed to
have been duly given (i) on the date of delivery if delivered personally, or
by telefacsimile, upon confirmation of receipt, (ii) on the first business
day following the date of dispatch if delivered by Federal Express or other
nationally reputable next-day courier service with proof of delivery, or
(iii) on the fifth business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive
such notice.
(a) If to Workflow Management:
Workflow Management, Inc.
240 Royal Palm Way
Palm Beach, Florida 33480
Attention: Thomas B. D'Agostino
Telefacsimile: (561) 659-7793
(b) If to School Specialty:
School Specialty, Inc.
1000 North Bluemound Drive
Appleton, Wisconsin 54914
Attention: Daniel P. Spalding
Telefacsimile: (920) 734-6276
15
<PAGE>
(c) If to Aztec:
Aztec Technology Partners, Inc.
52 Roland Street
Boston, Massachusetts 02129
Attention: James E. Claypoole
Telefacsimile: (617) 623-58888
(d) If to Navigant:
Navigant International, Inc.
84 Inverness Circle East
Englewood, Colorado 80112-5314
Attention: Edward S. Adams
Telefacsimile: (303) 706-0770
(e) If to USOP:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W., Suite 600 East
Washington, D.C. 20007-5490
Attention: Mark D. Director, Esq.
Kathleen Delaney, Esq.
Telefacsimile: (202) 339-6733
with copies to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
Eighteenth Floor
New York, NY 10152
Attention: Donald J. Gogel
Telefacsimile: (212) 407-5200
16
<PAGE>
SECTION 10
Indemnification
(a) Pre-Distribution & Distribution Taxes.
(i) USOP Indemnification. USOP shall be liable for and
shall indemnify, defend and hold the Spin-Off Companies harmless from and
against any Losses with respect to Taxes that result from, or arise in
connection with, an Adverse Tax Act of USOP or any of the Retained
Subsidiaries.
(ii) Spin-Off Companies Indemnification. The Spin-Off
Companies shall be jointly and severally liable for and shall jointly and
severally indemnify, defend and hold USOP harmless from and against any
Losses with respect to Taxes that result from, or arise in connection with,
an Adverse Tax Act of any of the Spin-Off Companies or any of their
respective Subsidiaries.
(iii) Multiple Adverse Tax Acts. If any Losses with respect
to Taxes result from, or arise in connection with, (a) an Adverse Tax Act of
USOP or any of the Retained Subsidiaries and (b) an Adverse Tax Act of any or
all of the Spin-Off Companies or any of their respective Subsidiaries (each
Spin-Off Company that is responsible or whose Subsidiary is responsible for
an Adverse Tax Act a "Distributing Tax Payor"), then the Spin-Off Companies
shall be jointly and severally liable for and shall jointly and severally
indemnify, defend and hold USOP harmless from and against a percentage of
such Losses with respect to Taxes equal to the percentage determined by
dividing (x) the aggregate Market Capitalizations of the Distributing Tax
Payors by (y) the aggregate Market Capitalizations of the Distributing Tax
Payors and USOP.
(iv) No Adverse Tax Acts. If USOP incurs any Losses with
respect to Taxes resulting from the Contributions or Distributions, as a
result of the failure of the Contributions or Distributions to qualify under
Section 355 or 368 of the Code or otherwise, including, without limitation,
by reason of any stock or securities of any of the Spin-Off Companies failing
to qualify as "qualified property" within the meaning of Section 355(c)(2) of
the Code, except to the extent such Losses result from an Adverse Tax Act by
any of the Companies or any of their respective Subsidiaries, then each of
the Spin-Off Companies shall be liable for and shall indemnify, defend and
hold USOP harmless from the portion of such Losses that bears the same ratio
to the aggregate amount of such Losses as the Market Capitalization of such
Spin-Off Company bears to the aggregate Market Capitalization of all of the
Companies.
(b) Treasury Regulations Sections 1.1502-6 and 1.1502-77. USOP
shall be liable for and shall indemnify, defend and hold each of the Spin-Off
Companies harmless from
17
<PAGE>
and against any federal or state income or franchise Taxes for the
Consolidated Return or any Prior Period Consolidated Return for which any of
the Spin-Off Company Groups may be liable solely as a result of the operation
of Treasury Regulation Sections 1.1502-6 and 1.1502-77 or any state
counterpart statute or regulation.
SECTION 11
Tax Deficiencies and Claims
(a) Except as otherwise provided in Section 11(b), the Tax
Administrator shall control all audits, examinations and proceedings with
respect to Taxes with respect to any Controlled Returns. The Tax
Administrator shall have overall responsibility for obtaining and
coordinating all responses in connection with any such proceedings with
respect to any Controlled Returns. To the extent that any such audit affects
one of the Groups, such Group shall prepare and submit such responses in a
manner consistent with prior practice; provided, however that the Tax
Administrator shall have the right to approve all such responses prior to
their submission. Adjustments affecting solely the taxable income, gain,
loss or deductions of, or Tax Credits generated by, any Group may be agreed
upon or settled only upon approval of that Group, which approval shall not be
unreasonably withheld or delayed.
(b) Spin-Off Company Claims. Any proposed or actual income Tax
deficiencies or refund claims with respect to Controlled Returns which arise
from the business activities of one of the Spin-Off Company Groups, and do
not otherwise affect any Controlled Return or the Tax treatment of the
Contributions or Distributions, may be defended or prosecuted by such Group
at its own cost and expense and with counsel and accountants of its own
selection; provided that in an action for an income Tax deficiency such Group
shall have theretofore acknowledged in writing its liability for such Taxes,
if any. The Tax Administrator may participate in any such prosecution or
defense at USOP's cost and expense (in either event such cost or expense is
not to include the amount of any payment of any Tax claim, interest or
penalties, or of any compromise settlement or other disposition thereof).
Notwithstanding the foregoing, none of the Spin-Off Company Groups shall have
a right to an extension of the statute of limitations beyond the time
reasonably necessary to complete review at the Appeals Division of the IRS or
to any waiver of any other procedural safeguard without the prior written
consent of the Tax Administrator, which consent shall not be unreasonably
withheld. The limitation expressed in the preceding sentence applies, but is
not limited to, the filing of a petition with the United States Tax Court. If
one of the Spin-Off Groups defends or prosecutes an action, it shall keep the
Tax Administrator informed of matters relating to such defense or prosecution.
18
<PAGE>
(c) Cost of Advisors. In connection with the defense of any audit
of any Controlled Return, except with regard to claims described in Section
11(b) of this Agreement, the Tax Administrator may retain advisors and charge
the reasonable cost of their services to the appropriate Group or Groups.
SECTION 12
Payment of Deficiencies and Refunds
(a) The Allocable Federal Income Tax Liability and any other Tax
liability of the Spin-Off Company Groups with respect to any Controlled
Returns shall be adjusted in computations to be prepared by the relevant
Spin-Off Company Group and approved by the Tax Administrator with respect to
changes in the taxable income, loss, deduction or Tax credits of the relevant
Spin-Off Company Group:
(i) in each instance when payments are to be made to, or
refunds are received from, the relevant Taxing authority;
(ii) when no payment is to be made or refund is to be
received due to offsetting adjustments, upon filing of an amended return,
completion of an audit and an appellate review by the relevant Taxing
authority; and
(iii) to reflect the results of any Final Determination.
Each of the Spin-Off Companies agree to pay to USOP additional
amounts (plus penalties and additions to Tax, if any) equal to any increases
in the Allocable Federal Income Tax Liability (or any other Tax liability
with respect to a Controlled Return) of such Spin-Off Company's Group
resulting from any such changes, and USOP agrees to pay to each of the
Spin-Off Companies amounts equal to any decreases in the Allocable Federal
Income Tax Liability (or any other Tax liability with respect to a Controlled
Return) of each such Spin-Off Company's Group resulting from any such
changes, in each case together with any interest relating thereto. For
purposes of this Agreement, unless specifically provided otherwise, interest
shall be computed at the federal statutory rate used, pursuant to Section
6621(a) of the Code, by the IRS in computing the interest payable to or by it
on the net balance due to or from the IRS. Any interest under Section 6621(c)
of the Code shall be charged to the Group whose separate deficiency gave rise
to such interest. If the separate deficiencies of more than one Group gave
rise to such interest, then such interest shall be allocated between or among
such Groups. Penalties levied in respect of any Controlled Return shall be
charged to the Group whose separate computations gave rise to such penalty.
19
<PAGE>
(b) Amounts payable to or from USOP from or to any of the Spin-Off
Companies under Section 12(a) of this Agreement shall be paid upon written
request therefor approved by the Tax Administrator, together with interest
thereon from the original due date or such other date as may be appropriate
under the circumstances. Any amounts due to or from USOP from or to any of
the Spin-Off Companies under Section 12(a) of this Agreement as a result of a
payment to a Taxing authority or the receipt of a refund shall be paid within
five working days after such payment or receipt, together with appropriate
interest thereon. If no payment is to be made or refund is to be received
due to offsetting items among the various Groups, then Tax and interest
(computed at the IRS overpayment rates) shall be paid within 30 calendar days
after the completion of each of the audit and appellate review of the Tax
period in question and a Final Determination. After expiration of the five
day period (or, if applicable, 30 day period) any amounts unpaid shall bear
interest computed from the date of payment or receipt (or, if applicable,
completion or Final Determination) at the Prime Rate.
(c) No payment relating to a change in Allocable Federal Income
Tax Liability (or any other Tax liability with respect to a Controlled
Return) shall be made by or to any Group with respect to the IRS audit of any
Controlled Return until the audit has been completed with respect to all
Groups, unless such advance payment has been approved by the Tax
Administrator.
SECTION 13
Certain Post-Distribution Actions
(a) USOP.
(i) USOP shall comply with and otherwise not take any action
inconsistent with any representation or statement made, or to be made, by or
on behalf of any member of the USOP Group in connection with this Agreement
or to USOP's outside Tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions.
(ii) Until two years after the Distribution Date, USOP will
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Code.
(b) Workflow Management.
(i) Workflow Management shall comply with and otherwise not
take action inconsistent with each representation and statement made, or to
be made, by or on behalf
20
<PAGE>
of any member of the Workflow Group in connection with this Agreement or to
USOP's outside Tax counsel in connection with such firm's rendering an
opinion to the Companies as to certain Tax aspects of the Contributions and
Distributions.
(ii) Until two years after the Distribution Date, Workflow
Management will maintain its status as a company engaged in the active
conduct of a trade or business, as defined in Section 355(b) of the Code.
(c) School Specialty.
(i) School Specialty shall comply with and otherwise not
take action inconsistent with each representation and statement made, or to
be made, by or on behalf of any member of the School Specialty Group in
connection with this Agreement or to USOP's outside Tax counsel in connection
with such firm's rendering an opinion to the Companies as to certain Tax
aspects of the Contributions and Distributions.
(ii) Until two years after the Distribution Date, School
Specialty will maintain its status as a company engaged in the active conduct
of a trade or business, as defined in Section 355(b) of the Code.
(d) Aztec.
(i) Aztec shall comply with and otherwise not take action
inconsistent with each representation and statement made, or to be made, by
or on behalf of any member of the Technology Group in connection with this
Agreement or to USOP's outside Tax counsel in connection with such firm's
rendering an opinion to the Companies as to certain Tax aspects of the
Contributions and Distributions.
(ii) Until two years after the Distribution Date, Aztec will
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Code.
(e) Navigant.
(i) Navigant shall comply with and otherwise not take action
inconsistent with each representation and statement made, or to be made, by
or on behalf of any member of the Travel Group in connection with this
Agreement or to USOP's outside Tax counsel in connection with such firm's
rendering an opinion to the Companies as to certain Tax aspects of the
Contributions and Distributions.
21
<PAGE>
(ii) Until two years after the Distribution Date, Navigant
will maintain its status as a company engaged in the active conduct of a
trade or business, as defined in Section 355(b) of the Code.
(f) During the two-year period following the Distribution Date,
none of the Spin-Off Companies shall effect, or agree to effect, any
Restricted Transaction unless and until the following conditions have been
satisfied or waived, in writing, by USOP with respect to such Restricted
Transaction:
(i) Such Company shall have given USOP at least 10 business
days' written notice prior to effecting such Restricted Transaction, which
notice shall describe the Restricted Transaction in detail reasonably
sufficient to permit analysis of the potential effect of the Restricted
Transaction on the U.S. federal income tax treatment of the Contributions and
the Distributions; provided, that such Company will not be required to
disclose the name of any other party participating in the Restricted
Transaction unless such disclosure is necessary to permit such analysis; and
provided further, that USOP will keep confidential all information relating
to the Restricted Transaction;
(ii) Such Company shall have afforded USOP and its
representatives 10 business days (which may overlap with the notice period in
Section 13(f)(i) of this Agreement) to discuss with the Spin-Off Company and
its representatives the terms of such Restricted Transaction, subject to the
provisos in Section 13(f)(i); and
(iii) At USOP's request, such Company shall have provided to
USOP, an opinion of outside counsel, reasonably satisfactory to USOP, in form
and substance reasonably satisfactory to USOP, to the effect that such
transaction will not adversely affect the U.S. federal income tax treatment
of the Contributions and/or the Distributions as transactions described in
Sections 355 and 368 of the Code.
SECTION 14
Entire Agreement and Termination of Existing Tax Allocation Agreements
This Agreement contains the entire agreement among the Companies
with respect to the subject matter hereof. Any and all existing tax
allocation agreements, written or unwritten, exclusively between any member
of the USOP Group and any member of any of the Spin-Off Company Groups other
than this Agreement shall be terminated immediately prior to the Distribution
Date. Nothing in this Section 14 shall affect any provision of the
Distribution Agreement or of this Agreement relating to Taxes.
22
<PAGE>
SECTION 15
Choice of Law; Successors and Assigns
This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Delaware applicable to contracts made and
to be performed entirely within such state, without regard to the conflicts
of law principles of such state.
The provisions of this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the Companies and their respective
successors and permitted assigns.
SECTION 16
Modifications
This Agreement may not be amended, supplemented or discharged except
by performance or by an instrument in writing signed by all of the Companies.
SECTION 17
Counterparts
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
23
<PAGE>
IN WITNESS WHEREOF, the Companies have duly executed this Agreement
as of the date first above written.
U.S. OFFICE PRODUCTS COMPANY
By
Name:
Title:
Seal
Attest:
WORKFLOW MANAGEMENT, INC.
By
Name:
Title:
Seal
Attest:
SCHOOL SPECIALTY, INC.
By
Name:
Title:
Seal
Attest:
24
<PAGE>
AZTEC TECHNOLOGY PARTNERS, INC.
By
Name:
Title:
Seal
Attest:
NAVIGANT INTERNATIONAL, INC.
By
Name:
Title:
Seal
Attest:
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this day of , 1998, is by and
between SCHOOL SPECIALTY, INC., a Wisconsin corporation (the "Company") and
DAVID VANDER ZANDEN ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of his skills and services, and Employee desires to accept 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 AND DUTIES. The Company hereby agrees to employ the Employee
and the Employee hereby accepts employment as the Chief Operating
Officer of the Company and agrees to devote his full business time and
efforts to the diligent and faithful performance of his duties as Chief
Operating Office hereunder under the direction of the CEO of the
Company. It is intended by the Employer that at the time that the
Company ceases to be a wholly owned subsidiary of U.S. Office Products
Company, by spin off, the Employee's title shall become President and
Chief Operating Officer of the Company. Such duties shall be performed
from headquarters in the Appleton, Wisconsin area. Throughout the term
of this Agreement, the Employee shall be recommended by management of
the Company to its shareholders as a suitable candidate for a position
on the Board of Directors of the Company.
2. TERM OF EMPLOYMENT. Unless sooner terminated as hereinafter provided,
the term of the Employee's employment hereunder shall commence with and
only with the date of this agreement and shall continue for a period of
two (2) years. This Agreement may be terminated prior to the end of the
term in the manner provided herein. In the event that this agreement is
not terminated pursuant to the terms of this Agreement, following the
first year of the initial term of two (2) years and any renewal terms
thereof, said agreement shall extend for successive renewal terms of two
(2) years each measured from the date of renewal, unless either party
shall notify the other party of their desire to not renew the term of
this agreement, with said notice to be made no later than ninety (90)
days prior to the expiration of the initial term of this agreement or
any then effective renewal term thereof.
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
Page 1 of 6
<PAGE>
(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be Two Hundred Twenty Five Thousand Dollars
($225,000.00) per year or such greater amount as determined from time
to time by the Board of Directors of the Company (but not reviewed
less frequently than on an annual basis), payable on a regular basis
in accordance with the Company's standard payroll procedures, but not
less than monthly. It is understood that the base salary is a minimum
amount, and shall not be reduced during the term of this Agreement.
(b) INCENTIVE BONUS. During the initial term and any extensions thereof,
Employee shall be eligible to receive an incentive bonus based upon
his participation in the Company's senior management bonus program as
specified in Exhibit A as attached hereto.
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the initial
term and any extensions thereof, Employee shall be entitled to
receive all perquisites and benefits as are customarily provided by
the Company to its executive 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 Chief Executive
Officer of the Company.
(d) STOCK OPTIONS.
4. COVENANTS AND CONDITIONS.
(a) The Employee will acquire information and knowledge respecting the
intimate and confidential affairs of the Company in the various
phases of its business. Accordingly, the Employee agrees that he
shall not for the period he receives severance pay under the terms of
this Employment Agreement from the Company, use for himself or
disclose to any person not employed by the Company any such knowledge
or information heretofore acquired or acquired during the term of
this employment hereunder, including but not limited to the
prescribed requirements of Section 134.90 of the Wisconsin Statutes,
as hereinafter amended from time to time. Nothing in this agreement
shall be construed to limit or supersede the common law of torts or
statutory or other protection of trade secrets where such law
provides the Company with greater protections or protections for a
longer duration than that provided in this section 4 of this
Agreement.
(b) The Employee agrees that all memoranda, notes, records, papers, or
other documents and all copies thereof relating to the Company's
operations or business, some of which may be prepared by him, and all
objects associated therewith (such as models and samples) in any way
Page 2 of 6
<PAGE>
obtained by him shall be the Company's property. This shall include but
is not limited to, documents and objects concerning any process,
apparatus, or product manufactured, used, developed, investigated, or
considered by the Company. The Employee shall not, except for Company
use, copy or duplicate any of the aforementioned documents or objects,
nor remove them from the Company's facilities, nor use any information
concerning them except for the Company's benefit, either during his
employment or thereafter. The Employee agrees that he will deliver all of
the aforementioned documents and objects that may be in his possession to
the Company on termination of his employment, or at any other time on the
Company's request, together with his written certification of compliance.
5. DEATH OR DISABILITY OF THE EMPLOYEE. The Employee's employment shall
terminate immediately upon his death. In the event the Employee becomes
physically or mentally disabled so as to become unable, for a period of
more than one hundred twenty (120) consecutive working days or for more
than one hundred twenty (120) working days in the aggregate during any
twelve (12) month period, to perform his duties hereunder on a
substantially full-time basis, the Company may at its option terminate
his employment upon not less than thirty (30) days written notice. The
Company's right to terminate the Employee's employment pursuant to the
preceding sentence shall cease in the event the notice of termination
provided for therein shall not be given during the period of the
Employee's disability or within ninety (90) days after such disability
ceases. In the event of termination, the Company shall be obligated to
pay the Employee's salary under paragraph 3 hereof, net of the gross
amount of Long Term disability benefits received by the Employee,
through the balance of the term of this Agreement and any then currently
effective extension thereof.
6. TERMINATION AND SEVERANCE COMPENSATION. The Company reserves the right
to terminate the Employee's employment under this agreement should any
of the following occur:
(a) The Employee's commission of a felony that is an act which is either
abhorrent to the community or is an intentional act which a
reasonable person would consider materially damaging to the
reputation of the Company or its successors or assigns.
(b) The Employee's breach of or failure to perform his obligations in
accordance with the terms and conditions of this agreement.
(c) The death or disability of the Employee.
Should the term of the Employee's employment with the Company be
terminated pursuant to the terms of Section 6(b), (c) and 7 herein, the
Company shall pay to the Employee the Base Salary described in Section
3(a) for the balance of the then effective term of this Agreement.
Page 3 of 6
<PAGE>
7. RIGHTS AND OBLIGATIONS OF SUCCESSORS. In the event that any of the
following events occur a "Change in Control" shall be deemed to occur
for the purpose of this Agreement: (a) any person or group of persons
acting in concert becomes the beneficial owner, directly or indirectly
(excluding ownership by or through employee benefit plans), of
securities of the Company representing fifty percent (50%) or more of
the combined voting power of the Company's then outstanding securities;
or (b) the Company is combined (by merger, share exchange,
consolidation, or otherwise) with another corporation and as a result of
such combination less than seventy five percent (75%) of the outstanding
securities of the surviving or resulting corporation are owned in the
aggregate by the former shareholders of the Company. Exempt from the
definition of Change in Control shall be the pending spin off of the
Company and the election of its Board of Directors promptly following
said spin off. The Employee shall have the right to terminate his
employment under the terms of this Agreement for a period of Sixty (60)
days following the Change in Control. In the event that the Employee
shall not so elect to terminate this Agreement, then this agreement
shall be assignable and transferable by the Company to any subsidiary or
affiliate or to any subsidiary or affiliate of the Company affiliated
with the Change in Control and shall inure to the benefit of and be
binding upon the Employee and his heirs and personal representatives and
the Company and its successors and assigns. In the event the Employee
elects to terminate employment, the Employee shall be paid through the
term of this Agreement and any then currently effective extension
thereof.
8. COVENANT NOT TO COMPETE. In consideration of the employment hereunder,
the Employee hereby agrees that during the term of his employment by the
Company and for the period that severance pay is paid under the terms of
this Agreement by the Company to the Employee, the Employee will not
either directly or indirectly own, have proprietary interest (except for
less than 5% of any listed company or company traded in the
over-the-counter market) of any kind in, be employed by, or serve as a
consultant to or in any other capacity for any firm, other than the
Company and its subsidiaries, engaged in the manufacture and
distribution of school supplies, equipment, furniture or other products
made and distributed by the Company or any of the Company's present or
future subsidiary corporations (acquired during the term of this
Agreement) during the period of the Employee's employment in the area
where they are engaged in business without the express written consent
of the Company. The Employee agrees that a breach of the covenant
contained herein will result in irreparable and continuing damage to the
Company for which there will be no adequate remedy at law and in the
event of any breach of such agreement, the Company shall be entitled to
injunctive and such other and further relief including damages as may be
proper.
Page 4 of 6
<PAGE>
9. NOTICE. All notices, demands and other communications hereunder shall be
deemed to have been duly given, if delivered by hand or mailed,
certified or registered mail with postage prepaid:
<TABLE>
<S> <C> <C>
To the Company: School Specialty, Inc.
1000 North Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
Attention: Mr. Daniel P. Spalding
Fax: (920) 734-6276
With a copy to: Joseph F. Franzoi IV, Esq.
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, WI 54952
Fax: (920) 725-0998
To Employee: David Vander Zanden
W2810 Oakridge Drive
Appleton, WI 54915
</TABLE>
or to such other address as the person to whom notice is to be given may
have specified in a notice duly given to the sender as provided herein.
Such notice, request, claim, demand, waiver, consent, approval or other
communication shall be deemed to have been given as of the date so
delivered, telefaxed, mailed or dispatched and, if given by any other
means, shall be deemed given only when actually received by the
addressees.
10. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including any
documents referred to herein) sets forth the entire understanding of the
parties hereto with respect to the subject matter contemplated hereby.
Any and all previous agreements and understandings between or among the
parties regarding the subject matter hereof, whether written or oral,
are superseded by this Agreement. This Agreement shall not be amended or
modified except by a written instrument duly executed by each of the
parties hereto. Any extension or waiver by any party of any provision
hereto shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
11. EXPENSES. The Company will pay all fees, expenses and disbursements of
their agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement, and its
enforcement.
12. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Wisconsin, without regard to its
conflict of laws principles.
Page 5 of 6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
COMPANY: School Specialty, Inc.
---------------------------------------------------------------------------
Daniel P. Spalding, President
EMPLOYEE:
---------------------------------------------------------------------------
David Vander Zanden, Individually
Page 6 of 6
<PAGE>
SCHOOL SPECIALTY, INC.
1998 STOCK INCENTIVE PLAN
PURPOSE
SCHOOL SPECIALTY, INC., a Delaware corporation (the "COMPANY"), wishes to
recruit, reward, and retain employees and outside directors. To further these
objectives, the Company hereby sets forth the School Specialty, Inc. 1998 Stock
Incentive Plan (the "PLAN") to provide options ("OPTIONS") or direct grants
("STOCK GRANTS" and, together with the Options, "AWARDS") to employees and
outside directors with respect to shares of the Company's common stock (the
"COMMON STOCK"). The Plan is effective as of the effective date (the "EFFECTIVE
DATE") of the Company's registration under Section 12 of the Securities Exchange
Act of 1934 (the "EXCHANGE ACT") with respect to its initial public offering
("IPO").
PARTICIPANTS
All Employees of the Company and any Eligible Subsidiaries are eligible for
Options and Stock Grants under this Plan, as are the directors of the Company
and the Eligible Subsidiaries who are not employees ("ELIGIBLE DIRECTORS").
Eligible employees and directors become "OPTIONEES" when the Administrator
grants them an option under this Plan or "RECIPIENTS" when they receive a direct
grant of Common Stock. (Optionees and recipients are referred to collectively as
"PARTICIPANTS." The term PARTICIPANT also includes, where appropriate, a person
authorized to exercise an Award in place of the original optionee.) The
Administrator may also grant Options or make Stock Grants to consultants and
other service providers.
EMPLOYEE means any person employed as a common law employee of the
Company or an Eligible Subsidiary.
ADMINISTRATOR
The ADMINISTRATOR will be the Compensation Committee of the Board of
Directors of the Company (the "COMPENSATION COMMITTEE"), unless the board
specifies another committee. The Board may also act under the Plan as though it
were the Compensation Committee. The Board of Directors of U.S. Office Products
Company ("U.S. OFFICE PRODUCTS"), directly or through a committee of directors,
may act as Administrator before U.S. Office Products distributes the Common
Stock to U.S. Office Products' stockholders (the "DISTRIBUTION").
The Administrator is responsible for the general operation and
administration of the Plan and for carrying out its provisions and has
full discretion in interpreting and administering the provisions of the
Plan. Subject to the express provisions of the Plan, the Administrator
may exercise such powers and authority of the Board as the Administrator
may find necessary or appropriate to carry out its functions. The
Administrator may delegate its functions (other than those described in
the GRANTING OF AWARDS section) to officers or other employees of the
Company.
The Administrator's powers will include, but not be limited to, the power
to amend, waive, or extend any provision or limitation of any Award. The
Administrator may act through meetings of a majority of its members or by
unanimous consent.
GRANTING OF AWARDS
Subject to the terms of the Plan, the Administrator will, in its sole
discretion, determine
the participants who receive Awards,
the terms of such Awards,
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the schedule for exercisability or nonforfeitability (including any
requirements that the participant or the Company satisfy performance
criteria),
the time and conditions for expiration of the Award, and
the form of payment due upon exercise, if any.
The Administrator's determinations under the Plan need not be uniform and
need not consider whether possible participants are similarly situated.
Options granted to employees may be nonqualified stock options ("NQSOS") or
"incentive stock options" ("ISOS") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended from time to time (the "CODE"), or the
corresponding provision of any subsequently enacted tax statute. Options granted
to Eligible Directors, including Formula Options, must be NQSOs. The
Administrator will not grant ISOs unless the stockholders either have already
approved the granting of ISOs or give such approval within 12 months after the
grant.
The Administrator may impose such conditions on or charge such price for the
Stock Grants as it deems appropriate.
SUBSTITUTIONS. The Administrator may also grant awards in substitution for
options or other equity interests held by individuals (i) as a result of their
employment by or services to U.S. Office Products before the Distribution or
(ii) who become Employees of the Company or of an Eligible Subsidiary as a
result of the Company's acquiring or merging with the individual's employer or
acquiring its assets. If necessary to conform the Awards to the interests for
which they are substitutes, the Administrator may grant substitute Awards under
terms and conditions that vary from those the Plan otherwise requires. Awards in
substitution for U.S. Office Products' options in connection with the
Distribution will retain their pre-Distribution exercise schedule and terms
(including Change of Control provisions) and expiration date.
DIRECTOR FORMULA OPTIONS
Each Eligible Director will receive a formula stock option ("FORMULA
OPTION") as of the Effective Date with respect to 15,000 shares of Common Stock,
as will each Eligible Director later appointed or elected to the Board (with the
grant made as of the date of his first election or appointment). Each Eligible
Director serving on the Board at each annual meeting of the Company's
shareholders (beginning with the meeting at least six months after the Effective
Date of the IPO) will receive a Formula Option as of that meeting with respect
to 5,000 shares of Common Stock. The Exercise Price for Formula Options will be
the Fair Market Value on the Date of Grant.
EXERCISE SCHEDULE Unless the Administrator specifies otherwise, each
Formula Option will become exercisable as to 20% of the covered shares on the
first anniversary of its Date of Grant, an additional 30% on the second
anniversary, and the remaining 50% on or after the third anniversary. A Formula
Option will become exercisable in its entirety upon the director's death,
disability, or attainment of age 70. Options will be forfeited to the extent
they are not then exercisable if a director resigns or fails to be reelected as
a director.
DATE OF GRANT
The DATE OF GRANT will be the date as of which this Plan or the
Administrator grants an Award to a participant, as specified in the Plan or in
the Administrator's minutes.
EXERCISE PRICE
The EXERCISE PRICE is the value of the consideration that a participant must
provide in exchange for one share of Common Stock. The Administrator will
determine the Exercise Price under each Award and may
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set the Exercise Price without regard to the Exercise Price of any other Awards
granted at the same or any other time. The Company may use the consideration it
receives from the participant for general corporate purposes.
The Exercise Price per share for NQSOs may not be less than 100% of the
Fair Market Value of a share on the Date of Grant. If an Option is intended
to be an ISO, the Exercise Price per share may not be less than 100% of the
Fair Market Value (on the Date of Grant) of a share of Common Stock covered
by the Option; PROVIDED, HOWEVER, that if the Administrator decides to grant
an ISO to someone covered by Sections 422(b)(6) and 424(d) (as a
more-than-10%-stock-owner), the Exercise Price of the Option must be at
least 110% of the Fair Market Value (on the Date of Grant).
The Administrator may satisfy any state law requirements regarding
adequate consideration for Stock Grants by (i) issuing Common Stock held as
treasury stock or (ii) charging the recipients at least the par value for
the shares covered by the Stock Grant. The Administrator may designate that
a recipient may satisfy (ii) either by direct payments or by the
Administrator's withholding from other payments due to the recipient.
FAIR MARKET VALUE
FAIR MARKET VALUE OF A SHARE OF COMMON STOCK FOR PURPOSES OF THE PLAN WILL
BE DETERMINED AS FOLLOWS:
if the Common Stock trades on a national securities exchange, the
closing sale price on that date;
if the Common Stock does not trade on any such exchange, the closing
sale price as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq") for such date;
if no such closing sale price information is available, the average of
the closing bid and asked prices that Nasdaq reports for such date; or
if there are no such closing bid and asked prices, the average of the
closing bid and asked prices as reported by any other commercial service for
such date.
For any date that is not a trading day, the Fair Market Value of a share of
Common Stock for such date shall be determined by using the closing sale
price or the average of the closing bid and asked prices, as appropriate,
for the immediately preceding trading day.
The Fair Market Value will be deemed equal to the IPO price for any Options
granted as of the date on which the IPO's underwriters price the IPO.
EXERCISABILITY
The Administrator will determine the times and conditions for the
exercise of or purchase under each Award but may not extend the period for
exercise beyond the tenth anniversary of its Date of Grant (or five years
for ISOs granted to 10% owners covered by Code Sections 422(b)(6) and
424(d)).
Awards will become exercisable at such times and in such manner as the
Administrator determines and the Award agreement, if any, indicates;
PROVIDED, HOWEVER, that the Administrator may, on such terms and conditions
as it determines appropriate, accelerate the time at which the participant
may exercise any portion of an Award or at which restrictions on Stock
Grants lapse. For Stock Grants, "exercise" refers to acceptance of the Award
or lapse of restrictions, as appropriate in context.
If the Administrator does not specify otherwise, Options will become
exercisable and restrictions on Stock Grants will lapse as to one-fourth of
the covered shares on each of the first four anniversaries of the Date of
Grant.
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No portion of an Award that is unexercisable at a participant's termination
of employment will thereafter become exercisable, unless the Award Agreement
provides otherwise, either initially or by amendment.
CHANGE OF CONTROL
Upon a Change of Control (as defined below), all Options held by current
Employees and directors will become fully exercisable and all restrictions
on Stock Grants will lapse. A CHANGE OF CONTROL for this purpose means the
occurrence, after the Company's IPO, of any one or more of the following
events:
a person, entity, or group (other than the Company, any Company
subsidiary, any Company benefit plan, or any underwriter temporarily
holding securities for an offering of such securities) acquires ownership
of more than 50% of the undiluted total voting power of the Company's
then-outstanding securities eligible to vote to elect members of the
Board ("COMPANY VOTING SECURITIES");
consummation of a merger or consolidation of the Company into any other
entity--unless the holders of the Company Voting Securities outstanding
immediately before such consummation, together with any trustee or other
fiduciary holding securities under a Company benefit plan, hold
securities that represent immediately after such merger or consolidation
at least 50% of the combined voting power of the then outstanding voting
securities of either the Company or the other surviving entity or its
parent; or the stockholders of the Company approve (i) a plan of complete
liquidation or dissolution of the Company or (ii) an agreement for the
Company's sale or disposition of all or substantially all the Company's
assets, AND such liquidation, dissolution, sale, or disposition is
consummated.
Even if other tests are met, a Change of Control has not occurred under
any circumstance in which the Company files for bankruptcy protection or
is reorganized following a bankruptcy filing.
The ADJUSTMENT UPON CHANGES IN CAPITAL STOCK provisions will also apply if
the Change of Control is a SUBSTANTIAL CORPORATE CHANGE (as defined in those
provisions).
LIMITATION ON ISOS
An Option granted to an employee will be an ISO only to the extent that
the aggregate Fair Market Value (determined at the Date of Grant) of the
stock with respect to which ISOs are exercisable for the first time by the
optionee during any calendar year (under the Plan and all other plans of the
Company and its subsidiary corporations, within the meaning of Code Section
422(d)), does not exceed $100,000. This limitation applies to Options in the
order in which such Options were granted. If, by design or operation, the
Option exceeds this limit, the excess will be treated as an NQSO.
METHOD OF EXERCISE
To exercise any exercisable portion of an Award, the participant must:
Deliver a written notice of exercise to the Secretary of the Company (or to
whomever the Administrator designates), in a form complying with any rules the
Administrator may issue, signed by the participant, and specifying the number of
shares of Common Stock underlying the portion of the Award the participant is
exercising;
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Pay the full Exercise Price, if any, by cashier's or certified check for the
shares of Common Stock with respect to which the Award is being exercised,
unless the Administrator consents to another form of payment (which could
include the use of Common Stock); and
Deliver to the Administrator such representations and documents as the
Administrator, in its sole discretion, may consider necessary or advisable.
Payment in full of the Exercise Price need not accompany the written notice
of exercise provided the notice directs that the stock certificates for the
shares issued upon the exercise be delivered to a licensed broker acceptable to
the Company as the agent for the individual exercising the option and at the
time the stock certificates are delivered to the broker, the broker will tender
to the Company cash or cash equivalents acceptable to the Company and equal to
the Exercise Price.
If the Administrator agrees to allow an optionee to pay through tendering
Common Stock to the Company, the individual can only tender stock he has held
for at least six months at the time of surrender. Shares of stock offered as
payment will be valued, for purposes of determining the extent to which the
participant has paid the Exercise Price, at their Fair Market Value on the date
of exercise. The Administrator may also, in its discretion, accept attestation
of ownership of Common Stock and issue a net number of shares upon Option
exercise.
AWARD EXPIRATION
No one may exercise an Award more than ten years after its Date of Grant (or
five years, for an ISO granted to a more-than-10% shareholder). Unless the Award
Agreement provides otherwise, either initially or by amendment, no one may
exercise an Award after the first to occur of:
EMPLOYMENT TERMINATION The 90th day after the date of termination of
employment (other than for death or Disability), where termination of employment
means the time when the employer-employee or other service-providing
relationship between the employee and the Company ends for any reason, including
retirement. Unless the Award Agreement provides otherwise, termination of
employment does not include instances in which the Company immediately rehires a
common law employee as an independent contractor. The Administrator, in its sole
discretion, will determine all questions of whether particular terminations or
leaves of absence are terminations of employment;
DISABILITY For disability, the earlier of (i) the first anniversary of the
participant's termination of employment for disability and (ii) 30 days after
the participant no longer has a disability, where "DISABILITY" means the
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or that has lasted or can be expected to last for a continuous
period of not less than twelve months; or
DEATH The date 24 months after the participant's death.
If exercise is permitted after termination of employment, the Award will
nevertheless expire as of the date that the former service provider violates any
covenant not to compete in effect between the Company and the former employee.
In addition, an optionee who exercises an Option more than 90 days after
termination of employment with the Company and/or the Eligible Subsidiaries will
only receive ISO treatment to the extent permitted by law, and becoming or
remaining an employee of another related company (that is not an Eligible
Subsidiary) or an independent contractor to the Company will not prevent loss of
ISO status because of the formal termination of employment.
Nothing in this Plan extends the term of an Award beyond the tenth
anniversary of its Date of Grant, nor does anything in this AWARD EXPIRATION
section make an Award exercisable that has not otherwise become exercisable.
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AWARD AGREEMENT
Award Agreements will set forth the terms of each Award and will include
such terms and conditions, consistent with the Plan, as the Administrator may
determine are necessary or advisable. To the extent the agreement is
inconsistent with the Plan, the Plan will govern. The Award Agreements may
contain special rules. The Administrator may, but is not required to, issue
agreements for Stock Grants.
STOCK SUBJECT TO PLAN
Except as adjusted below under CORPORATE CHANGES, the aggregate number of
shares of Common Stock that may be issued under the Awards (whether ISOs, NQSOs,
or Stock Grants) may not exceed 20% percent of the total number of shares of
Common Stock outstanding, determined immediately after the grant of the Award;
the maximum number of shares that may be subject to ISOs may not exceed 600,000;
and the maximum number of shares that may be granted under Awards for a single
individual in a calendar year may not exceed 1,200,000. (The individual maximum
applies only to Awards first made under this Plan and not to Awards made in
substitution of a prior employer's options or other incentives, except as Code
Section 162(m) otherwise requires.)
The Common Stock will come from either authorized but unissued shares or
from previously issued shares that the Company reacquires, including shares it
purchases on the open market. If any Award expires, is canceled, or terminates
for any other reason, the shares of the Common Stock available under that Award
will again be available for the granting of new Awards (but will be counted
against that calendar year's limit for a given individual).
No adjustment will be made for a dividend or other right for which the
record date precedes the date of exercise.
The participant will have no rights of a stockholder with respect to the
shares of stock subject to an Award except to the extent that the Company has
issued certificates for, or otherwise confirmed ownership of, such shares upon
the exercise of the Award.
The Company will not issue fractional shares pursuant to the exercise of an
Award, but the Administrator may, in its discretion, direct the Company to make
a cash payment in lieu of fractional shares.
PERSON WHO MAY EXERCISE
During the participant's lifetime, only the participant or his duly
appointed guardian or personal representative may exercise the Awards. After his
death, his personal representative or any other person authorized under a will
or under the laws of descent and distribution may exercise any then exercisable
portion of an Award. If someone other than the original recipient seeks to
exercise any portion of an Award, the Administrator may request such proof as it
may consider necessary or appropriate of the person's right to exercise the
Award.
ADJUSTMENTS UPON CHANGES IN CAPITAL STOCK
Subject to any required action by the Company (which it shall promptly take)
or its stockholders, and subject to the provisions of applicable corporate law,
if, after the Date of Grant of an Award, the outstanding shares of Common Stock
increase or decrease or change into or are exchanged for a different number or
kind of security because of any recapitalization, reclassification, stock split,
reverse stock split, combination of shares, exchange of shares, stock dividend,
or other distribution payable in capital stock, or some other increase or
decrease in such Common Stock occurs without the Company's receiving
consideration, the Administrator may make a proportionate and appropriate
adjustment in the number of shares of Common Stock underlying each Award, so
that proportionate interest of the participant immediately following such event
will, to the extent practicable, be the same as immediately before such event.
(This
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adjustment does not apply to Common Stock that the optionee has already
purchased nor to Stock Grants that are already nonforfeitable, except to the
extent of similar treatment for most stockholders.) Unless the Administrator
determines another method would be appropriate, any such adjustment to an Award
will not change the total price with respect to shares of Common Stock
underlying the unexercised portion of the Award but will include a corresponding
proportionate adjustment in the Award's Exercise Price.
The Administrator will make a commensurate change to the maximum number and
kind of shares provided in the Stock Subject to Plan section.
Any issue by the Company of any class of preferred stock, or securities
convertible into shares of common or preferred stock of any class, will not
affect, and no adjustment by reason thereof will be made with respect to, the
number of shares of Common Stock subject to any Award or the Exercise Price
except as this ADJUSTMENTS section specifically provides. The grant of an Award
under the Plan will not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, or to merge or to consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or assets.
SUBSTANTIAL CORPORATE CHANGE
Upon a SUBSTANTIAL CORPORATE CHANGE, the Plan and any unexercised Awards
will terminate unless provision is made in writing in connection with such
transaction for the assumption or continuation of outstanding Awards, or the
substitution for such options or grants of any options or grants covering the
stock or securities of a successor employer corporation, or a parent or
subsidiary of such successor, with appropriate adjustments as to the number and
kind of shares of stock and prices, in which event the Awards will continue in
the manner and under the terms so provided.
Unless the Board determines otherwise, if an Award would otherwise terminate
under the preceding sentence, participants who are then employees or directors
of the Company will have the right, at such time before the consummation of the
transaction causing such termination as the Board reasonably designates, to
exercise any unexercised portions of the Award, whether or not they had
previously become exercisable. However, unless the Board determines otherwise,
the acceleration will not occur if it would render unavailable "pooling of
interest" accounting for any reorganization, merger, or consolidation of the
Company.
A SUBSTANTIAL CORPORATE CHANGE means the dissolution or liquidation of the
Company, merger, consolidation, or reorganization of the Company with one or
more corporations in which the Company is not the surviving corporation, the
sale of substantially all of the assets of the Company to another corporation,
or any transaction (including a merger or reorganization in which the Company
survives) approved by the Board that results in any person or entity (other than
any affiliate of the Company as defined in Rule 144(a)(1) under the Securities
Act, any Company Subsidiary, any Company benefit plan, or any underwriter
temporarily holding securities for an offering of such securities) owning 100%
of the combined voting power of all classes of stock of the Company.
SUBSIDIARY EMPLOYEES
Employees of Company Subsidiaries will be entitled to participate in the
Plan, except as otherwise designated by the Board of Directors or the Committee.
Eligible Subsidiary means each of the Company's Subsidiaries, except as the
Board otherwise specifies. For ISO grants, SUBSIDIARY means any corporation
(other than the Company) in an unbroken chain of corporations beginning with the
Company if, at the time an ISO is granted to a Participant under the Plan, each
corporation (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in another corporation in such chain. For ISO purposes, SUBSIDIARY also
includes a single-member limited liability company included
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within the chain described in the preceding sentence. For NQSOs, the Board or
the Administrator can use a different definition of Subsidiary in its
discretion.
LEGAL COMPLIANCE
The Company will not issue any shares of Common Stock under an Award until
all applicable requirements imposed by Federal and state securities and other
laws, rules and regulations, and by any applicable regulatory agencies or stock
exchanges, have been fully met. To that end, the Company may require the
participant to take any reasonable action to comply with such requirements
before issuing such shares. No provision in the Plan or action taken under it
authorizes any action that is otherwise prohibited by Federal or state laws.
The Plan is intended to conform to the extent necessary with all provisions
of the Securities Act of 1933 ("SECURITIES ACT") and the Securities Exchange Act
of 1934 and all regulations and rules the Securities and Exchange Commission
issues under those laws. Notwithstanding anything in the Plan to the contrary,
the Administrator must administer the Plan, and Awards may be granted and
exercised, only in a way that conforms to such laws, rules, and regulations. To
the extent permitted by applicable law, the Plan and any Awards will be deemed
amended to the extent necessary to conform to such laws, rules, and regulations.
PURCHASE FOR INVESTMENT AND OTHER RESTRICTIONS
Unless a registration statement under the Securities Act covers the shares
of Common Stock a participant receives upon exercise of his Award, the
Administrator may require, at the time of such exercise or receipt of a grant,
that the participant agree in writing to acquire such shares for investment and
not for public resale or distribution, unless and until the shares subject to
the Award are registered under the Securities Act. Unless the shares are
registered under the Securities Act, the participant must acknowledge:
that the shares purchased on exercise of the Award are not so
registered,
that the participant may not sell or otherwise transfer the shares
unless
the shares have been registered under the Securities Act in
connection with the sale or transfer thereof, or
counsel satisfactory to the Company has issued an opinion
satisfactory to the Company that the sale or other transfer of such
shares is exempt from registration under the Securities Act, and
such sale or transfer complies with all other applicable laws, rules,
and regulations, including all applicable Federal and state
securities laws, rules, and regulations.
Additionally, the Common Stock, when issued upon the exercise of an Award,
will be subject to any other transfer restrictions, rights of first refusal, and
rights of repurchase set forth in or incorporated by reference into other
applicable documents, including the Company's articles or certificate of
incorporation, by-laws, or generally applicable stockholders' agreements.
The Administrator may, in its sole discretion, take whatever additional
actions it deems appropriate to comply with such restrictions and applicable
laws, including placing legends on certificates and issuing stop-transfer orders
to transfer agents and registrars.
TAX WITHHOLDING
The participant must satisfy all applicable Federal, state, and local income
and employment tax withholding requirements before the Company will deliver
stock certificates upon the exercise of an Award. The Company may decide to
satisfy the withholding obligations through additional withholding on
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salary or wages. If the Company does not or cannot withhold from other
compensation, the participant must pay the Company, with a cashier's check or
certified check, the full amounts required by withholding. Payment of
withholding obligations is due before the Company issues shares with respect to
the Award. If the Administrator so determines, the participant may instead
satisfy the withholding obligations by directing the Company to retain shares
from the Award exercise, by tendering previously owned shares, or by attesting
to his ownership of shares (with the distribution of net shares).
TRANSFERS, ASSIGNMENTS, AND PLEDGES
Unless the Administrator otherwise approves in advance in writing for estate
planning or other purposes, an Award may not be assigned, pledged, or otherwise
transferred in any way, whether by operation of law or otherwise or through any
legal or equitable proceedings (including bankruptcy), by the participant to any
person, except by will or by operation of applicable laws of descent and
distribution. If Rule 16b-3 then applies to an Award, the participant may not
transfer or pledge shares of Common Stock acquired under a Stock Grant or upon
exercise of an Option until at least six months have elapsed from (but
excluding) the Date of Grant, unless the Administrator approves otherwise in
advance in writing. The Administrator may, in its discretion, expressly provide
that a participant may transfer his Award without receiving consideration to (i)
members of his immediate family (children, grandchildren, or spouse); (ii)
trusts for the benefit of such family members; or (iii) partnerships where the
only partners are such family members.
AMENDMENT OR TERMINATION OF PLAN AND OPTIONS
The Board may amend, suspend, or terminate the Plan at any time, without the
consent of the participants or their beneficiaries; PROVIDED, HOWEVER, that no
amendment will deprive any participant or beneficiary of any previously declared
Award. Except as required by law or by the CORPORATE CHANGES section, the
Administrator may not, without the participant's or beneficiary's consent,
modify the terms and conditions of an Award so as to adversely affect the
participant. No amendment, suspension, or termination of the Plan will, without
the participant's or beneficiary's consent, terminate or adversely affect any
right or obligations under any outstanding Awards.
PRIVILEGES OF STOCK OWNERSHIP
No participant and no beneficiary or other person claiming under or through
such participant will have any right, title, or interest in or to any shares of
Common Stock allocated or reserved under the Plan or subject to any Award except
as to such shares of Common Stock, if any, already issued to such participant.
EFFECT ON OTHER PLANS
Whether exercising or receiving an Award causes the participant to accrue or
receive additional benefits under any pension or other plan is governed solely
by the terms of such other plan.
LIMITATIONS ON LIABILITY
Notwithstanding any other provisions of the Plan, no individual acting as a
director, employee, or agent of the Company shall be liable to any participant,
former participant, spouse, beneficiary, or any other person for any claim,
loss, liability, or expense incurred in connection with the Plan, nor shall such
individual be personally liable because of any contract or other instrument he
executes in such other capacity. The Company will indemnify and hold harmless
each director, employee, or agent of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been or will be
delegated, against any cost or expense (including attorneys' fees) or liability
(including any sum
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paid in settlement of a claim with the Board's approval) arising out of any act
or omission to act concerning
this Plan unless arising out of such person's own fraud or bad faith.
NO EMPLOYMENT CONTRACT
Nothing contained in this Plan constitutes an employment contract between
the Company and the participants. The Plan does not give any participant any
right to be retained in the Company's employ, nor does it enlarge or diminish
the Company's right to end the participant's employment.
APPLICABLE LAW
The laws of the State of Delaware (other than its choice of law provisions)
govern this Plan and its interpretation.
DURATION OF PLAN
Unless the Board extends the Plan's term, the Administrator may not grant
Awards after June 8, 2008. The Plan will then terminate but will continue to
govern unexercised and unexpired Awards.
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Exhibit 10.13
CREDIT AGREEMENT
Dated as of June __, 1998
among
SCHOOL SPECIALTY, INC.
as Borrower,
Certain Subsidiaries and Affiliates,
as Guarantors,
THE LENDERS NAMED HEREIN
AND
NATIONSBANK, N.A.,
as Administrative Agent
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TABLE OF CONTENTS
SECTION 1 DEFINITIONS ...................................................... 1
1.1 Definitions ................................................... 1
1.2 Computation of Time Periods ................................... 24
1.3 Accounting Terms .............................................. 24
SECTION 2 CREDIT FACILITIES ................................................ 25
2.1 Revolving Loans ............................................... 25
2.2 Letter of Credit Subfacility .................................. 26
2.3 Swingline Loan Subfacility .................................... 31
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES ................... 33
3.1 Default Rate .................................................. 33
3.2 Extension and Conversion ...................................... 34
3.3 Prepayments ................................................... 34
3.4 Termination and Reduction of Commitments ...................... 35
3.5 Fees .......................................................... 35
3.6 Capital Adequacy .............................................. 36
3.7 Inability To Determine Interest Rate .......................... 36
3.8 Illegality .................................................... 37
3.9 Requirements of Law ........................................... 37
3.10 Taxes ......................................................... 38
3.11 Indemnity ..................................................... 40
3.12 Pro Rata Treatment ............................................ 41
3.13 Sharing of Payments ........................................... 42
3.14 Payments, Computations, Etc. .................................. 42
3.15 Evidence of Debt .............................................. 44
3.16 Certain Rules Relating to the Payment of
Additional Amounts ........................................... 45
SECTION 4 GUARANTY ......................................................... 46
4.1 The Guarantee ................................................. 46
4.2 Obligations Unconditional ..................................... 46
4.3 Reinstatement ................................................. 47
4.4 Certain Additional Waivers .................................... 48
4.5 Remedies ...................................................... 48
4.6 Rights of Contribution ........................................ 48
4.7 Continuing Guarantee .......................................... 49
SECTION 5 CONDITIONS ....................................................... 49
5.1 Conditions to Closing ......................................... 49
5.2 Conditions to All Extensions of Credit ........................ 51
5.3 Conditions Subsequent to Closing .............................. 52
SECTION 6 REPRESENTATIONS AND WARRANTIES.................................... 53
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6.1 Financial Condition ........................................... 53
6.2 No Changes or Restricted Payments ............................. 53
6.3 Organization; Existence; Compliance with Law .................. 53
6.4 Power; Authorization; Enforceable Obligations ................. 54
6.5 No Legal Bar .................................................. 54
6.6 No Material Litigation ........................................ 54
6.7 No Default .................................................... 55
6.8 Ownership of Property; Liens .................................. 55
6.9 Intellectual Property ......................................... 55
6.10 No Burdensome Restrictions .................................... 55
6.11 Taxes ......................................................... 55
6.12 ERISA ......................................................... 56
6.13 Governmental Regulations, Etc. ................................ 57
6.14 Subsidiaries .................................................. 58
6.15 Purpose of Extensions of Credit ............................... 58
6.16 Environmental Matters ......................................... 58
SECTION 7 AFFIRMATIVE COVENANTS ............................................ 59
7.1 Financial Statements .......................................... 59
7.2 Certificates; Other Information ............................... 60
7.3 Notices ....................................................... 61
7.4 Payment of Obligations ........................................ 63
7.5 Conduct of Business and Maintenance of Existence .............. 63
7.6 Maintenance of Property; Insurance ............................ 63
7.7 Inspection of Property; Books and Records; Discussions ........ 63
7.8 Environmental Laws ............................................ 64
7.9 Financial Covenants ........................................... 64
7.10 Agency Fees ................................................... 65
7.11 Additional Guaranties and Stock Pledges ....................... 65
7.12 Ownership of Subsidiaries ..................................... 66
7.13 Use of Proceeds ............................................... 66
SECTION 8 NEGATIVE COVENANTS ............................................... 67
8.1 Indebtedness .................................................. 67
8.2 Liens ......................................................... 69
8.3 Nature of Business ............................................ 69
8.4 Consolidation, Merger, Sale or Purchase of Assets, Etc. ....... 69
8.5 Advances, Investments and Loans ............................... 70
8.6 Transactions with Affiliates .................................. 71
8.7 Ownership of Equity Interests ................................. 71
8.8 Fiscal Year ................................................... 71
8.9 Prepayments of Indebtedness, Etc. ............................. 71
8.10 Restricted Payments ........................................... 71
8.11 No Further Negative Pledges ................................... 72
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SECTION 9 EVENTS OF DEFAULT ................................................ 72
9.1 Events of Default ............................................. 72
9.2 Acceleration; Remedies ........................................ 74
SECTION 10 AGENCY PROVISIONS ............................................... 75
10.1 Appointment .................................................. 75
10.2 Delegation of Duties ......................................... 76
10.3 Exculpatory Provisions ....................................... 76
10.4 Reliance on Communications ................................... 77
10.5 Notice of Default ............................................ 77
10.6 Non-Reliance on Administrative Agent and Other Lenders ....... 77
10.7 Indemnification .............................................. 78
10.8 Administrative Agent in its Individual Capacity .............. 78
10.9 Successor Administrative Agent ............................... 79
SECTION 11 MISCELLANEOUS ................................................... 79
11.1 Notices ...................................................... 79
11.2 Right of Set-Off ............................................. 81
11.3 Benefit of Agreement ......................................... 81
11.4 No Waiver; Remedies Cumulative ............................... 84
11.5 Payment of Expenses, Etc. .................................... 84
11.6 Amendments, Waivers and Consents ............................. 85
11.7 Counterparts ................................................. 86
11.8 Headings ..................................................... 86
11.9 Survival ..................................................... 86
11.10 Governing Law; Submission to Jurisdiction; Venue ............. 86
11.11 Severability ................................................. 87
11.12 Entirety ..................................................... 87
11.13 Binding Effect; Termination .................................. 88
11.14 Confidentiality .............................................. 88
11.15 Source of Funds .............................................. 89
11.16 Conflict ..................................................... 89
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SCHEDULES
Schedule 2.1(a) Lenders and Commitments
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Revolving Note
Schedule 2.2(b)-1 Existing Letters of Credit
Schedule 2.2(b)-2 Form of Notice of Request for Letter of Credit
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 5.1(i)(v) Form of Secretary's Certificate
Schedule 6.6 Description of Legal Proceedings
Schedule 6.8 Liens
Schedule 6.14 Subsidiaries
Schedule 7.2(b) Form of Officer's Compliance Certificate
Schedule 7.11 Form of Joinder Agreement
Schedule 8.1 Indebtedness
Schedule 8.5 Existing Investments
Schedule 11.1 Lenders and Addresses
Schedule 11.3(b) Form of Assignment and Acceptance
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<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of June __, 1998 (the "Credit
Agreement"), is by and among SCHOOL SPECIALTY, INC., a Delaware corporation (the
"Borrower"), the subsidiaries and affiliates identified on the signature pages
hereto and such other subsidiaries and affiliates as may from time to time
become Guarantors hereunder in accordance with the provisions hereof (the
"Guarantors"), the lenders named herein and such other lenders as may become a
party hereto (the "Lenders"), and NATIONSBANK, N.A., as Administrative Agent (in
such capacity, the "Administrative Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a $250
million credit facility for the purposes hereinafter set forth;
WHEREAS, the Lenders have agreed to make the requested credit facility
available to the Borrower on the terms and conditions hereinafter set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall
have the meanings specified below unless the context otherwise requires:
"Additional Credit Party" means each Person that becomes a
Guarantor after the Closing Date by execution of a Joinder Agreement.
"Administrative Agent" shall have the meaning assigned to such
term in the heading hereof, together with any successors or assigns.
"Administrative Agent Fees" shall have the meaning assigned to
such term in Section 3.5(c).
"Administrative Agent's Fee Letter" means that certain letter
agreement, dated as of April 1, 1998, between the Agent and the
Borrower, as amended, modified, supplemented or replaced from time to
time.
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"Affiliate" means, with respect to any Person, any other
Person (i) directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person or (ii) directly or
indirectly owning or holding five percent (5%) or more of the equity
interest in such Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative
to the foregoing. Notwithstanding anything to the contrary in this
Agreement, no Affiliate of Jonathan J. Ledecky shall be deemed to be an
Affiliate of any member of the Consolidated Group solely because of Mr.
Ledecky's status as an officer, director or employee of a member of the
Consolidated Group.
"Agency Services Address" means NationsBank, N.A.,
NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255,
Attn: Agency Services, or such other address as may be identified by
written notice from the Administrative Agent to the Borrower.
"Aggregate Revolving Committed Amount" means the aggregate
amount of Revolving Commitments in effect from time to time, being
initially TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000).
"Applicable Percentage" means for any day, the rate per annum
set forth below opposite the applicable Consolidated Leverage Ratio
then in effect, it being understood that the Applicable Percentage for
(i) Base Rate Loans shall be the percentage set forth under the column
"Base Rate Margin", (ii) Eurodollar Loans shall be the percentage set
forth under the column "Eurodollar Margin and Letter of Credit Fee",
(iii) the Letter of Credit Fee shall be the percentage set forth under
the column "Eurodollar Margin and Letter of Credit Fee" and (iv) the
Commitment Fee shall be the percentage set forth under the column
"Commitment Fee":
<TABLE>
<CAPTION>
Eurodollar
Margin
Consolidated and
Pricing Leverage Base Rate Letter of Commitment
Level Ratio Margin Credit Fee Fee
----- ----- ------ ---------- ---
<S> <C> <C> <C> <C>
I Less than or equal to 2.25 0% .625% .20%
II Greater than 2.25 but less than or equal to 2.75 0% .875% .25%
III Greater than 2.75 but less than or equal to 3.25 0% 1.125% .25%
IV Greater than 3.25 but less than or equal to 3.75 .125% 1.375% .25%
V Greater than 3.75 .250% 1.625% .325%
</TABLE>
The Applicable Percentage shall be determined and adjusted periodically
on the date (each a "Rate Determination Date") five (5) Business Days
after the date by which the
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annual and quarterly compliance certificates and related financial
statements and information are required in accordance with the
provisions of Sections 7.1(a) and (b) and Section 7.2(b), as
appropriate; provided that:
(i) the initial Applicable Percentages shall be 1.0%
in the case of the Eurodollar Margin and Letter of Credit Fee,
0% in the case of the Base Rate Margin, and .25% in the case
of the Commitment Fee and shall remain in effect until the
earlier of (A) the date six months from the Closing Date or
(B) the date of any Material Acquisition; and
(ii) in the event an annual or quarterly compliance
certificate and related financial statements and information
are not delivered timely to the Agency Services Address by the
date required by Sections 7.1(a) and (b) and Section 7.2(b),
as appropriate, the Applicable Percentages shall be based on
Pricing Level V until such time as an appropriate compliance
certificate and related financial statements and information
are delivered, whereupon the applicable Pricing Level shall be
adjusted based on the information contained in such compliance
certificate and related financial statements and information.
Each Applicable Percentage shall be effective from a Rate Determination
Date until the next such Rate Determination Date. The Administrative
Agent shall determine the appropriate Applicable Percentages in the
pricing matrix promptly upon receipt of the quarterly or annual
compliance certificate and related financial information and shall
promptly notify the Borrower and the Lenders of any change thereof.
Such determinations by the Administrative Agent shall be conclusive
absent manifest error. Adjustments in the Applicable Percentages shall
be effective as to existing Extensions of Credit as well as new
Extensions of Credit made thereafter.
"Asset Disposition" means, other than a Securitization
Transaction, (i) the sale, lease or other disposition of any property
or asset by any member of the Consolidated Group, other than any such
sale permitted by Sections 8.4(b) and other than to the extent
permitted by Section 8.5, and (ii) receipt by any member of the
Consolidated Group of any cash insurance proceeds or condemnation award
payable by reason of theft, loss, physical destruction or damage,
taking or similar event with respect to any of their property or
assets.
"Attributed Principal Amount" means, on any day, with respect
to any Securitization Transaction entered into by any member of the
Consolidated Group, the aggregate amount (with respect to any such
transaction, the "Invested Amount") paid to, or borrowed by, such
Person as of such date under such Securitization Transaction, minus the
aggregate amount received by the applicable Receivables Financier and
applied to the reduction of the Invested Amount under such
Securitization Transaction.
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the
United States Code, as amended, modified, succeeded or replaced from
time to time.
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<PAGE>
"Bankruptcy Event" means, with respect to any Person, the
occurrence of any of the following with respect to such Person: (i) a
court or governmental agency having jurisdiction in the premises shall
enter a decree or order for relief in respect of such Person in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of such Person or for any substantial part of its Property or
ordering the winding up or liquidation of its affairs; or (ii) there
shall be commenced against such Person an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or any case, proceeding or other action for the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of such Person or for any substantial part of its
Property or for the winding up or liquidation of its affairs, and such
involuntary case or other case, proceeding or other action shall remain
undismissed, undischarged or unbonded for a period of sixty (60)
consecutive days; or (iii) such Person shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in
an involuntary case under any such law, or consent to the appointment
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of such Person or for any
substantial part of its Property or make any general assignment for the
benefit of creditors; or (iv) such Person shall be unable to, or shall
admit in writing its inability to, pay its debts generally as they
become due.
"Base Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest whole multiple of 1/100 of 1%)
equal to the greater of (a) the Federal Funds Rate in effect on such
day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for
any reason the Administrative Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is
unable after due inquiry to ascertain the Federal Funds Rate for any
reason, including the inability or failure of the Administrative Agent
to obtain sufficient quotations in accordance with the terms hereof,
the Base Rate shall be determined without regard to clause (a) of the
first sentence of this definition until the circumstances giving rise
to such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Rate shall be effective
on the effective date of such change in the Prime Rate or the Federal
Funds Rate, respectively.
"Base Rate Loan" means any Loan bearing interest at a rate
determined by reference to the Base Rate.
"Borrower" means School Specialty, Inc., a Delaware
corporation, as referenced in the opening paragraph, its successors and
permitted assigns.
"Business Day" means a day other than a Saturday, Sunday or
other day on which commercial banks in Charlotte, North Carolina or New
York, New York are authorized or required by law to close, except that,
when used in connection with a Eurodollar Loan, such day shall also be
a day on which dealings between banks are carried on in U.S. dollar
deposits in London, England.
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<PAGE>
"Capital Expenditures" means, for any period, without
duplication, all expenditures (whether paid in cash or other
consideration) during such period that, in accordance with GAAP, are or
should be included in additions to property, plant and equipment or
similar items reflected in the consolidated statement of cash flows for
such period; provided, that Capital Expenditures shall not include, for
purposes hereof, (i) expenditures of proceeds of insurance settlements,
condemnation awards and other settlements in respect of lost,
destroyed, damaged or condemned assets, equipment or other property to
the extent such expenditures are made to replace or repair such lost,
destroyed, damaged or condemned assets, equipment or other property or
otherwise to acquire assets or properties useful in the business of the
members of the Consolidated Group within 12 months of receipt of such
proceeds.
"Capital Lease" means, as applied to any Person, any lease of
any Property (whether real, personal or mixed) by that Person as lessee
which, in accordance with GAAP, is or should be accounted for as a
capital lease on the balance sheet of that Person.
"Capital Lease Obligation" means the capital lease obligations
relating to a Capital Lease determined in accordance with GAAP.
"Cash Equivalents" means (a) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and
credit of the United States of America is pledged in support thereof)
having maturities of not more than twelve months from the date of
acquisition, (b) U.S. dollar denominated time deposits and certificates
of deposit of (i) any Lender, or (ii) any domestic commercial bank of
recognized standing (y) having capital and surplus in excess of
$500,000,000 and (z) whose short-term commercial paper rating from S&P
is at least A-1 or the equivalent thereof or from Moody's is at least
P-1 or the equivalent thereof (any such bank being an "Approved Bank"),
in each case with maturities of not more than 270 days from the date of
acquisition, (c) commercial paper and variable or fixed rate notes
issued by any Approved Bank (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic
corporation rated A-1 (or the equivalent thereof) or better by S&P or
P-1 (or the equivalent thereof) or better by Moody's and maturing
within six months of the date of acquisition, (d) repurchase agreements
entered into by a Person with a bank or trust company (including any of
the Lenders) or recognized securities dealer having capital and surplus
in excess of $500,000,000 for direct obligations issued by or fully
guaranteed by the United States of America in which such Person shall
have a perfected first priority security interest (subject to no other
Liens) and having, on the date of purchase thereof, a fair market value
of at least 100% of the amount of the repurchase obligations, (e)
obligations of any State of the United States or any political
subdivision thereof, the interest with respect to which is exempt from
federal income taxation under Section 103 of the Code, having a long
term rating of at least AA- or Aa-3 by S&P or Moody's, respectively,
and maturing within three years from the date of acquisition thereof,
(f) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the equivalent
thereof) or better by Moody's and (ii)
5
<PAGE>
with dividends that reset at least once every 365 days and (g)
Investments, classified in accordance with GAAP as current assets, in
money market investment programs registered under the Investment
Company Act of 1940, as amended, which are administered by reputable
financial institutions having capital of at least $100,000,000 and the
portfolios of which are limited to Investments of the character
described in the foregoing subdivisions (a) through (f).
"Change of Control" means the occurrence of any of the
following events: (i) any Person or two or more Persons acting in
concert shall have acquired beneficial ownership, directly or
indirectly, of, or shall have acquired by contract or otherwise, or
shall have entered into a contract or arrangement that, upon
consummation, will result in its or their acquisition of or control
over, Voting Stock of the Borrower (or other securities convertible
into such Voting Stock) representing 35% or more of the combined voting
power of all Voting Stock of the Borrower, or (ii) during any period of
up to 24 consecutive months, commencing after the Closing Date,
individuals who at the beginning of such 24 month period were directors
of the Borrower (together with any new director whose election by the
Borrower's Board of Directors or whose nomination for election by the
Borrower's shareholders was approved by a vote of at least a majority
of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the directors of the Borrower then in office. As used
herein, "beneficial ownership" shall have the meaning provided in Rule
13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor statute thereto, as interpreted by the rules and
regulations issued thereunder, in each case as in effect from time to
time. References to sections of the Code shall be construed also to
refer to any successor sections.
"Commitment" means the Revolving Commitment, the LOC
Commitment and the Swingline Commitment.
"Commitment Fee" shall have the meaning given such term in
Section 3.5(a).
"Commitment Period" means the period from and including the
Closing Date to but not including the earlier of (i) the Termination
Date, or (ii) the date on which the Commitments terminate in accordance
with the provisions of this Credit Agreement.
"Consolidated EBITDA" means for any period for the
Consolidated Group, the sum of Consolidated Net Income plus
Consolidated Interest Expense plus all provisions for any Federal,
state or other domestic and foreign income taxes plus depreciation and
amortization plus (minus) one-time non-recurring and/or restructuring
charges deducted (added) in calculating Consolidated Net Income, in
each case on a consolidated basis
6
<PAGE>
determined in accordance with GAAP applied on a consistent basis, but
excluding for purposes hereof extraordinary gains and losses and
related tax effects thereon (to the extent such items are not taken
into consideration for purposes of determining Consolidated Net
Income). Except as otherwise expressly provided, the applicable period
shall be for the four consecutive fiscal quarters ending as of the date
of determination.
"Consolidated Fixed Charge Coverage Ratio" means for any
period, the ratio of Consolidated EBITDA to Consolidated Fixed Charges.
"Consolidated Fixed Charges" means for any period for the
Consolidated Group, the cash portion of Consolidated Interest Expense,
in each case on a consolidated basis determined in accordance with GAAP
applied on an consistent basis. Except as otherwise expressly provided,
the applicable period shall be for the four consecutive fiscal quarters
ending as of the date of determination.
"Consolidated Funded Debt" means Funded Debt of the
Consolidated Group determined on a consolidated basis in accordance
with GAAP applied on a consistent basis.
"Consolidated Group" means the Borrower and its consolidated
subsidiaries, as determined in accordance with GAAP.
"Consolidated Interest Expense" means for any period for the
Consolidated Group, all interest expense, including the amortization of
debt discount and premium, the interest component under Capital Leases
and the implied interest component under Securitization Transactions,
in each case on a consolidated basis determined in accordance with GAAP
applied on a consolidated basis. Except as expressly provided
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Leverage Ratio" means, as of the last day of any
fiscal quarter, the ratio of Consolidated Funded Debt on such day to
Consolidated EBITDA for the period of four consecutive fiscal quarters
ending as of such day.
"Consolidated Net Income" means for any period for the
Consolidated Group, net income on a consolidated basis determined in
accordance with GAAP applied on a consistent basis, but excluding for
purposes of determining the Consolidated Leverage Ratio and
Consolidated Fixed Charge Coverage Ratio, any extraordinary gains or
losses and related tax effects thereon. Except as expressly provided
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Net Worth" means, as for any date for the
Consolidated Group, shareholders' equity or net worth as determined in
accordance with GAAP.
7
<PAGE>
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any material
agreement, instrument or undertaking to which such Person is a party or
by which it or any of its property is bound.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, the LOC Documents, Security Agreement, Pledge
Agreement, Mortgages, each Joinder Agreement, the Administrative
Agent's Fee Letter, and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or
thereto.
"Credit Party" means any of the Borrower and the Guarantors.
"Debt Transaction" means, with respect to any member of the
Consolidated Group, any sale, issuance or placement of Funded Debt,
whether or not evidenced by promissory note or other written evidence
of indebtedness, other than under the Credit Documents.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time, (i) has failed to make an Extension of Credit required
pursuant to the terms of this Credit Agreement, (ii) has failed to pay
to the Administrative Agent or any Lender an amount owed by such Lender
pursuant to the terms of the Credit Agreement or any other of the
Credit Documents, or (iii) has been deemed insolvent or has become
subject to a bankruptcy or insolvency proceeding or to a receiver,
trustee or similar proceeding.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"Domestic Credit Party" means any Credit Party which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Domestic Subsidiary" means any Subsidiary which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Environmental Laws" means any and all lawful and applicable
Federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
8
<PAGE>
"Equity Transaction" means, with respect to any member of the
Consolidated Group, any issuance of shares of its capital stock or
other equity interest, other than an issuance (i) to a member of the
Consolidated Group, (ii) in connection with a conversion of debt
securities to equity, (iii) in connection with exercise by a present or
former employee, officer or director under a stock incentive plan,
stock option plan or other equity-based compensation plan or
arrangement or (iv) in connection with the Spin-Off Transactions.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, as interpreted by
the rules and regulations thereunder, all as the same may be in effect
from time to time. References to sections of ERISA shall be construed
also to refer to any successor sections.
"ERISA Affiliate" means an entity which is under common
control with any Credit Party within the meaning of Section 4001(a)(14)
of ERISA, or is a member of a group which includes the Borrower and
which is treated as a single employer under Sections 414(b) or (c) of
the Code.
"ERISA Event" means (i) with respect to any Plan, the
occurrence of a Reportable Event or the substantial cessation of
operations (within the meaning of Section 4062(e) of ERISA); (ii) the
withdrawal by the Borrower, any Subsidiary of the Borrower or any ERISA
Affiliate from a Multiple Employer Plan during a plan year in which it
was a substantial employer (as such term is defined in Section 4001 of
ERISA), or the termination of a Multiple Employer Plan; (iii) the
distribution of a notice of intent to terminate or the actual
termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA;
(iv) the institution of proceedings to terminate or the actual
termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any
event or condition which could reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (vi) the complete or
partial withdrawal of the Borrower, any Subsidiary of the Borrower or
any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for
imposition of a lien under Section 302(f) of ERISA exist with respect
to any Plan; or (vii) the adoption of an amendment to any Plan
requiring the provision of security to such Plan pursuant to Section
307 of ERISA.
"Eurodollar Loan" means any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate.
"Eurodollar Rate" means, for the Interest Period for each
Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
determined pursuant to the following formula:
Interbank Offered Rate
Eurodollar Rate = ---------------------------------
1 - Eurodollar Reserve Percentage
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<PAGE>
"Eurodollar Reserve Percentage" means for any day, that
percentage (expressed as a decimal) which is in effect from time to
time under Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental,
emergency, special, or marginal reserves) applicable with respect to
Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by
reference to which the interest rate of Eurodollar Loans is
determined), whether or not Lender has any Eurocurrency liabilities
subject to such reserve requirement at that time. Eurodollar Loans
shall be deemed to constitute Eurocurrency liabilities and as such
shall be deemed subject to reserve requirements without benefits of
credits for proration, exceptions or offsets that may be available from
time to time to a Lender. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage. As of the date hereof, the Eurodollar
Reserve Percentage is zero.
"Event of Default" means such term as defined in Section 9.1.
"Existing Letters of Credit" means those Letters of Credit
outstanding on the Closing Date and identified on Schedule 2.2(b)-1.
"Extension of Credit" means, as to any Lender, the making of,
or participation in, a Loan by such Lender or the issuance or extension
of, or participation in, a Letter of Credit.
"Fees" means all fees payable pursuant to Section 3.5.
"Federal Funds Rate" means, for any day, the rate of interest
per annum (rounded upwards, if necessary, to the nearest whole multiple
of 1/100 of 1%) equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding
such day, provided that (A) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions
on the next preceding Business Day and (B) if no such rate is so
published on such next preceding Business Day, the Federal Funds Rate
for such day shall be the average rate quoted to the Administrative
Agent on such day on such transactions as determined by the
Administrative Agent.
"Foreign Credit Party" means a Credit Party which is not a
Domestic Credit Party.
"Foreign Subsidiary" means a Subsidiary which is not a
Domestic Subsidiary.
"Funded Debt" means, with respect to any Person, without
duplication, (i) all Indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures,
notes or similar instruments, or upon which interest payments are
customarily made, (iii) all purchase money Indebtedness (including for
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purposes hereof, indebtedness and obligations described in clauses
(iii) and (iv) of the definition of "Indebtedness") of such Person,
including without limitation the principal portion of all obligations
of such Person under Capital Leases, (iv) all Support Obligations of
such Person with respect to Funded Indebtedness of another Person, (v)
the maximum available amount of all standby letters of credit or
acceptances issued or created for the account of such Person, (vi) all
Funded Debt of another Person secured by a Lien on any Property of such
Person, whether or not such Funded Indebtedness has been assumed,
provided that for purposes hereof the amount of such Funded Debt shall
be limited to the greater of (A) the amount of such Funded Debt as to
which there is recourse to such Person and (B) the fair market value of
the property which is subject to the Lien (but not greater than the
amount of Funded Debt secured thereby), (vii) the outstanding
Attributed Principal Amount under any Securitization Transaction, and
(viii) the principal balance outstanding under any synthetic lease, tax
retention operating lease, off-balance sheet loan or similar
off-balance sheet financing product to which such Person is a party,
where such transaction is considered borrowed money indebtedness for
tax purposes but is classified as an operating lease in accordance with
GAAP (but specifically excluding, for purposes of this subsection
(viii), leases which are treated as operating leases both for purposes
of GAAP and for tax purposes). The Funded Debt of any Person shall
include the Funded Debt of any partnership or joint venture in which
such Person is a general partner or joint venturer, but only to the
extent to which there is recourse to such Person for the payment of
such Funded Debt.
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to the terms of
Section 1.3 hereof.
"Governmental Authority" means any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Guarantor" means each of those other Persons identified as a
"Guarantor" on the signature pages hereto, and each other Person which
may hereafter become a Guarantor by execution of a Joinder Agreement,
together with their successors and permitted assigns.
"Guaranteed Obligations" means, as to each Guarantor, without
duplication, (i) all obligations of the Borrower (including interest
accruing after a Bankruptcy Event, regardless of whether such interest
is allowed as a claim under the Bankruptcy Code) to the Lenders and the
Administrative Agent, whenever arising, under this Credit Agreement,
the Notes or the Credit Documents, and (ii) all liabilities and
obligations, whenever arising, owing from the Borrower to any Lender,
or any Affiliate of a Lender, arising under any Hedging Agreement
relating to Obligations hereunder.
"Hedging Agreements" means any interest rate protection
agreement or foreign currency exchange agreement between the Borrower
and any Lender, or any Affiliate of a Lender.
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"Indebtedness" of any Person means, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations
of such Person evidenced by bonds, debentures, notes or similar
instruments, or upon which interest payments are customarily made,
(iii) all obligations of such Person under conditional sale or other
title retention agreements relating to Property purchased by such
Person (other than customary reservations or retentions of title under
agreements with suppliers entered into in the ordinary course of
business), (iv) all obligations of such Person issued or assumed as the
deferred purchase price of Property or services purchased by such
Person (other than trade debt incurred in the ordinary course of
business and due within twelve months of the incurrence thereof) which
would appear as liabilities on a balance sheet of such Person, (v) all
obligations of such Person under take-or-pay or similar arrangements or
under commodities agreements, (vi) all Indebtedness of others secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on, or payable out
of the proceeds of production from, Property owned or acquired by such
Person, whether or not the obligations secured thereby have been
assumed, provided that for purposes hereof the amount of such
Indebtedness shall be limited to the greater of (A) the amount of such
Indebtedness as to which there is recourse to such Person and (B) the
fair market value of the property which is subject to the Lien (but not
greater than the amount of Indebtedness secured thereby), (vii) all
Support Obligations of such Person, (viii) the principal portion of all
obligations of such Person under Capital Leases, (ix) all obligations
of such Person in respect of interest rate protection agreements,
foreign currency exchange agreements, commodity purchase or option
agreements or other interest or exchange rate or commodity price
hedging agreements (including, but not limited to, the Hedging
Agreements), (x) the maximum amount of all standby letters of credit
issued or bankers' acceptances facilities created for the account of
such Person and, without duplication, all drafts drawn thereunder (to
the extent unreimbursed), (xi) all preferred stock issued by such
Person and required by the terms thereof to be redeemed, or for which
mandatory sinking fund payments are due, by a fixed date, (xii) the
outstanding Attributed Principal Amount under any Securitization
Transaction and (xiii) the principal balance outstanding under any
synthetic lease, tax retention operating lease, off-balance sheet loan
or similar off-balance sheet financing product to which such Person is
a party, where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease
in accordance with GAAP (but specifically excluding, for purposes of
this subsection (xiii), leases which are treated as operating leases
both for purposes of GAAP and for tax purposes). The Indebtedness of
any Person shall include the Indebtedness of any partnership or joint
venture in which such Person is a general partner or a joint venturer,
but only to the extent to which there is recourse to such Person for
payment of such Indebtedness.
"Interbank Offered Rate" means, for the Interest Period for
each Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
(rounded upwards, if necessary, to the nearest whole multiple of 1/100
of 1%) equal to the rate of interest, determined by the Administrative
Agent on the basis of the offered rates for deposits in dollars for a
period of time corresponding to such Interest Period (and commencing on
the first day of such Interest Period), appearing on
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Telerate Page 3750 (or, if, for any reason, Telerate Page 3750 is not
available, the Reuters Screen LIBO Page) as of approximately 11:00 A.M.
(London time) two (2) Business Days before the first day of such
Interest Period. As used herein, "Telerate Page 3750" means the display
designated as page 3750 by Dow Jones Markets, Inc. (or such other page
as may replace such page on that service for the purpose of displaying
the British Bankers Association London interbank offered rates) and
"Reuters Screen LIBO Page" means the display designated as page "LIBO"
on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying
London interbank offered rates of major banks).
"Interest Payment Date" means (i) as to any Base Rate Loan,
the last day of each March, June, September and December, the date of
repayment of principal of such Loan and the Termination Date and (ii)
as to any Eurodollar Loan and Swingline Loan, the last day of each
Interest Period for such Loan, the date of repayment of principal of
such Loan and on the Termination Date, and in addition where the
applicable Interest Period is more than three months, then also on the
date three months from the beginning of the Interest Period, and each
three months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be deemed
to be the next succeeding Business Day.
"Interest Period" means (i) as to any Eurodollar Loan, a
period of one, two, three or six month's duration, as the Borrower may
elect, commencing in each case, on the date of the borrowing (including
conversions, extensions and renewals), and (ii) as to any Swingline
Loan, a period of such duration, not to exceed 30 days, as the Borrower
may request and the Swingline Lender may agree in accordance with the
provisions of Section 2.3(b)(i), commencing in each case, on the date
of borrowing; provided, however, (A) if any Interest Period would end
on a day which is not a Business Day, such Interest Period shall be
extended to the next succeeding Business Day (except that in the case
of Eurodollar Loans where the next succeeding Business Day falls in the
next succeeding calendar month, then on the next preceding Business
Day), (B) no Interest Period shall extend beyond the Termination Date,
and (C) in the case of Eurodollar Loans, where an Interest Period
begins on a day for which there is no numerically corresponding day in
the calendar month in which the Interest Period is to end, such
Interest Period shall end on the last day of such calendar month.
"Invested Amount" shall have the meaning given such term in
the definition of Attributed Principal Amount.
"Investment", in any Person, means any loan or advance to such
Person, any purchase or other acquisition of any capital stock,
warrants, rights, options, obligations or other securities of, or
equity interest in, such Person, any capital contribution to such
Person or any other investment in such Person, including, without
limitation, any Support Obligation incurred for the benefit of such
Person.
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"IPO" means the completion of the initial public offering of
common stock, par value $.001 per share, of the Borrower.
"Issuing Lender" means, initially, NationsBank and, hereafter,
any Lender which the Borrower may request and such Lender may agree.
"Issuing Lender Fees" shall have the meaning assigned to such
term in Section 3.5(b)(ii).
"Joinder Agreement" means a Joinder Agreement substantially in
the form of Schedule 7.11 hereto, executed and delivered by an
Additional Credit Party in accordance with the provisions of Section
7.11.
"Knowledge" of any Person means the actual knowledge of the
Responsible Officers of such Person and the knowledge they would
acquire through the exercise of reasonable diligence in the ordinary
course of duties.
"Lenders" means each of the Persons identified as a "Lender"
on the signature pages hereto, and their successors and assigns.
"Letter of Credit" means the Existing Letters of Credit and
any letter of credit issued by the Issuing Lender for the account of
the Borrower in accordance with the terms of Section 2.2.
"Letter of Credit Fee" shall have the meaning given such term
in Section 3.5(b)(i).
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, encumbrance, lien (statutory or
otherwise), preference, priority or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other
title retention agreement, any financing or similar statement or notice
filed under the Uniform Commercial Code as adopted and in effect in the
relevant jurisdiction or other similar recording or notice statute, and
any lease in the nature thereof).
"Loan" or "Loans" means the Revolving Loans and/or Swingline
Loans.
"LOC Commitment" means the commitment of the Issuing Lender to
issue, and to honor payment obligations under, Letters of Credit
hereunder and with respect to each Lender, the commitment of each
Lender to purchase participation interests in the Letters of Credit up
to such Lender's LOC Committed Amount as specified in Schedule 2.1(a),
as such amount may be reduced from time to time in accordance with the
provisions hereof.
"LOC Committed Amount" means, collectively, the aggregate
amount of all of the LOC Commitments of the Lenders to issue and
participate in Letters of Credit as
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referenced in Section 2.2(a) and, individually, the amount of each
Lender's LOC Commitment as specified in Schedule 2.1(a).
"LOC Documents" means, with respect to any Letter of Credit,
such Letter of Credit, any amendments thereto, any documents delivered
in connection therewith, any application therefor, and any agreements,
instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or
providing for (i) the rights and obligations of the parties concerned
or at risk or (ii) any collateral security for such obligations.
"LOC Obligations" means, at any time, the sum of (i) the
maximum amount which is, or at any time thereafter may become,
available to be drawn under Letters of Credit then outstanding,
assuming compliance with all requirements for drawings referred to in
such Letters of Credit plus (ii) the aggregate amount of all drawings
under Letters of Credit honored by the Issuing Lender but not
theretofore reimbursed.
"Material Acquisition" means any acquisition the Borrower
consummates with an acquisition value of $50,000,000 or greater.
"Material Adverse Effect" means a material adverse effect on
(i) the condition (financial or otherwise), operations, business,
assets, liabilities or prospects of the Consolidated Group taken as a
whole, (ii) the ability of the Credit Parties taken as a whole to
perform any material obligation under the Credit Documents to which it
is a party or (iii) the rights and remedies of the Lenders under the
Credit Documents.
"Materials of Environmental Concern" means any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Laws,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Moody's" means Moody's Investors Service, Inc., or any
successor or assignee of the business of such company in the business
of rating securities.
"Mortgages" means those mortgages, deeds of trust, security
deeds or like instruments given to the Administrative Agent for the
benefit of the Lenders to secure the Obligations hereunder, as amended
and modified.
"Mortgaged Property" means the property which is the subject
of a Mortgage as referenced therein.
"Multiemployer Plan" means a Plan which is a multiemployer
plan as defined in Sections 3(37) or 4001(a)(3) of ERISA.
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"Multiple Employer Plan" means a Plan of which the Borrower,
any Subsidiary of the Borrower or any ERISA Affiliate and at least one
employer other than the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate are contributing sponsors.
"NationsBank" means NationsBank, N.A. and its successors.
"Net Proceeds" means gross cash proceeds (including any cash
received by way of deferred payment pursuant to a promissory note,
receivable or otherwise, but only as and when received) received in
connection with an Asset Disposition, Equity Transaction, Debt
Transaction or Securitization Transaction (relating, in the case of a
Securitization Transaction, to the Attributed Principal Amount
thereof), net of (i) reasonable transaction costs, including in the
case of an Equity Transaction or a Debt Transaction, underwriting
discounts and commissions and in the case of an Asset Disposition
occurring in connection with a claim under an insurance policy, costs
incurred in connection with adjustment and settlement of the claim,
(ii) estimated taxes payable in connection therewith, and (iii) in the
case of an Asset Disposition, Debt Transaction or Securitization
Transaction, any amounts payable in respect of Funded Debt, including
without limitation principal, interest, premiums and penalties, which
is secured by, or otherwise related to, any property or asset which is
the subject thereof to the extent that such Funded Debt and any
payments in respect thereof are paid with a portion of the proceeds
therefrom.
"Non-Excluded Taxes" means such term as is defined in
Section 3.10.
"Note" or "Notes" means any Revolving Note.
"Notice of Borrowing" means a written notice of borrowing
in substantially the form of Schedule 2.1(b)(i), as required by
Section 2.1(b)(i).
"Notice of Extension/Conversion" means the written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Obligations" means, collectively, the Revolving Loans,
Swingline Loans and the LOC Obligations.
"Operating Lease" means, as applied to any Person, any lease
(including, without limitation, leases which may be terminated by the
lessee at any time) of any Property (whether real, personal or mixed)
which is not a Capital Lease other than any such lease in which that
Person is the lessor.
"Participation Interest" means the purchase by a Lender of a
participation in LOC Obligations as provided in Section 2.2(c), in
Swingline Loans as provided in Section 2.3(b)(iii) and in Loans as
provided in Section 3.13.
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"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereof.
"Permitted Investments" means Investments which are either (i)
cash and Cash Equivalents; (ii) accounts receivable created, acquired
or made in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; (iii) Investments consisting
of stock, obligations, securities or other property received in
settlement of accounts receivable (created in the ordinary course of
business) from bankrupt obligors; (iv) Investments existing as of the
Closing Date and set forth in Schedule 8.5, (v) Support Obligations
permitted by Section 8.1; (vi) acquisitions permitted by Section
8.4(c); (vii) transactions permitted by Section 8.6, (viii) loans to
employees, directors or officers in connection with the award of
convertible bonds or stock under a stock incentive plan, stock option
plan or other equity-based compensation plan or arrangement in the
aggregate not to exceed $5,000,000 (calculated on the exercise price
for any such shares) in the aggregate at any time outstanding; (ix)
other advances or loans to employees, directors, officers or agents not
to exceed $2,000,000 in the aggregate at any time outstanding; (x)
advances or loans to customers or suppliers that do not exceed
$5,000,000 in the aggregate at any one time outstanding, (xi)
Investments by a member of the Consolidated Group or an Affiliate of a
member of the Consolidated Group in connection with a Permitted
Securitization Transaction, (xii) Investments by members of the
Consolidated Group in their Subsidiaries and Affiliates existing on the
Closing Date, (xiii) Investments by one Credit Party in and to another
Credit Party which is, at the time such Investment is made, not subject
to a Bankruptcy Event, and (xiv) other loans, advances and investments
of a nature not contemplated in the foregoing subsections in an amount
not to exceed $5,000,000 in the aggregate at any time outstanding.
"Permitted Liens" means:
(i) Liens in favor of the Administrative
Agent on behalf of the Lenders;
(ii) Liens in favor of a Lender or an
Affiliate of a Lender pursuant to a Hedging Agreement
permitted hereunder, but only (A) to the extent such Liens
secure obligations under such agreements permitted under
Section 8.1, (B) to the extent such Liens are on the same
collateral as to which the Lenders also have a Lien and (C) if
such provider and the Lender shall share pari passu in the
collateral subject to such Liens;
(iii) Liens (other than Liens created or
imposed under ERISA) for taxes, assessments or governmental
charges or levies not yet due or Liens for taxes being
contested in good faith by appropriate proceedings for which
adequate reserves determined in accordance with GAAP have been
established (and as to which the Property subject to any such
Lien is not yet subject to foreclosure, sale or loss on
account thereof);
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(iv) Liens of landlords or of mortgagees of
landlords arising by operation of law or pursuant to the terms
of real property laws and Liens of carriers, warehousemen,
mechanics, materialmen and suppliers and other Liens imposed
by law or pursuant to customary reservations or retentions of
title arising in the ordinary course of business, provided
that such Liens secure only amounts not yet due and payable
or, if due and payable, are unfiled and no other action has
been taken to enforce the same, or are being contested in good
faith by appropriate proceedings for which adequate reserves
determined in accordance with GAAP have been established (and
as to which the Property subject to any such Lien is not yet
subject to foreclosure, sale or loss on account thereof);
(v) Liens (other than Liens created or
imposed under ERISA) incurred or deposits made by the Borrower
and its Subsidiaries in the ordinary course of business in
connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the
performance of tenders, statutory obligations, bids, leases,
government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for
the payment of borrowed money);
(vi) Liens in connection with attachments or
judgments (including judgment or appeal bonds) provided that
the judgments secured shall, within 30 days after the entry
thereof, have been bonded, discharged or execution thereof
stayed pending appeal, or shall have been discharged within 30
days after the expiration of any such stay;
(vii) easements, rights-of-way, restrictions
(including zoning restrictions), minor defects or
irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use
of the encumbered Property for its intended purposes;
(viii) Liens securing purchase money and
sale/leaseback Indebtedness (including Capital Leases) to the
extent permitted under Section 8.1(c), provided that any such
Lien attaches only to the Property financed or leased and such
Lien attaches thereto concurrently with or within 90 days
after the acquisition thereof in connection with the purchase
money transactions and within 30 days after the closing of any
sale/leaseback transaction;
(ix) leases or subleases granted to others
not interfering in any material respect with the business of
any member of the Consolidated Group;
(x) any interest of title of a lessor under,
and Liens arising from UCC financing statements (or equivalent
filings, registrations or agreements in foreign jurisdictions)
relating to, leases permitted by this Credit Agreement;
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(xi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods;
(xii) Liens created or deemed to exist in
connection with a Permitted Securitization Transaction
(including any related filings of any financing statements),
but only to the extent that any such Lien relates to the
applicable receivables and related property actually sold,
contributed or otherwise conveyed pursuant to such
transaction;
(xiii) Liens deemed to exist in connection
with Investments in repurchase agreements permitted under
Section 8.5;
(xiv) normal and customary rights of setoff
upon deposits of cash in favor of banks or other depository
institutions;
(xv) Liens existing as of the Closing Date
and set forth on Schedule 6.8; provided that (a) no such Lien
shall at any time be extended to or cover any Property other
than the Property subject thereto on the Closing Date or
replacement property and (b) the principal amount of the
Indebtedness secured by such Liens shall not be increased;
(xvi) mortgage liens on real property of a
Person that becomes a Subsidiary or is merged into the
Borrower or a Subsidiary after the Closing Date securing
Indebtedness permitted by subsection 8.1(h); provided that (A)
such mortgage Liens existed at the time such Person became a
Subsidiary or was merged into the Borrower or a Subsidiary and
were not created in anticipation thereof, (B) no such mortgage
Lien is spread to cover any other property or asses after the
time such Person becomes a Subsidiary or is merged into the
Borrower or a Subsidiary and (C) such mortgage Liens are
released or otherwise satisfied by the end of the Acquired
Mortgaged Property Disposition Period provided in Section
7.15; and
(xvii) Additional Liens not otherwise
permitted by the preceding clauses that secure obligations not
to exceed $5,000,000 in the aggregate at any time outstanding.
"Permitted Securitization Transaction" means any
Securitization Transaction; provided that (i) the Administrative Agent
and the Required Lenders shall be reasonably satisfied with the
structure and documentation for any such transaction and that the terms
of such transaction entered into after the Closing Date, including the
discount applicable to the Receivables which are subject of such
financing and any termination events, shall be (in the good faith
understanding of the Administrative Agent and the Required Lenders)
consistent with those prevailing in the market at the time of
commitment thereto for similar transactions involving a receivables
originator/servicer of similar credit quality
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and a receivables pool or other similar characteristics and (ii) the
documentation for such transaction shall not be amended or modified in
a way which is materially detrimental to the Lenders without the prior
written approval of the Administrative Agent and the Required Lenders.
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or
other enterprise (whether or not incorporated) or any Governmental
Authority.
"Plan" means any employee benefit plan (as defined in Section
3(3) of ERISA) which is covered by ERISA and with respect to which the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is (or,
if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" within the meaning of Section 3(5)
of ERISA.
"Pledge Agreement" means the Pledge Agreement dated as of the
Closing Date given by the Borrower and the other pledgors identified
therein to NationsBank, N.A., as Administrative Agent, to secure the
obligations hereunder, as amended and modified.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by NationsBank as its prime rate in effect
at its principal office in Charlotte, North Carolina, with each change
in the Prime Rate being effective on the date such change is publicly
announced as effective (it being understood and agreed that the Prime
Rate is a reference rate used by NationsBank in determining interest
rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit by NationsBank to any
debtor).
"Pro Forma Basis" means, with respect to any transaction, that
such transaction shall be deemed to have occurred as of the first day
of the four fiscal-quarter period ending as of the most recent fiscal
quarter end preceding the date of such transaction with respect to
which the Administrative Agent and the Lenders have received the
officer's certificate in accordance with the provisions of Section
7.2(b). As used herein, "Transaction" means (i) any corporate merger or
consolidation as referred to in Section 8.4(a), (ii) any sale or other
disposition of assets as referred to in Section 8.4(b), (iii) any
acquisition of capital stock or securities or any purchase, lease or
other acquisition of property as referred to in Section 8.4(c) or (iv)
the making of any Restricted Payment as referred to in Section 8.10.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Receivables" means any right of payment from or on behalf of
any obligor, whether constituting an account, chattel paper,
instrument, general intangible or otherwise, arising from the sale or
financing by a member of the Consolidated Group of merchandise or
services, and monies due thereunder, security in the merchandise and
services financed thereby, records related thereto, and the right to
payment of any interest
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or finance charges and other obligations with respect thereto, proceeds
from claims on insurance policies related thereto, any other proceeds
related thereto, and any other related rights.
"Receivables Financier" means, in connection with a
Securitization Transaction, the Person which provides financing for
such transaction whether by purchase, loan or otherwise in respect of
Receivables.
"Register" shall have the meaning given such term in
Section 11.3(c).
"Regulation T, U, or X" means Regulation T, U or X,
respectively, of the Board of Governors of the Federal Reserve System
as from time to time in effect and any successor to all or a portion
thereof.
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the environment (including the abandonment or
discarding of barrels, containers and other closed receptacles
containing any Materials of Environmental Concern).
"Reportable Event" means any of the events set forth in
Section 4043(c) of ERISA, other than those events as to which the
notice requirement has been waived by regulation.
"Required Lenders" means, at any time, Lenders having more
than fifty percent (50%) of the Commitments, or if the Commitments have
been terminated, Lenders having more than fifty percent (50%) of the
aggregate principal amount of the Obligations outstanding (taking into
account in each case Participation Interests or obligation to
participate therein); provided that the Commitments of, and outstanding
principal amount of Obligations (taking into account Participation
Interests therein) owing to, a Defaulting Lender shall be excluded for
purposes hereof in making a determination of Required Lenders.
"Requirement of Law" means, as to any Person, the certificate
of incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its material property is subject.
"Responsible Officer" means the President, Chief Executive
Officer, the Chief Financial Officer and the Controller.
"Restricted Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class
of stock now or hereafter outstanding, except (A) a dividend payable
solely in shares of that class to the holders of that class and (B)
dividends and other distributions payable to a Credit Party, (ii) any
redemption, retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any
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shares of any class of stock now or hereafter outstanding and (iii) any
payment made to retire, or to obtain the surrender of, any outstanding
warrants, options or other rights to acquire shares of any class of
stock now or hereafter outstanding.
"Revolving Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans in an aggregate
principal amount at any time outstanding of up to such Lender's
Revolving Committed Amount.
"Revolving Commitment Percentage" means, for each Lender, a
fraction (expressed as a decimal) the numerator of which is the
Revolving Committed Amount of such Lender at such time and the
denominator of which is the Aggregate Revolving Committed Amount at
such time. The initial Revolving Commitment Percentages are set out on
Schedule 2.1(a).
"Revolving Committed Amount" means, collectively, the
aggregate amount of all of the Revolving Commitments and, individually,
the amount of each Lender's Revolving Commitment as specified in
Schedule 2.1(a), as such amounts may be reduced from time to time in
accordance with the provisions hereof.
"Revolving Loans" shall have the meaning assigned to such term
in Section 2.1(a).
"Revolving Note" or "Revolving Notes" means the promissory
notes of the Borrower in favor of each of the Lenders evidencing the
Revolving Loans and Swingline Loans in substantially the form attached
as Schedule 2.1(e), individually or collectively, as appropriate, as
such promissory notes may be amended, modified, supplemented, extended,
renewed or replaced from time to time.
"S&P" means Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., or any successor or assignee of the business of such
division in the business of rating securities.
"Securitization Transaction" means any financing transaction
or series of financing transactions that have been or may be entered
into by a member of the Consolidated Group pursuant to which such
member of the Consolidated Group may sell, convey or otherwise transfer
to (i) a Subsidiary or affiliate (a "Securitization Subsidiary"), or
(ii) any other Person, or may grant a security interest in, any
Receivables or interests therein secured by merchandise or services
financed thereby (whether such Receivables are then existing or arising
in the future) of such member of the Consolidated Group, and any assets
related thereto, including without limitation, all security interests
in merchandise or services financed thereby, the proceeds of such
Receivables, and other assets which are customarily sold or in respect
of which security interests are customarily granted in connection with
securitization transactions involving such assets.
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"Security Agreement" means the Security Agreement dated as of
the Closing Date given by the Borrower and the other grantors
identified therein to NationsBank, N.A., as Administrative Agent, to
secure the obligations hereunder, as amended and modified.
"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple
Employer Plan.
"Spin-Off Transactions" shall have the meaning given to such
term in Section 5.1(b).
"Subordinated Debt" means any Indebtedness of a member of the
Consolidated Group which by its terms is expressly subordinated in
right of payment to the prior payment of the obligations under the
Credit Agreement and the other Credit Documents on terms and conditions
satisfactory to the Required Lenders.
"Subsidiary" means, as to any Person, (a) any corporation more
than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time, any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by
such Person directly or indirectly through Subsidiaries, and (b) any
partnership, association, joint venture or other entity in which such
Person directly or indirectly through Subsidiaries has more than 50% of
the voting interests at any time. Unless otherwise identified,
"Subsidiary" or "Subsidiaries" shall mean Subsidiaries of the Borrower.
"Support Obligations" means, with respect to any Person,
without duplication, any obligations of such Person (other than
endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to
guarantee any Indebtedness of any other Person in any manner, whether
direct or indirect, and including without limitation any obligation,
whether or not contingent, (i) to purchase any such Indebtedness or any
Property constituting security therefor, (ii) to advance or provide
funds or other support for the payment or purchase of any such
Indebtedness or to maintain working capital, solvency or other balance
sheet condition of such other Person (including without limitation keep
well agreements, maintenance agreements, comfort letters or similar
agreements or arrangements) for the benefit of any holder of
Indebtedness of such other Person, (iii) to lease or purchase Property,
securities or services primarily for the purpose of assuring the holder
of such Indebtedness, or (iv) to otherwise assure or hold harmless the
holder of such Indebtedness against loss in respect thereof. Subject to
any limits set forth in the agreements evidencing such Support
Obligations, the amount of any Support Obligation shall be deemed to be
an amount equal to the outstanding principal amount (or maximum
principal amount, if larger) of the Indebtedness in respect of which
such Support Obligation is made.
"Swingline Commitment" means the commitment of the Swingline
Lender to make Swingline Loans in an aggregate principal amount at any
time outstanding up to the
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Swingline Committed Amount and the commitment of the Lenders to
purchase participation interests in the Swingline Loans up to their
respective Revolving Commitment Percentage as provided in Section
2.3(b)(iii), as such amounts may be reduced from time to time in
accordance with the provisions hereof.
"Swingline Committed Amount" means the amount of the Swingline
Lender's Commitment as specified in Section 2.3(a).
"Swingline Lender" means NationsBank and its successors.
"Swingline Loan" means a swingline revolving loan made by the
Swingline Lender pursuant to the provisions of Section 2.3.
"Termination Date" means June __, 2003 (being five years from
the Closing Date), or if extended with the written consent of each of
the Lenders, such later date as to which the Termination Date may be
extended.
"Voting Stock" means, with respect to any Person, capital
stock or other equity or ownership interest issued by such Person the
holders of which are ordinarily, in the absence of contingencies,
entitled to vote for the election of directors (or persons performing
similar functions) of such Person, even though the right so to vote has
been suspended by the happening of such a contingency.
1.2 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the
word "from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
1.3 Accounting Terms.
Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Lenders hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All calculations made for the purposes of determining
compliance with this Credit Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP applied on a basis consistent
with the most recent annual or quarterly financial statements delivered pursuant
to Section 7.1 hereof (or, prior to the delivery of the first financial
statements pursuant to Section 7.1 hereof, consistent with the annual unaudited
financial statements referenced in Section 6.1(i) hereof); provided, however, if
(a) the Borrower shall object to determining such compliance on such basis at
the time of delivery of such financial statements due to any change in GAAP or
the rules promulgated with respect thereto or (b) the Administrative Agent or
the Required Lenders shall so object in writing within 30 days after delivery of
such financial statements, then such calculations shall be made on a basis
consistent with the most recent financial statements delivered by the Borrower
to the Lenders as to which no such objection shall have been made.
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It is further acknowledged and agreed that, except as expressly
provided otherwise, for purposes of determining the Applicable Percentage and
compliance with the financial covenants in Section 7.11 (and compliance
therewith on a Pro Forma Basis), in the case of acquisitions and dispositions
which have occurred during the applicable period to the extent permitted
hereunder, adjustments shall be made to take into account historical performance
relating thereto during such applicable period prior to the date of such
acquisition or disposition, and the effect of any Indebtedness paid with
proceeds from a disposition whether or not such adjustments are consistent with
GAAP.
SECTION 2
CREDIT FACILITIES
2.1 Revolving Loans.
(a) Revolving Commitment. During the Commitment Period, subject to the
terms and conditions hereof, each Lender severally agrees to make revolving
credit loans (the "Revolving Loans") to the Borrower from time to time in the
amount of such Lender's Revolving Commitment Percentage of such Revolving Loans
for the purposes hereinafter set forth; provided that (i) with regard to the
Lenders collectively, the aggregate principal amount of Obligations outstanding
at any time shall not exceed the Aggregate Revolving Committed Amount and (ii)
with regard to each Lender individually, such Lender's Revolving Commitment
Percentage of Obligations outstanding at any time shall not exceed such Lender's
Revolving Committed Amount. Revolving Loans may consist of Base Rate Loans or
Eurodollar Loans, or a combination thereof, as the Borrower may request, and may
be repaid and reborrowed in accordance with the provisions hereof.
(b) Revolving Loan Borrowings.
(i) Notice of Borrowing. The Borrower shall request a
Revolving Loan borrowing by written notice (or telephone notice
promptly confirmed in writing) to the Administrative Agent not later
than 11:00 A.M. (Charlotte, North Carolina time) on the Business Day
prior to the date of the requested borrowing in the case of Base Rate
Loans, and on the third Business Day prior to the date of the requested
borrowing in the case of Eurodollar Loans. Each such request for
borrowing shall be irrevocable and shall specify (A) that a Revolving
Loan is requested, (B) the date of the requested borrowing (which shall
be a Business Day), (C) the aggregate principal amount to be borrowed,
and (D) whether the borrowing shall be comprised of Base Rate Loans,
Eurodollar Loans or a combination thereof, and if Eurodollar Loans are
requested, the Interest Period(s) therefor. If the Borrower shall fail
to specify in any such Notice of Borrowing (I) an applicable Interest
Period in the case of a Eurodollar Loan, then such notice shall be
deemed to be a request for an Interest Period of one month, or (II) the
type of Revolving Loan requested, then such notice shall be deemed to
be a request for a Base Rate Loan hereunder. The Administrative Agent
shall give notice to each Lender promptly upon receipt of each Notice
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of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof
and each such Lender's share of any borrowing to be made pursuant
thereto.
(ii) Minimum Amounts. Each Revolving Loan shall be in a
minimum aggregate principal amount of $5,000,000, in the case of
Eurodollar Loans, or $500,000 (or the remaining Revolving Committed
Amount, if less), in the case of Base Rate Loans, and integral
multiples of $500,000 in excess thereof.
(iii) Advances. Each Lender will make its Revolving Commitment
Percentage of each Revolving Loan borrowing available to the
Administrative Agent for the account of the Borrower, or in such other
manner as the Administrative Agent may specify in writing, by 1:00 P.M.
(Charlotte, North Carolina time) on the date specified in the
applicable Notice of Borrowing in Dollars and in funds immediately
available to the Administrative Agent. Such borrowing will then be made
available to the Borrower by the Administrative Agent by crediting the
account of the Borrower on the books of such office with the aggregate
of the amounts made available to the Administrative Agent by the
Lenders and in like funds as received by the Administrative Agent.
(c) Repayment. The principal amount of all Revolving Loans shall be due
and payable in full on the Termination Date.
(d) Interest. Subject to the provisions of Section 3.1,
(i) Base Rate Loans. During such periods as Revolving Loans
shall be comprised in whole or in part of Base Rate Loans, such Base
Rate Loans shall bear interest at a per annum rate equal to the Base
Rate plus the Applicable Percentage;
(ii) Eurodollar Loans. During such periods as Revolving Loans
shall be comprised in whole or in part of Eurodollar Loans, such
Eurodollar Loans shall bear interest at a per annum rate equal to the
Eurodollar Rate plus the Applicable Percentage.
Interest on Revolving Loans shall be payable in arrears on each applicable
Interest Payment Date (or at such other times as may be specified herein).
(e) Revolving Notes. The Revolving Loans shall be evidenced by a duly
executed Revolving Note in favor of each Lender.
(f) Maximum Number of Eurodollar Loans. The Borrower will be limited to
a maximum number of ten (10) Eurodollar Loans outstanding at any time. For
purposes hereof, Eurodollar Loans with separate or different Interest Periods
will be considered as separate Eurodollar Loans even if their Interest Periods
expire on the same date.
2.2 Letter of Credit Subfacility.
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(a) Issuance. During the Commitment Period, subject to the terms and
conditions hereof and of the LOC Documents, if any, and such other terms and
conditions which the Issuing Lender may reasonably require, the Issuing Lender
shall issue, and the Lenders shall participate in, such Letters of Credit as the
Borrower may request for its own account or for the account of any Subsidiary as
provided herein, in a form acceptable to the Issuing Lender, for the purposes
hereinafter set forth; provided that (i) the aggregate amount of LOC Obligations
shall not exceed FIVE MILLION DOLLARS ($5,000,000) at any time (the "LOC
Committed Amount"), (ii) with regard to the Lenders collectively, the aggregate
principal amount of Obligations outstanding at any time shall not exceed the
Aggregate Revolving Committed Amount and (iii) with regard to each Lender
individually, such Lender's Revolving Commitment Percentage of Obligations
outstanding at any time shall not exceed such Lender's Revolving Committed
Amount. Letters of Credit issued hereunder shall not have an original expiry
date more than one year from the date of issuance or extension, nor an expiry
date, whether as originally issued or by extension, extending beyond the
Termination Date. Each Letter of Credit shall comply with the related LOC
Documents. The issuance date of each Letter of Credit shall be a Business Day.
(b) Notice and Reports. Except for those Letters of Credit described on
Schedule 2.2(b)-1 which shall be issued on the Closing Date, the request for the
issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing
Lender at least three (3) Business Days prior to the requested date of issuance
(or such shorter period as may be agreed by the Issuing Lender). A form of
Notice of Request for Letter of Credit is attached as Schedule 2.2(b)-2. The
Issuing Lender will provide to the Administrative Agent at least monthly, and
more frequently upon request, a detailed summary report on its Letters of Credit
and the activity thereon, in form and substance acceptable to the Administrative
Agent. In addition, the Issuing Lender will provide to the Administrative Agent
for dissemination to the Lenders at least quarterly, and more frequently upon
request, a detailed summary report on its Letters of Credit and the activity
thereon, including, among other things, the Credit Party for whose account the
Letter of Credit is issued, the beneficiary, the face amount, and the expiry
date. The Issuing Lender will provide copies of the Letters of Credit to the
Administrative Agent and the Lenders promptly upon request.
(c) Participation. Each Lender, with respect to the Existing Letters of
Credit, hereby purchases a participation interest in such Existing Letters of
Credit, and with respect to Letters of Credit issued after the Closing Date,
upon issuance of a Letter of Credit, shall be deemed to have purchased without
recourse a risk participation from the applicable Issuing Lender in such Letter
of Credit and the obligations arising thereunder, in each case in an amount
equal to its pro rata share of the obligations under such Letter of Credit
(based on the respective Revolving Commitment Percentages of the Lenders) and
shall absolutely, unconditionally and irrevocably assume, as primary obligor and
not as surety, and be obligated to pay to the Issuing Lender therefor and
discharge when due, its pro rata share of the obligations arising under such
Letter of Credit. Without limiting the scope and nature of each Lender's
participation in any Letter of Credit, to the extent that the Issuing Lender has
not been reimbursed as required hereunder or under any such Letter of Credit,
each such Lender shall pay to the Issuing Lender its pro rata share of such
unreimbursed drawing in same day funds on the day of notification by the Issuing
Lender of an unreimbursed drawing pursuant to the provisions of subsection (d)
hereof. The obligation of each Lender
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to so reimburse the Issuing Lender shall be absolute and unconditional and shall
not be affected by the occurrence of a Default, an Event of Default or any other
occurrence or event. Any such reimbursement shall not relieve or otherwise
impair the obligation of the Borrower to reimburse the Issuing Lender under any
Letter of Credit, together with interest as hereinafter provided.
(d) Reimbursement. In the event of any drawing under any Letter of
Credit, the Issuing Lender will promptly notify the Borrower. Unless the
Borrower shall immediately notify the Issuing Lender that the Borrower intends
to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall
be deemed to have requested that the Lenders make a Revolving Loan in the amount
of the drawing as provided in subsection (e) hereof on the related Letter of
Credit, the proceeds of which will be used to satisfy the related reimbursement
obligations. The Borrower promises to reimburse the Issuing Lender on the day of
drawing under any Letter of Credit (either with the proceeds of a Revolving Loan
obtained hereunder or otherwise) in same day funds. If the Borrower shall fail
to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount
of such drawing shall bear interest at a per annum rate equal to the Base Rate
plus the sum of (i) the Applicable Percentage and (ii) two percent (2%). The
Borrower's reimbursement obligations hereunder shall be absolute and
unconditional under all circumstances irrespective of any rights of setoff,
counterclaim or defense to payment the Borrower may claim or have against the
Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the
Letter of Credit drawn upon or any other Person, including without limitation
any defense based on any failure of the Borrower or any other Credit Party to
receive consideration or the legality, validity, regularity or unenforceability
of the Letter of Credit. The Issuing Lender will promptly notify the other
Lenders of the amount of any unreimbursed drawing and each Lender shall promptly
pay to the Administrative Agent for the account of the Issuing Lender in Dollars
and in immediately available funds, the amount of such Lender's pro rata share
of such unreimbursed drawing. Such payment shall be made on the day such notice
is received by such Lender from the Issuing Lender if such notice is received at
or before 2:00 P.M. (Charlotte, North Carolina time) otherwise such payment
shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the
Business Day next succeeding the day such notice is received. If such Lender
does not pay such amount to the Issuing Lender in full upon such request, such
Lender shall, on demand, pay to the Administrative Agent for the account of the
Issuing Lender interest on the unpaid amount during the period from the date of
such drawing until such Lender pays such amount to the Issuing Lender in full at
a rate per annum equal to, if paid within two (2) Business Days of the date that
such Lender is required to make payments of such amount pursuant to the
preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the
Base Rate. Each Lender's obligation to make such payment to the Issuing Lender,
and the right of the Issuing Lender to receive the same, shall be absolute and
unconditional, shall not be affected by any circumstance whatsoever and without
regard to the termination of this Credit Agreement or the Commitments hereunder,
the existence of a Default or Event of Default or the acceleration of the
obligations of the Borrower hereunder and shall be made without any offset,
abatement, withholding or reduction whatsoever. Simultaneously with the making
of each such payment by a Lender to the Issuing Lender, such Lender shall,
automatically and without any further action on the part of the Issuing Lender
or such Lender, acquire a participation in an amount equal to such payment
(excluding the portion of such payment constituting interest owing to the
Issuing Lender) in the related unreimbursed drawing portion of
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the LOC Obligation and in the interest thereon and in the related LOC Documents,
and shall have a claim against the Borrower with respect thereto.
(e) Repayment with Revolving Loans. On any day on which the Borrower
shall have requested, or been deemed to have requested, a Revolving Loan advance
to reimburse a drawing under a Letter of Credit, the Administrative Agent shall
give notice to the Lenders that a Revolving Loan has been requested or deemed
requested by the Borrower to be made in connection with a drawing under a Letter
of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans
(or Eurodollar Loans to the extent the Borrower has complied with the procedures
of Section 2.1(b)(i) with respect thereto) shall be immediately made to the
Borrower by all Lenders (notwithstanding any termination of the Commitments
pursuant to Section 9.2) pro rata based on the respective Revolving Commitment
Percentages of the Lenders (determined before giving effect to any termination
of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be
paid directly to the Issuing Lender for application to the respective LOC
Obligations. Each such Lender hereby irrevocably agrees to make its pro rata
share of each such Revolving Loan immediately upon any such request or deemed
request in the amount, in the manner and on the date specified in the preceding
sentence notwithstanding (i) the amount of such borrowing may not comply with
the minimum amount for advances of Revolving Loans otherwise required hereunder,
(ii) whether any conditions specified in Section 5.2 are then satisfied, (iii)
whether a Default or an Event of Default then exists, (iv) failure for any such
request or deemed request for Revolving Loan to be made by the time otherwise
required hereunder, (v) whether the date of such borrowing is a date on which
Revolving Loans are otherwise permitted to be made hereunder or (vi) any
termination of the Commitments relating thereto immediately prior to or
contemporaneously with such borrowing. In the event that any Revolving Loan
cannot for any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding under the
Bankruptcy Code with respect to the Borrower or any Credit Party), then each
such Lender hereby agrees that it shall forthwith purchase (as of the date such
borrowing would otherwise have occurred, but adjusted for any payments received
from the Borrower on or after such date and prior to such purchase) from the
Issuing Lender such participation in the outstanding LOC Obligations as shall be
necessary to cause each such Lender to share in such LOC Obligations ratably
(based upon the respective Revolving Commitment Percentages of the Lenders
(determined before giving effect to any termination of the Commitments pursuant
to Section 9.2)), provided that in the event such payment is not made on the day
of drawing, such Lender shall pay in addition to the Issuing Lender interest on
the amount of its unfunded Participation Interest at a rate equal to, if paid
within two (2) Business Days of the date of drawing, the Federal Funds Rate, and
thereafter at the Base Rate.
(f) Designation of Subsidiaries as Account Parties. Notwithstanding
anything to the contrary set forth in this Credit Agreement, including without
limitation Section 2.2(a) hereof, a Letter of Credit issued hereunder may
contain a statement to the effect that such Letter of Credit is issued for the
account of a Subsidiary, provided that notwithstanding such statement, the
Borrower shall be the actual account party for all purposes of this Credit
Agreement for such Letter of Credit and such statement shall not affect the
Borrower's reimbursement obligations hereunder with respect to such Letter of
Credit.
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(g) Renewal, Extension. The renewal or extension of any Letter of
Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
(h) Uniform Customs and Practices. The Issuing Lender may have the
Letters of Credit be subject to The Uniform Customs and Practice for Documentary
Credits, as published as of the date of issue by the International Chamber of
Commerce (the "UCP"), in which case the UCP may be incorporated therein and
deemed in all respects to be a part thereof.
(i) Indemnification; Nature of Issuing Lender's Duties.
(i) In addition to its other obligations under this Section
2.2, the Borrower hereby agrees to protect, indemnify, pay and save the
Issuing Lender harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) that the Issuing Lender may incur or be
subject to as a consequence, direct or indirect, of (A) the issuance of
any Letter of Credit or (B) the failure of the Issuing Lender to honor
a drawing under a Letter of Credit as a result of any act or omission,
whether rightful or wrongful, of any present or future de jure or de
facto government or governmental authority (all such acts or omissions,
herein called "Government Acts").
(ii) As between the Borrower and the Issuing Lender, the
Borrower shall assume all risks of the acts, omissions or misuse of any
Letter of Credit by the beneficiary thereof. The Issuing Lender shall
not be responsible: (A) for the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any party in
connection with the application for and issuance of any Letter of
Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged; (B) for the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, that may
prove to be invalid or ineffective for any reason; (C) for errors,
omissions, interruptions or delays (other than by the Issuing Lender)
in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in cipher; (D) for any loss
or delay (other than by the Issuing Lender) in the transmission or
otherwise of any document required in order to make a drawing under a
Letter of Credit or of the proceeds thereof; and (E) for any
consequences arising from causes beyond the control of the Issuing
Lender, including, without limitation, any Government Acts. None of the
above shall affect, impair, or prevent the vesting of the Issuing
Lender's rights or powers hereunder.
(iii) In furtherance and extension and not in limitation of
the specific provisions hereinabove set forth, any action taken or
omitted by the Issuing Lender, under or in connection with any Letter
of Credit or the related certificates, if taken or omitted in good
faith and not constituting gross negligence, shall not put such Issuing
Lender under any resulting liability to the Borrower or any other
Credit Party. It is the intention of the parties
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that this Credit Agreement shall be construed and applied to protect
and indemnify the Issuing Lender against any and all risks involved in
the issuance of the Letters of Credit, all of which risks are hereby
assumed by the Borrower (on behalf of itself and each of the other
Credit Parties), including, without limitation, any and all Government
Acts. The Issuing Lender shall not, in any way, be liable for any
failure by the Issuing Lender or anyone else to pay any drawing under
any Letter of Credit as a result of any Government Acts or any other
cause beyond the control of the Issuing Lender.
(iv) Nothing in this subsection (i) is intended to limit the
reimbursement obligations of the Borrower contained in subsection (d)
above. The obligations of the Borrower under this subsection (i) shall
survive the termination of this Credit Agreement. No act or omissions
of any current or prior beneficiary of a Letter of Credit shall in any
way affect or impair the rights of the Issuing Lender to enforce any
right, power or benefit under this Credit Agreement.
(v) Notwithstanding anything to the contrary contained in this
subsection (i), the Borrower shall have no obligation to indemnify the
Issuing Lender in respect of any liability incurred by the Issuing
Lender (A) arising out of the negligence or willful misconduct of the
Issuing Lender, as determined by a court of competent jurisdiction, or
(B) caused by the Issuing Lender's failure to pay under any Letter of
Credit after presentation to it of a request strictly complying with
the terms and conditions of such Letter of Credit, as determined by a
court of competent jurisdiction, unless such payment is prohibited by
any law, regulation, court order or decree.
(j) Responsibility of Issuing Lender. It is expressly understood and
agreed that the obligations of the Issuing Lender hereunder to the Lenders are
only those expressly set forth in this Credit Agreement and that the Issuing
Lender shall be entitled to assume that the conditions precedent set forth in
Section 5.2 have been satisfied unless it shall have acquired actual knowledge
that any such condition precedent has not been satisfied; provided, however,
that nothing set forth in this Section 2.2 shall be deemed to prejudice the
right of any Lender to recover from the Issuing Lender any amounts made
available by such Lender to the Issuing Lender pursuant to this Section 2.2 in
the event that it is determined by a court of competent jurisdiction that the
payment with respect to a Letter of Credit constituted gross negligence or
willful misconduct on the part of the Issuing Lender.
(k) Conflict with LOC Documents. In the event of any conflict between
this Credit Agreement and any LOC Document (including any letter of credit
application), this Credit Agreement shall control.
2.3 Swingline Loan Subfacility.
(a) Swingline Commitment. Subject to the terms and conditions hereof
and in reliance upon the representations and warranties set forth herein, the
Swingline Lender, in its individual capacity, agrees to make certain revolving
credit loans requested by the Borrower in Dollars to the Borrower (each a
"Swingline Loan" and, collectively, the "Swingline Loans") from time to time
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from the Closing Date until the Termination Date for the purposes hereinafter
set forth; provided, however, (i) the aggregate principal amount of Swingline
Loans outstanding at any time shall not exceed TWENTY MILLION DOLLARS
($20,000,000) (the "Swingline Committed Amount") and (ii) with regard to the
Lenders collectively, the aggregate principal amount of Obligations outstanding
at any time shall not exceed the Aggregate Revolving Committed Amount. Swingline
Loans hereunder shall be made as Base Rate Loans, and may be repaid and
reborrowed in accordance with the provisions hereof.
(b) Swingline Loan Advances.
(i) Notices; Disbursement. Whenever the Borrower
desires a Swingline Loan advance hereunder it shall give written notice
(or telephonic notice promptly confirmed in writing) to the Swingline
Lender not later than 11:00 A.M. (Charlotte, North Carolina time) on
the Business Day of the requested Swingline Loan advance. Each such
notice shall be irrevocable and shall specify (A) that a Swingline Loan
advance is requested, (B) the date of the requested Swingline Loan
advance (which shall be a Business Day) and (C) the principal amount of
and Interest Period for the Swingline Loan advance requested. Each
Swingline Loan shall have such maturity date as the Swingline Lender
and the Borrower shall agree upon receipt by the Swingline Lender of
any such notice from the Borrower. The Swingline Lender shall initiate
the transfer of funds representing the Swingline Loan advance to the
Borrower by 3:00 P.M. (Charlotte, North Carolina time) on the Business
Day of the requested borrowing.
(ii) Minimum Amounts. Each Swingline Loan advance shall be in
a minimum principal amount of $500,000 and in integral multiples of
$100,000 in excess thereof (or the remaining amount of the Swingline
Committed Amount, if less).
(iii) Repayment of Swingline Loans. Swingline Loans shall not
be outstanding more than 30 days from the date of advance and may not
extend beyond the Termination Date, on which date the Swingline Loans
shall be due and payable in full. The Swingline Lender may, at any
time, in its sole discretion, by written notice to the Borrower and the
Lenders, demand repayment of its Swingline Loans by way of a Revolving
Loan advance, in which case the Borrower shall be deemed to have
requested a Revolving Loan advance comprised solely of Base Rate Loans
in the amount of such Swingline Loans; provided, however, that any such
demand shall be deemed to have been given one Business Day prior to the
Termination Date and on the date of the occurrence of any Event of
Default described in Section 9.1 and upon acceleration of the
indebtedness hereunder and the exercise of remedies in accordance with
the provisions of Section 9.2. Each Lender hereby irrevocably agrees to
make its pro rata share of each such Revolving Loan in the amount, in
the manner and on the date specified in the preceding sentence
notwithstanding (I) the amount of such borrowing may not comply with
the minimum amount for advances of Revolving Loans otherwise required
hereunder, (II) whether any conditions specified in Section 5.2 are
then satisfied, (III) whether a Default or an Event of Default then
exists, (IV) failure of any such request or deemed request for
Revolving Loan to be made by the time otherwise required hereunder, (V)
whether the date of such borrowing is a date on which Revolving Loans
are
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otherwise permitted to be made hereunder or (VI) any termination of the
Commitments relating thereto immediately prior to or contemporaneously
with such borrowing. In the event that any Revolving Loan cannot for
any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding
under the Bankruptcy Code with respect to the Borrower or any other
Credit Party), then each Lender hereby agrees that it shall forthwith
purchase (as of the date such borrowing would otherwise have occurred,
but adjusted for any payments received from the Borrower on or after
such date and prior to such purchase) from the Swingline Lender such
Participations Interest in the outstanding Swingline Loans as shall be
necessary to cause each such Lender to share in such Swingline Loans
ratably based upon its Revolving Commitment Percentage of the Revolving
Committed Amount (determined before giving effect to any termination of
the Commitments pursuant to Section 3.4), provided that (A) all
interest payable on the Swingline Loans shall be for the account of the
Swingline Lender until the date as of which the respective
Participation Interest is purchased and (B) at the time any purchase of
Participation Interests pursuant to this sentence is actually made, the
purchasing Lender shall be required to pay to the Swingline Lender, to
the extent not paid to the Swingline Lender by the Borrower in
accordance with the terms of subsection (c)(ii) below, interest on the
principal amount of Participation Interests purchased for each day from
and including the day upon which such borrowing would otherwise have
occurred to but excluding the date of payment for such Participation
Interests, at the rate equal to the Federal Funds Rate.
(c) Interest on Swingline Loans.
Subject to the provisions of Section 3.1, each Swingline Loan shall
bear interest at a per annum rate (computed on the basis of the actual number
of days elapsed over a year of 365 days) equal to the Base Rate. Interest on
Swingline Loans shall be payable in arrears on each applicable Interest
Payment Date (or at such other times as may be specified herein), unless
accelerated sooner pursuant to Section 9.2.
(d) Swingline Note. The Swingline Loans shall be evidenced by the
Revolving Note.
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 Default Rate.
Upon the occurrence, and during the continuance, of an Event
of Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable on demand, at a per annum rate 2% greater
than the rate which would otherwise be applicable (or if no rate is applicable,
whether in respect of interest, fees or other amounts, then 2% greater than the
Base Rate).
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3.2 Extension and Conversion.
Subject to the terms of Section 5.2, the Borrower shall have
the option, on any Business Day, to extend existing Loans into a subsequent
permissible Interest Period or to convert Loans into Loans of another interest
rate type; provided, however, that (i) except as provided in Section 3.8,
Eurodollar Loans may be converted into Base Rate Loans only on the last day of
the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended,
and Base Rate Loans may be converted into Eurodollar Loans, only if no Default
or Event of Default is in existence on the date of extension or conversion,
(iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to
the terms of the definition of "Interest Period" set forth in Section 1.1 and
shall be in such minimum amounts as provided in Section 2.1(b)(ii) , and (iv)
any request for extension or conversion of a Eurodollar Loan which shall fail to
specify an Interest Period shall be deemed to be a request for an Interest
Period of one month. Each such extension or conversion shall be effected by the
Borrower by giving a Notice of Extension/Conversion (or telephone notice
promptly confirmed in writing) to the Administrative Agent prior to 11:00 A.M.
(Charlotte, North Carolina time) on the Business Day of, in the case of the
conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business
Day prior to, in the case of the extension of a Eurodollar Loan as, or
conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed
extension or conversion, specifying the date of the proposed extension or
conversion, the Loans to be so extended or converted, the types of Loans into
which such Loans are to be converted and, if appropriate, the applicable
Interest Periods with respect thereto. Each request for extension or conversion
shall be irrevocable and shall constitute a representation and warranty by the
Borrower of the matters specified in subsections (a) through (e) of Section 5.2.
In the event the Borrower fails to request extension or conversion of any
Eurodollar Loan in accordance with this Section, or any such conversion or
extension is not permitted or required by this Section, then such Eurodollar
Loan shall be automatically converted into a Base Rate Loan at the end of the
Interest Period applicable thereto. The Administrative Agent shall give each
Lender notice as promptly as practicable of any such proposed extension or
conversion affecting any Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. Revolving Loans and Swingline Loans
may be repaid in whole or in part without premium or penalty; provided that (i)
Eurodollar Loans may be prepaid only upon three (3) Business Days' prior written
notice to the Administrative Agent and must be accompanied by payment of any
amounts owing under Section 3.11, and (ii) partial prepayments shall be minimum
principal amounts of $5,000,000, in the case of Eurodollar Loans, and $500,000,
in the case of Base Rate Loans, and in integral multiples of $500,000 in excess
thereof.
(b) Mandatory Prepayments. If at any time, (A) the aggregate
principal amount of Obligations shall exceed the Aggregate Revolving Committed
Amount, (B) the aggregate amount of LOC Obligations shall exceed the LOC
Committed Amount, or (C) the aggregate amount of Swingline Loans shall exceed
the Swingline Committed Amount, the Borrower shall immediately make payment on
the Revolving Loans and/or to a cash collateral account in respect of the LOC
Obligations, in an amount sufficient to eliminate the deficiency.
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(c) Application. Unless otherwise specified by the Borrower,
prepayments made hereunder shall be applied first to Swingline Loans, then to
Revolving Loans which are Base Rate Loans, then to Revolving Loans which are
Eurodollar Loans in direct order of Interest Period maturities, and then to a
cash collateral account to secure LOC Obligations. Amounts prepaid hereunder may
be reborrowed in accordance with the provisions hereof.
3.4 Termination and Reduction of Commitments
(a) Voluntary Reductions. The Revolving Commitments may be
terminated or permanently reduced by the Borrower in whole or in part upon three
(3) Business Days' prior written notice to the Administrative Agent, provided
that (i) after giving effect to any voluntary reduction the aggregate amount of
Obligations shall not exceed the Aggregate Revolving Committed Amount, as
reduced, and (ii) partial reductions by the Borrower shall be minimum principal
amount of $5,000,000, and in integral multiples of $1,000,000 in excess thereof.
(b) Mandatory Reductions. The Revolving Commitments shall be
permanently reduced in an amount equal to one hundred percent (100%) of the Net
Proceeds received from Asset Dispositions in any fiscal year; but only to the
extent that (i) such Net Proceeds are not reinvested in other property or assets
within six (6) months of the date of sale, lease, disposition, casualty, theft
or loss giving rise thereto, and (ii) the aggregate amount of such Net Proceeds
not reinvested in accordance with the foregoing subsection (i) in any fiscal
year shall exceed five percent (5%) of total assets for the Consolidated Group
as of the end of the immediately preceding fiscal year.
(c) Termination. The Commitments hereunder shall terminate on
the Termination Date.
3.5 Fees.
(a) Commitment Fee. In consideration of the Revolving
Commitments hereunder, the Borrower agrees to pay to the Administrative Agent
for the ratable benefit of the Lenders a commitment fee (the "Commitment Fee")
equal to the Applicable Percentage per annum on the average daily unused amount
of the Revolving Committed Amount for the applicable period. The Commitment Fee
shall be payable quarterly in arrears on the 15th day following the last day of
each calendar quarter for the immediately preceding quarter (or portion thereof)
beginning with the first such date to occur after the Closing Date. For purposes
of computation of the Commitment Fee, Swingline Loans shall not be counted
toward or considered usage under the Revolving Loan facility.
(b) Letter of Credit Fees.
(i) Letter of Credit Fee. In consideration of the LOC
Commitment hereunder, the Borrower agrees to pay to the Administrative
Agent for the ratable benefit of the Lenders a fee (the "Letter of
Credit Fee") equal to the Applicable Percentage per
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annum on the average daily maximum amount available to be drawn under
Letters of Credit from the date of issuance to the date of expiration.
The Letter of Credit Fee shall be payable quarterly in arrears on the
15th day following the last day of each calendar quarter for the
immediately preceding quarter (or portion thereof) beginning with the
first such date to occur after the Closing Date.
(ii) Issuing Lender Fee. In addition to the Letter of
Credit Fee, the Borrower agrees to pay to the Issuing Lender for its
own account without sharing by the other Lenders (A) a fronting and
negotiation fee of .125% per annum on the average daily maximum amount
available to be drawn under Letters of Credit issued by it from the
date of issuance to the date of expiration, and (B) customary charges
of the Issuing Lender with respect to the issuance, amendment,
transfer, administration, cancellation and conversion of, and drawings
under, such Letters of Credit (collectively, the "Issuing Lender
Fees").
(c) Administrative Fees. The Borrower agrees to pay to the
Administrative Agent, for its own account, an annual administrative fee and such
other fees, if any, referred to in the Administrative Agent's Fee Letter
(collectively, the "Administrative Agent Fees").
3.6 Capital Adequacy.
If any Lender has determined, after the date hereof, that the
adoption or the becoming effective of, or any change in, or any change by any
Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof in the interpretation or administration
of, any applicable law, rule or regulation regarding capital adequacy, or
compliance by such Lender with any request or directive of general applicability
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital or assets as a consequence
of its commitments or obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, effectiveness, change or
compliance (taking into consideration such Lender's policies with respect to
capital adequacy applied on a consistent basis), then, upon notice from such
Lender to the Borrower, the Borrower shall be obligated to pay to such Lender
such additional amount or amounts as will compensate such Lender for such
reduction. Each determination by any such Lender of amounts owing under this
Section shall, absent manifest error, be conclusive and binding on the parties
hereto.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Administrative
Agent shall have determined (which determination shall be conclusive and binding
upon the Borrower) that, by reason of circumstances affecting the relevant
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period, the Administrative Agent shall give
telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as
practicable thereafter. If such notice is given (a) any Eurodollar Loans
requested to be made on the first day of such Interest Period shall be made as
Base Rate Loans and (b) any Loans that were to have been
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converted on the first day of such Interest Period to or continued as Eurodollar
Loans shall be converted to or continued as Base Rate Loans. The Administrative
Agent shall withdraw such notice promptly after such circumstances cease to
exist. Until such notice has been withdrawn by the Administrative Agent, no
further Eurodollar Loans shall be made or continued as such, nor shall the
Borrower have the right to convert Base Rate Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or any
change in any Requirement of Law or in the interpretation or application thereof
occurring after the Closing Date shall make it unlawful for any Lender to make
or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such
Lender shall promptly give written notice of such circumstances to the Borrower
and the Administrative Agent (which notice shall be withdrawn whenever such
circumstances no longer exist), (b) the commitment of such Lender hereunder to
make Eurodollar Loans, continue Eurodollar Loans as such and convert a Base Rate
Loan to Eurodollar Loans shall forthwith be canceled and, until such time as it
shall no longer be unlawful for such Lender to make or maintain Eurodollar
Loans, such Lender shall then have a commitment only to make a Base Rate Loan
when a Eurodollar Loan is requested and (c) such Lender's Loans then outstanding
as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans
on the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of the
then current Interest Period with respect thereto, the Borrower shall pay to
such Lender such amounts, if any, as may be required pursuant to Section 3.11.
3.9 Requirements of Law.
Subject to Section 3.16, if, after the date hereof, the adoption of or
any change in any Requirement of Law or in the interpretation or application
thereof applicable to any Lender, or compliance by any Lender with any request
or directive of general applicability (whether or not having the force of law)
from any central bank or other Governmental Authority, in each case made
subsequent to the Closing Date (or, if later, the date on which such Lender
becomes a Lender):
(a) shall subject such Lender to any tax of any kind
whatsoever with respect to any Letter of Credit, any Eurodollar Loans
made by it or its obligation to make Eurodollar Loans, or change the
basis of taxation of payments to such Lender in respect thereof (except
for (i) Non-Excluded Taxes covered by Section 3.10 (including
Non-Excluded Taxes imposed solely by reason of any failure of such
Lender to comply with its obligations under Section 3.10(b)) and (ii)
changes in taxes measured by or imposed upon the overall net income, or
franchise tax (imposed in lieu of such net income tax), of such Lender
or its applicable lending office, branch, or any affiliate thereof));
(b) shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or any
other
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acquisition of funds by, any office of such Lender which is not
otherwise included in the determination of the Eurodollar Rate
hereunder; or
(c) shall impose on such Lender any other condition
(excluding any tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, upon notice to the Borrower from such Lender,
through the Administrative Agent, in accordance herewith, the Borrower shall be
obligated to promptly pay such Lender, upon its demand, any additional amounts
(net of any amounts paid pursuant to Section 3.6) necessary to compensate such
Lender for such increased cost or reduced amount receivable, provided that, in
any such case, the Borrower may elect to convert the Eurodollar Loans made by
such Lender hereunder to Base Rate Loans by giving the Administrative Agent at
least one Business Day's notice of such election, in which case the Borrower
shall promptly pay to such Lender, upon demand, without duplication, such
amounts, if any, as may be required pursuant to Section 3.11. If any Lender
becomes entitled to claim any additional amounts pursuant to this subsection, it
shall provide prompt notice thereof to the Borrower, through the Administrative
Agent, certifying (x) that one of the events described in this paragraph (a) has
occurred and describing in reasonable detail the nature of such event, (y) as to
the increased cost or reduced amount resulting from such event and (z) as to the
additional amount demanded by such Lender and a reasonably detailed explanation
of the calculation thereof. Such a certificate as to any additional amounts
payable pursuant to this subsection submitted by such Lender, through the
Administrative Agent, to the Borrower shall be conclusive and binding on the
parties hereto in the absence of manifest error. This covenant shall survive the
termination of this Credit Agreement and the payment of the Loans and all other
amounts payable hereunder.
3.10 Taxes.
(a) Except as provided below in this subsection, all payments made by
the Borrower under this Credit Agreement and any Notes shall be made free and
clear of, and without deduction or withholding for or on account of, any present
or future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any court, or governmental body, agency or other
official, excluding taxes (the "Excluded Taxes") that are measured by or imposed
upon the overall net income of the Administrative Agent or any Lender or its
applicable lending office, or any branch or affiliate thereof, and all franchise
taxes, branch taxes, taxes on doing business or taxes on the overall capital or
net worth of the Administrative Agent or any Lender or its applicable lending
office, or any branch or affiliate thereof, in each case imposed in lieu of net
income taxes, imposed: (i) by the jurisdiction under the laws of which the
Administrative Agent or such Lender, applicable lending office, branch or
affiliate is organized or is located, or in which its principal executive office
is located, or any nation within which such jurisdiction is located or any
political subdivision thereof; or (ii) by reason of any connection between the
jurisdiction imposing such tax and the Administrative Agent or such Lender,
applicable lending office, branch or affiliate other than a
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connection arising solely from such Lender having executed, delivered or
performed its obligations, or received payment under or enforced, this Credit
Agreement or any Notes. If any such taxes, levies, imposts, duties, charges,
fees, deductions or withholdings other than the Excluded Taxes ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the
Administrative Agent or any Lender hereunder or under any Notes, (A) the amounts
so payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Credit Agreement and
any Notes, provided, however, that the Borrower shall be entitled to deduct and
withhold any Non-Excluded Taxes and shall not be required to increase any such
amounts payable to any Lender that is not organized under the laws of the United
States of America or a state thereof if such Lender fails to comply with the
requirements of paragraph (b) of this subsection whenever any Non-Excluded Taxes
are payable by the Borrower, and (B) as promptly as possible thereafter the
Borrower shall send to the Administrative Agent for its own account or for the
account of such Lender, as the case may be, a certified copy of an original
official receipt received by the Borrower showing payment thereof. If the
Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure. If the Administrative Agent or any Lender receives a
refund or tax benefit in respect of Non-Excluded Taxes for which the Borrower
had made additional payments pursuant to this Section 3.10(a), the
Administrative Agent or such Lender, as the case may be, shall promptly pay such
refund (together with any interest with respect thereto received from the
relevant taxing authority) to the Borrower; provided, however, that the Borrower
agrees promptly to return such refund (together with any interest with respect
thereto due to the relevant taxing authority) to the Administrative Agent or the
applicable Lender, as the case may be, upon receipt of a notice that such refund
is required to be repaid to the relevant taxing authority. The agreements in
this subsection shall survive the termination of this Credit Agreement and the
payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(X)(i) on or before the date of any payment by the Borrower
under this Credit Agreement or Notes to such Lender, deliver to the
Borrower and the Administrative Agent (A) two (2) duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, or
successor applicable form, as the case may be, certifying that it is
entitled to receive payments under this Credit Agreement and any Notes
without deduction or withholding of any United States federal income
taxes and (B) an Internal Revenue Service Form W-8 or W-9, or successor
applicable form, as the case may be, certifying that it is entitled to
an exemption from United States backup withholding tax;
(ii) deliver to the Borrower and the Administrative Agent two
(2) further copies of any such form or certification on or before the
date that any such form or certification
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expires or becomes obsolete and after the occurrence of any event
requiring a change in the most recent form previously delivered by it
to the Borrower; and
(iii) obtain such extensions of time for filing and complete
such forms or certifications as may reasonably be requested by the
Borrower or the Administrative Agent; or
(Y) in the case of any such Lender that is not a "bank" within
the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (i)
represent to the Borrower (for the benefit of the Borrower and the
Administrative Agent) that it is not a bank within the meaning of
Section 881(c)(3)(A) of the Internal Revenue Code, (ii) agree to
furnish to the Borrower on or before the date of any payment by the
Borrower, with a copy to the Administrative Agent two (2) accurate and
complete original signed copies of Internal Revenue Service Form W-8,
or successor applicable form certifying to such Lender's legal
entitlement at the date of such certificate to an exemption from U.S.
withholding tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this Credit
Agreement and any Notes (and to deliver to the Borrower and the
Administrative Agent two (2) further copies of such form on or before
the date it expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recently provided form and, if
necessary, obtain any extensions of time reasonably requested by the
Borrower or the Administrative Agent for filing and completing such
forms), and (iii) agree, to the extent legally entitled to do so, upon
reasonable request by the Borrower, to provide to the Borrower (for the
benefit of the Borrower and the Administrative Agent) such other forms
as may be reasonably required in order to establish the legal
entitlement of such Lender to an exemption from withholding with
respect to payments under this Credit Agreement and any Notes;
unless in any such case any change in treaty, law or regulation has occurred
after the date such Person becomes a Lender hereunder which renders all such
forms inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender so advises the
Borrower and the Administrative Agent. Each Person that shall become a Lender
pursuant to subsection 11.3 shall, upon the effectiveness of the related
transfer, be required to provide all of the forms, certifications and statements
required pursuant to this subsection.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur (other
than through such Lender's gross negligence or willful misconduct) as a
consequence of (a) default by the Borrower in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on a
day which is not the last day of an Interest Period with respect thereto. With
respect to Eurodollar Loans, such indemnification may include an amount
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equal to the excess, if any, of (i) the amount of interest which would have
accrued on the amount so prepaid, or not so borrowed, converted or continued,
for the period from the date of such prepayment or of such failure to borrow,
convert or continue to the last day of the applicable Interest Period (or, in
the case of a failure to borrow, convert or continue, the Interest Period that
would have commenced on the date of such failure) in each case at the applicable
rate of interest for such Loans provided for herein (excluding, however, the
Applicable Percentage included therein, if any) over (ii) the amount of interest
(as reasonably determined by such Lender) which would have accrued to such
Lender on such amount by placing such amount on deposit for a comparable period
with leading banks in the interbank Eurodollar market. The covenants of the
Borrower set forth in this Section 3.11 shall survive the termination of this
Credit Agreement and the payment of the Loans and all other amounts payable
hereunder.
3.12 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Loans. Each Loan, each payment or prepayment of principal of any
Loan (other than Swingline Loans) or reimbursement obligations arising from
drawings under Letters of Credit, each payment of interest on the Loans or
reimbursement obligations arising from drawings under Letters of Credit, each
payment of Commitment Fees, each payment of the Letter of Credit Fee, each
reduction of the Revolving Committed Amount and each conversion or extension of
any Loan (other than Swingline Loans), shall be allocated pro rata among the
Lenders in accordance with the respective principal amounts of their outstanding
Loans and Participation Interests
(b) Advances. No Lender shall be responsible for the failure or delay
by any other Lender in its obligation to make its ratable share of a borrowing
hereunder; provided, however, that the failure of any Lender to fulfill its
obligations hereunder shall not relieve any other Lender of its obligations
hereunder. Unless the Administrative Agent shall have been notified in writing
by any Lender prior to a borrowing that such Lender will not make the amount
that would constitute its ratable share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by such Lender within the time period specified therefor hereunder, such
Lender shall pay to the Administrative Agent, on demand, such amount with
interest thereon at a rate equal to the Federal Funds Rate for a period of two
(2) Business Days, and thereafter at the Base Rate, for the period until such
Lender makes such amount immediately available to the Administrative Agent. If
such Lender does not pay such amounts to the Administrative Agent forthwith upon
demand, the Administrative Agent may notify the Borrower and request the
Borrower to immediately pay such amount to the Administrative Agent with
interest at the Base Rate. A certificate of the Administrative Agent submitted
to any Lender with respect to any amounts owing under this subsection shall be
conclusive in the absence of manifest error.
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3.13 Sharing of Payments.
The Lenders agree among themselves that, in the event that any Lender
shall obtain payment in respect of any Loan, LOC Obligations or any other
obligation owing to such Lender under this Credit Agreement through the exercise
of a right of setoff, banker's lien or counterclaim, or pursuant to a secured
claim under Section 506 of Title 11 of the United States Code or other security
or interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means, in excess of its pro rata share of such
payment as provided for in this Credit Agreement, such Lender shall promptly
purchase from the other Lenders a participation in such Loans, LOC Obligations
and other obligations in such amounts, and make such other adjustments from time
to time, as shall be equitable to the end that all Lenders share such payment in
accordance with their respective ratable shares as provided for in this Credit
Agreement. The Lenders further agree among themselves that if payment to a
Lender obtained by such Lender through the exercise of a right of setoff,
banker's lien, counterclaim or other event as aforesaid shall be rescinded or
must otherwise be restored, each Lender which shall have shared the benefit of
such payment shall, by purchase of a participation, return its share of that
benefit (together with its share of any accrued interest payable with respect
thereto) to each Lender whose payment shall have been rescinded or otherwise
restored. The Borrower agrees that any Lender so purchasing such a participation
may, to the fullest extent permitted by law, exercise all rights of payment,
including setoff, banker's lien or counterclaim, with respect to such
participation as fully as if such Lender were a holder of such Loan, LOC
Obligations or other obligation in the amount of such participation. Except as
otherwise expressly provided in this Credit Agreement, if any Lender or the
Administrative Agent shall fail to remit to the Administrative Agent or any
other Lender an amount payable by such Lender or the Administrative Agent to the
Administrative Agent or such other Lender pursuant to this Credit Agreement on
the date when such amount is due, such payments shall be made together with
interest thereon for each date from the date such amount is due until the date
such amount is paid to the Administrative Agent or such other Lender at a rate
per annum equal to the Federal Funds Rate. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a setoff to which this Section 3.13 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a manner
consistent with the rights of the Lenders under this Section 3.13 to share in
the benefits of any recovery on such secured claim.
3.14 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein, all payments
hereunder shall be made to the Administrative Agent in dollars in immediately
available funds, without setoff, deduction, counterclaim or withholding of any
kind, at the Administrative Agent's office specified in Section 11.1 not later
than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments
received after such time shall be deemed to have been received on the next
succeeding Business Day. The Administrative Agent may (but shall not be
obligated to) debit the amount of any such payment which is not made by such
time to any ordinary deposit account of the Borrower maintained with the
Administrative Agent (with notice to the Borrower). The Borrower shall, at the
time it makes any payment under this Credit Agreement, specify to the
Administrative Agent
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the Loans, LOC Obligations, Fees, interest or other amounts payable by the
Borrower hereunder to which such payment is to be applied (and in the event that
it fails so to specify, or if such application would be inconsistent with the
terms hereof, the Administrative Agent shall distribute such payment to the
Lenders in such manner as the Administrative Agent may determine to be
appropriate in respect of obligations owing by the Borrower hereunder, subject
to the terms of Section 3.12(a)). The Administrative Agent will distribute such
payments to such Lenders, if any such payment is received prior to 12:00 Noon
(Charlotte, North Carolina time) on a Business Day in like funds as received
prior to the end of such Business Day and otherwise the Administrative Agent
will distribute such payment to such Lenders on the next succeeding Business
Day. Whenever any payment hereunder shall be stated to be due on a day which is
not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day (subject to accrual of interest and Fees for the period
of such extension), except that in the case of Eurodollar Loans, if the
extension would cause the payment to be made in the next following calendar
month, then such payment shall instead be made on the next preceding Business
Day. Except as expressly provided otherwise herein, all computations of interest
and fees shall be made on the basis of actual number of days elapsed over a year
of 360 days, except with respect to computation of interest on Base Rate Loans
which (unless the Base Rate is determined by reference to the Federal Funds
Rate) shall be calculated based on a year of 365 or 366 days, as appropriate.
Interest shall accrue from and include the date of borrowing, but exclude the
date of payment.
(b) Allocation of Payments After Event of Default. Notwithstanding any
other provisions of this Credit Agreement to the contrary, after the occurrence
and during the continuance of an Event of Default, all amounts collected or
received by the Administrative Agent or any Lender on account of the Guaranteed
Obligations or any other amounts outstanding under any of the Credit Documents
shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation reasonable attorneys' fees)
of the Administrative Agent in connection with enforcing the rights of
the Lenders under the Credit Documents;
SECOND, to payment of any fees owed to the Administrative
Agent;
THIRD, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation, reasonable attorneys' fees)
of each of the Lenders in connection with enforcing its rights under
the Credit Documents or otherwise with respect to the Obligations owing
to such Lender;
FOURTH, to the payment of all accrued interest and fees on or
in respect of the Obligations;
FIFTH, to the payment of the outstanding principal amount of
the Guaranteed Obligations (including the payment or cash
collateralization of the outstanding LOC Obligations);
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SIXTH, to all other Obligations and other obligations which
shall have become due and payable under the Credit Documents or
otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH"
above; and
SEVENTH, to the payment of the surplus, if any, to whoever may
be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category; and (ii) each of the Lenders shall receive an amount equal
to its pro rata share (based on the proportion that the then outstanding
Obligations held by such Lender bears to the aggregate then outstanding
Obligations) of amounts available to be applied pursuant to clauses "FOURTH",
"FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available
for distribution pursuant to clause "FIFTH" above are attributable to the issued
but undrawn amount of outstanding Letters of Credit, such amounts shall be held
by the Administrative Agent in a cash collateral account and applied (A) first,
to reimburse the Issuing Lender for any drawings under such Letters of Credit
and (B) then, following the expiration of all Letters of Credit, to all other
obligations of the types described in clauses "FIFTH" and "SIXTH" above in the
manner provided in this Section 3.14(b).
3.15 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts evidencing each
Loan made by such Lender to the Borrower from time to time, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Credit Agreement. Each Lender will make reasonable efforts to
maintain the accuracy of its account or accounts and to promptly update its
account or accounts from time to time, as necessary.
(b) The Administrative Agent shall maintain the Register pursuant to
Section 11.3(c) hereof, and a subaccount for each Lender, in which Register and
subaccounts (taken together) shall be recorded (i) the amount, type and Interest
Period of each such Loan hereunder, (ii) the amount of any principal or interest
due and payable or to become due and payable to each Lender hereunder and (iii)
the amount of any sum received by the Administrative Agent hereunder from or for
the account of the Borrower and each Lender's share thereof. The Administrative
Agent will make reasonable efforts to maintain the accuracy of the subaccounts
referred to in the preceding sentence and to promptly update such subaccounts
from time to time, as necessary.
(c) The entries made in the accounts, Register and subaccounts
maintained pursuant to subsection (b) of this Section 3.15 (and, if consistent
with the entries of the Administrative Agent, subsection (a)) shall be prima
facie evidence of the existence and amounts of the obligations of the Borrower
therein recorded; provided, however, that the failure of any Lender or the
Administrative Agent to maintain any such account, such Register or such
subaccount, as applicable, or any error therein, shall not in any manner affect
the obligation of the Borrower to repay the Loans made by such Lender in
accordance with the terms hereof.
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3.16 Certain Rules Relating to the Payment of Additional Amounts. (a)
Upon the request and at the expense of the Borrower, each Lender to which the
Borrower is required to pay any additional amount pursuant to Section 3.9 or
3.10 shall reasonably afford the Borrower the opportunity to contest, and shall
reasonably cooperate with the Borrower in contesting, the imposition of any
Non-Excluded Tax giving rise to such payment; provided that (i) such Lender
shall not be required to afford the Borrower the opportunity to so contest
unless the Borrower shall have confirmed in writing to such Lender its
obligation to pay such amounts pursuant to this Agreement and (ii) the Borrower
shall reimburse such Lender for its reasonable attorney's and accountant's fees
and disbursements incurred in so cooperating with the Borrower in contesting the
imposition of such Non-Excluded Tax.
(b) If a Lender changes its applicable lending office (other than
pursuant to paragraph (c) below) or engages in a combination with another
financial institution and the effect of the change or combination, as of the
date of the change or combination, would be to cause the Borrower to become
obligated to pay any additional amount under subsection 3.9 or 3.10, the
Borrower shall not be obligated to pay such additional amount.
(c) If a condition or an event occurs that would, or would upon the
passage of time or giving of notice, result in the payment of any additional
amount to any Lender by the Borrower pursuant to Section 3.9 or 3.10, such
Lender shall promptly notify the Borrower and the Administrative Agent and shall
take such steps as may reasonably be available to it and acceptable to the
Borrower to mitigate the effects of such condition or event (which shall include
efforts to rebook the Revolving Loans held by such Lender at another lending
office, or through another branch or an affiliate, of such Lender); provided
that such Lender shall not be required to take any step that, in its reasonable
judgment, would be disadvantageous to its business or operations in any material
respect or would require it to incur additional costs (unless the Borrower
agrees to reimburse such Lender for the reasonable incremental out-of-pocket
costs thereof).
(d) If the Borrower shall become obligated to pay additional amounts
pursuant to Section 3.9 or 3.10 and any affected Lender shall not have promptly
taken steps necessary to avoid the need for payments under Section 3.9 or 3.10,
the Borrower shall have the right, for so long as such obligation remains, with
the assistance of the Administrative Agent, to seek one or more substitute
Lenders reasonably satisfactory to the Administrative Agent and the Borrower to
purchase the affected Revolving Loans, in whole or in part, at an aggregate
price no less than such Revolving Loans' principal amount plus accrued interest,
and assume the affected obligations under this Agreement. In such case, the
Borrower, the Administrative Agent, the affected Lender, and any substitute
Lender shall execute and deliver an appropriately completed Assignment pursuant
to Section 11.3(b) to effect the assignment of rights to, and the assumption of
obligations by, the substitute Lender; provided that any fees required to be
paid pursuant to Section 11.3(b) in connection with such assignment shall be
paid by the Borrower.
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SECTION 4
GUARANTY
4.1 The Guarantee.
Each of the Guarantors hereby jointly and severally guarantees to each
Lender, to each Affiliate of a Lender that enters into a Hedging Agreement and
to the Administrative Agent as hereinafter provided the prompt payment of the
Guaranteed Obligations in full when due (whether at stated maturity, as a
mandatory prepayment, by acceleration, as mandatory cash collateralization or
otherwise) strictly in accordance with the terms thereof. The Guarantors hereby
further agree that if any of the Guaranteed Obligations are not paid in full
when due (whether at stated maturity, as a mandatory prepayment, by
acceleration, as mandatory cash collateralization or otherwise), the Guarantors
will, jointly and severally, promptly pay the same, without any demand or notice
whatsoever, and that in the case of any extension of time of payment or renewal
of any of the Guaranteed Obligations, the same will be promptly paid in full
when due (whether at extended maturity, as a mandatory prepayment, by
acceleration or otherwise) in accordance with the terms of such extension or
renewal.
Notwithstanding any provision to the contrary contained herein or in
any other of the Credit Documents or Hedging Agreements, to the extent the
obligations of a Guarantor shall be adjudicated to be invalid or unenforceable
for any reason (including, without limitation, because of any applicable state
or federal law relating to fraudulent conveyances or transfers) then the
obligations of each Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Code).
4.2 Obligations Unconditional.
The obligations of the Guarantors under Section 4.1 hereof are joint
and several, absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of any of the Credit Documents or Hedging
Agreements, or any other agreement or instrument referred to therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 4.2 that the obligations of the
Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Each Guarantor agrees that such Guarantor shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Guaranteed Obligations for amounts paid under this
Guaranty until such time as the Lenders (and any Affiliates of Lenders entering
into Hedging Agreements) have been paid in full, all Commitments under the
Credit Agreement have been terminated and no Person or Governmental Authority
shall have any right to request any return or reimbursement of funds from the
Lenders in connection with monies received under the Credit Documents or Hedging
Agreements. Without limiting the generality of the foregoing, it is agreed that,
to the fullest extent permitted by law, the
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occurrence of any one or more of the following shall not alter or impair the
liability of any Guarantor hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to any
Guarantor, the time for any performance of or compliance with any of
the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of any
of the Credit Documents, any Hedging Agreement or any other agreement
or instrument referred to in the Credit Documents or Hedging Agreements
shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall
be accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under any of the
Credit Documents, any Hedging Agreement or any other agreement or
instrument referred to in the Credit Documents or Hedging Agreements
shall be waived or any other guarantee of any of the Guaranteed
Obligations or any security therefor shall be released or exchanged in
whole or in part or otherwise dealt with;
(iv) any Lien granted to, or in favor of, the Administrative
Agent or any Lender or Lenders as security for any of the Guaranteed
Obligations shall fail to attach or be perfected; or
(v) any of the Guaranteed Obligations shall be determined to
be void or voidable (including, without limitation, for the benefit of
any creditor of any Guarantor) or shall be subordinated to the claims
of any Person (including, without limitation, any creditor of any
Guarantor).
With respect to its obligations hereunder, each Guarantor hereby expressly
waives diligence, presentment, demand of payment, protest and all notices
whatsoever, and any requirement that the Administrative Agent or any Lender
exhaust any right, power or remedy or proceed against any Person under any of
the Credit Documents, any Hedging Agreement or any other agreement or instrument
referred to in the Credit Documents or Hedging Agreements, or against any other
Person under any other guarantee of, or security for, any of the Guaranteed
Obligations.
4.3 Reinstatement.
The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Guaranteed Obligations is rescinded
or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Administrative Agent and each Lender on demand for all reasonable costs and
expenses (including, without limitation, fees and expenses of counsel) incurred
by the Administrative Agent or such Lender in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any
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claim alleging that such payment constituted a preference, fraudulent transfer
or similar payment under any bankruptcy, insolvency or similar law.
4.4 Certain Additional Waivers.
Each Guarantor agrees that such Guarantor shall have no right of
recourse to security for the Guaranteed Obligations, except through the exercise
of the rights of subrogation pursuant to Section 4.2.
4.5 Remedies.
The Guarantors agree that, to the fullest extent permitted by law, as
between the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, the Guaranteed Obligations may be declared to be
forthwith due and payable as provided in Section 9.2 hereof (and shall be deemed
to have become automatically due and payable in the circumstances provided in
said Section 9.2) for purposes of Section 4.1 hereof notwithstanding any stay,
injunction or other prohibition preventing such declaration (or preventing the
Guaranteed Obligations from becoming automatically due and payable) as against
any other Person and that, in the event of such declaration (or the Guaranteed
Obligations being deemed to have become automatically due and payable), the
Guaranteed Obligations (whether or not due and payable by any other Person)
shall forthwith become due and payable by the Guarantors for purposes of said
Section 4.1.
4.6 Rights of Contribution.
The Guarantors hereby agree, as among themselves, that if any Guarantor
shall become an Excess Funding Guarantor (as defined below), each other
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor
an amount equal to such Guarantor's Pro Rata Share (as defined below and
determined, for this purpose, without reference to the properties, assets,
liabilities and debts of such Excess Funding Guarantor) of such Excess Payment
(as defined below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this Section 4.6 shall be subordinate and subject in
right of payment to the prior payment in full of the obligations of such
Guarantor under the other provisions of this Section 4, and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For purposes
hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations
arising under the other provisions of this Section 4 (hereafter, the "Guarantied
Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata
Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in
respect of any Guarantied Obligations, the amount paid by an Excess Funding
Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and
(iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for
any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which
the aggregate present fair saleable value of all of its assets and properties
exceeds the amount of all debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured, and unliquidated liabilities, but excluding
the obligations of such Guarantor hereunder) to (b) the amount by which the
aggregate present fair saleable value of all assets and other properties of the
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Borrower and all of the Guarantors exceeds the amount of all of the debts and
liabilities (including contingent, subordinated, unmatured, and unliquidated
liabilities, but excluding the obligations of the Borrower and the Guarantors
hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date
(if any Guarantor becomes a party hereto subsequent to the Closing Date, then
for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed
to have been a Guarantor as of the Closing Date and the information pertaining
to, and only pertaining to, such Guarantor as of the date such Guarantor became
a Guarantor shall be deemed true as of the Closing Date).
4.7 Continuing Guarantee.
The guarantee in this Section 4 is a continuing guarantee, and shall
apply to all Guaranteed Obligations whenever arising.
SECTION 5
CONDITIONS
5.1 Conditions to Closing.
This Credit Agreement shall become effective, and the initial
Extensions of Credit may be made, upon the satisfaction of the following
conditions precedent:
(a) Execution of Credit Agreement and Credit Documents.
Receipt of (i) multiple counterparts of this Credit Agreement, (ii) a Revolving
Note for each Lender, (iii) multiple counterparts of the Pledge Agreement, the
Security Agreement and the UCC financing statements relating thereto, if any, in
each case executed by a duly authorized officer of each party thereto and in
each case conforming to the requirements of this Credit Agreement.
(b) Consummation of Spin-off. Evidence of consummation of the
spin-off of the Borrower from U.S. Office Products Company ("USOP") as described
in the Distribution Agreement among Workflow Graphics, Inc., Paradigm Concepts,
Inc., TDOP, Inc. and the Borrower (collectively, the "Spin-Off Companies") and
USOP, the Tax Allocation Agreement among the Spin-Off Companies and USOP, the
Employee Benefits Agreement among the Spin-Off Companies and USOP and the Tax
Indemnity Agreement among the Spin-Off Companies, the forms of all of which are
attached as exhibits to the Borrower's Form S-1 Registration Statement under the
Securities Act of 1933 with respect to the IPO, and the transactions
contemplated in connection therewith, including receipt of all shareholder,
governmental and other necessary consents, approvals and authorizations
(including the passage of all waiting periods) (the "Spin-Off Transactions").
(c) Pro Forma Balance Sheet. Receipt of a pro forma balance
sheet for the Borrower and its Subsidiaries upon consummation of the spin-off
and the transactions contemplated in connection therewith after giving effect to
the initial Extensions of Credit hereunder.
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(d) Legal Opinions. Receipt of multiple counterparts of
opinions of counsel for the Credit Parties relating to the Credit Documents and
the transactions contemplated herein, in form and substance satisfactory to the
Administrative Agent and the Required Lenders.
(e) Stock Certificates. Receipt of original stock certificates
evidencing the ownership interests of the Credit Parties pledged pursuant to the
Pledge Agreement, together in each case with original undated stock powers
executed in blank.
(f) Financial Information. Receipt of financial information
regarding the Borrower and its subsidiaries, as may be requested by, and in each
case in form and substance satisfactory to the Administrative Agent and the
Lenders.
(g) Evidence of Insurance. Receipt of insurance certificates
or policies evidencing flood hazard insurance (for improvements located in areas
having "special flood hazards"), casualty insurance (including builders' risk
and all-risk permanent policies) and liability insurance conforming to the
requirements of this Credit Agreement and the other Credit Documents, showing
the Administrative Agent as loss payee with respect to the flood hazard and
casualty insurance, together with evidence of payment of premiums thereon.
(h) Absence of Legal Proceedings. The absence of any action ,
suit, investigation or proceeding pending in any court or before any arbitrator
or governmental instrumentality which could reasonably be expected to have a
Material Adverse Effect on the Consolidated Group taken as a whole.
(i) Corporate Documents. Receipt of the following (or their
equivalent) for each of the Credit Parties:
(i) Articles of Incorporation. Copies of the articles
of incorporation or charter documents certified to be true and complete
as of a recent date by the appropriate governmental authority of the
state of its incorporation.
(ii) Resolutions. Copies of resolutions of the Board
of Directors approving and adopting the respective Credit Documents,
the transactions contemplated therein and authorizing execution and
delivery thereof, certified by a secretary or assistant secretary as of
the Closing Date to be true and correct and in force and effect as of
such date.
(iii) Bylaws. Copies of the bylaws certified by a
secretary or assistant secretary as of the Closing Date to be true and
correct and in force and effect as of such date.
(iv) Good Standing. Copies, where applicable, of (A)
certificates of good standing, existence or its equivalent certified as
of a recent date by the appropriate governmental authorities of the
state of incorporation and each other state in which the failure to so
qualify and be in good standing would in the aggregate have a Material
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Adverse Effect and (B) a certificate indicating payment of all
corporate franchise taxes certified as of a recent date by the
appropriate governmental taxing authorities.
(v) Officer's Certificate. An officer's certificate
for each of the Credit Parties dated as of the Closing Date
substantially in the form of Schedule 5.1(i)(v) with appropriate
insertions and attachments.
(j) Fees. Receipt of all fees, if any, owing pursuant to the
Administrative Agent's Fee Letter, Section 3.5 or otherwise.
(k) Subsection 5.2 Conditions. The conditions specified in
Section 5.2 shall be satisfied.
(l) Additional Matters. All other documents and legal matters
in connection with the transactions contemplated by this Credit Agreement shall
be reasonably satisfactory in form and substance to the Agents and the Required
Lenders.
5.2 Conditions to All Extensions of Credit.
The obligation of each Lender to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations and
warranties made by the Credit Parties herein or in any other Credit Documents or
which are contained in any certificate furnished at any time under or in
connection herewith shall be true and correct in all material respects on and as
of the date of such Extension of Credit as if made on and as of such date
(except for those which expressly relate to an earlier date).
(b) No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing on such date or after giving
effect to the Extension of Credit to be made on such date unless such Default or
Event of Default shall have been waived in accordance with this Credit
Agreement.
(c) No Bankruptcy Event. No Bankruptcy Event shall have
occurred and be continuing with respect to any of the Credit Parties.
(d) No Material Adverse Effect. No circumstances, events or
conditions shall have occurred since the date of the audited financial
statements referenced in Section 6.1 which could reasonably be expected to have
a Material Adverse Effect.
(e) Additional Conditions to Revolving Loans. If a Revolving
Loan is made pursuant to Section 2.1, all conditions set forth therein shall
have been satisfied.
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(f) Additional Conditions to Letters of Credit. If such
Extension of Credit is made pursuant to Section 2.2, all conditions set forth
therein shall have been satisfied.
(g) Additional Conditions to Swingline Loans. If a Swingline
Loan is made pursuant to Section 2.3, all conditions set forth therein shall
have been satisfied.
Each request for Extension of Credit (including extensions and
conversions) and each acceptance by the Borrower of an Extension of Credit
(including extensions and conversions) shall be deemed to constitute a
representation and warranty by the Borrower as of the date of such Extension of
Credit that the applicable conditions in paragraphs (a), (b), (c) and (d), and
in (e), (f) or (g) of this subsection have been satisfied.
5.3 Conditions Subsequent to Closing.
As of the Closing Date, it is the present intention of the Borrower, as
a general matter, to lease, rather than own, real property in its business. To
that end, the Borrower plans to market real property owned by it with an intent
to lease back the real property necessary and useful in its operations and to
dispose of real property which is not needed in the operation of its business.
The Borrower agrees that to the extent domestic members of the Consolidated
Group shall continue to own real property owned as of the Closing Date twelve
(12) months after the Closing Date, the following conditions subsequent shall be
satisfied:
(a) Execution of Mortgages. Receipt of multiple counterparts
of the Mortgages in each case executed by a duly authorized officer of each
party thereto and in each case conforming to the requirements of the Credit
Agreement.
(b) Surveys. Receipt of copies of recent ALTA surveys of each
of the Mortgaged Properties by registered engineers or land surveyors, in form
and detail (including the location of special flood hazard areas) acceptable to
the Administrative Agent.
(c) Title Policies. Receipt of standard ALTA mortgagee
policies insuring the priority of the Mortgages in amounts and from companies
acceptable to the Administrative Agent and the Required Lenders. The title
policies shall include only such exceptions as are acceptable to the
Administrative Agent. Copies of recorded documentation relating to all such
exceptions will be provided to the Administrative Agent.
(d) Appraisals. Receipt of appraisals of certain of the
Mortgaged Property, in form and content satisfactory to the Administrative
Agent.
(e) Environmental Reports. Receipt of copies of environmental
assessment reports and other environmental documentation, if any, relating to
the Mortgaged Properties, which reports shall be in form and detail and which
results and conclusions shall be satisfactory to the Administrative Agent and
the Required Lenders.
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SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Credit Agreement and to make
Extensions of Credit herein provided for, each of the members of the
Consolidated Group parties hereto hereby represents and warrants to the
Administrative Agent and to each Lender that:
6.1 Financial Condition.
Each of the financial statements described below (copies of which have
heretofore been provided to the Administrative Agent for distribution to the
Lenders), have been prepared in accordance with GAAP consistently applied
throughout the periods covered thereby, are complete and correct in all material
respects and present fairly the financial condition and results from operations
of the entities and for the periods specified, subject in the case of interim
company-prepared statements to normal year-end adjustments:
(i) a consolidated and consolidating balance sheet of the
Borrower and its consolidated subsidiaries dated as of April 26, 1997,
together with related statements income and cash flows certified by
Price Waterhouse LLP, certified public accountants; and
(ii) a consolidated and consolidating balance sheet of the
Borrower and its consolidated subsidiaries dated as of January 24, 1998
certified by Price Waterhouse LLP, certified public accountants.
6.2 No Changes or Restricted Payments.
Since the date of the financial statements referenced in Section
6.1(i), there has been no circumstance, development or event relating to or
affecting the members of the Consolidated Group which has had or would be
reasonably expected to have a Material Adverse Effect.
6.3 Organization; Existence; Compliance with Law.
Each of the members of the Consolidated Group (a) is duly organized,
validly existing in good standing under the laws of the jurisdiction of its
incorporation or organization, (b) has the corporate or other necessary power
and authority, and the legal right to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign entity and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not, in the aggregate, have a Material
Adverse Effect, and (d) is in compliance with all Requirements of Law, except to
the extent that the failure to comply therewith would not, in the aggregate, be
reasonably expected to have a Material Adverse Effect.
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6.4 Power; Authorization; Enforceable Obligations.
Each of the Credit Parties has the corporate or other necessary power
and authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party and has taken all necessary corporate or other
action to authorize the execution, delivery and performance by it of the Credit
Documents to which it is a party. No consent or authorization of, filing with,
notice to or other act by or in respect of, any Governmental Authority or any
other Person is required in connection with acceptance of extensions of credit
or the making of the guaranties hereunder or with the execution, delivery or
performance of any Credit Documents by the Credit Parties (other than those
which have been obtained, such filings as are required by the Securities and
Exchange Commission and to fulfill other reporting requirements with
Governmental Authorities) or with the validity or enforceability of any Credit
Document against the Credit parties (except such filings as are necessary in
connection with the perfection of the Liens created by such Credit Documents).
Each Credit Document to which it is a party constitutes a legal, valid and
binding obligation of such Credit Party enforceable against such Credit Party in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law.
6.5 No Legal Bar.
The execution, delivery and performance of the Credit Documents, the
borrowings hereunder and the use of the Extensions of Credit will not violate
any Requirement of Law or any Contractual Obligation of any member of the
Consolidated Group (except those as to which waivers or consents have been
obtained), and will not result in, or require, the creation or imposition of any
Lien on any of their respective properties or revenues pursuant to any
Requirement of Law or Contractual Obligation other than the Liens arising under
or contemplated in connection with the Credit Documents. No member of the
Consolidated Group is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a Material
Adverse Effect.
6.6 No Material Litigation.
No claim, litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the best knowledge of the
Credit Parties, threatened by or against, any members of the Consolidated Group
or against any of their respective properties or revenues which (a) relate to
the Credit Documents or any of the transactions contemplated hereby or thereby,
(b) if adversely determined, could reasonably be expected to have a Material
Adverse Effect. Set forth on Schedule 6.6 is a summary of all claims,
litigation, investigations and proceedings pending or, to the best knowledge of
the Credit Parties, threatened by or against the members of the Consolidated
Group or against any of their respective properties or revenues seeking damages
in excess of $100,000 in each case, and none of such actions, individually or in
the aggregate, is reasonably expected to have a Material Adverse Effect.
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6.7 No Default.
No Default or Event of Default has occurred and is continuing.
6.8 Ownership of Property; Liens.
Each of members of the Consolidated Group has good record and
marketable title in fee simple to, or a valid leasehold interest in, all its
material real property, and good title to, or a valid leasehold interest in, all
its other material property, and none of such property is subject to any Lien,
except for Permitted Liens.
6.9 Intellectual Property.
Each of the members of the Consolidated Group owns, or has the legal
right to use, all United States trademarks, tradenames, copyrights, technology,
know-how and processes, if any, necessary for each of them to conduct its
business as currently conducted (the "Intellectual Property") except for those
the failure to own or have such legal right to use could not be reasonably
expected to have a Material Adverse Effect. No claim has been asserted and is
pending by any Person challenging or questioning the use of any such
Intellectual Property or the validity or effectiveness of any such Intellectual
Property, nor does any Credit Party know of any such claim, and the use of such
Intellectual Property by the members of the Consolidated Group does not infringe
on the rights of any Person, except for such claims and infringements that in
the aggregate, could not be reasonably expected to have a Material Adverse
Effect.
6.10 No Burdensome Restrictions.
No Requirement of Law or Contractual Obligation of the members of the
Consolidated Group could be reasonably expected to have a Material Adverse
Effect.
6.11 Taxes.
Each of the members of the Consolidated Group has filed or caused to be
filed all United States federal income tax returns and all other material tax
returns which, to the best knowledge of the Credit Parties, are required to be
filed and has paid (a) all taxes shown to be due and payable on said returns or
(b) all taxes shown to be due and payable on any assessments of which it has
received notice made against it or any of its property and all other taxes, fees
or other charges imposed on it or any of its property by any Governmental
Authority (other than any (i) taxes, fees or other charges with respect to which
the failure to pay, in the aggregate, could not reasonably be expected to have a
Material Adverse Effect or (ii) taxes, fees or other charges the amount or
validity of which are currently being contested and with respect to which
reserves in conformity with GAAP have been provided on the books of such
Person), and no tax Lien has been filed, and, to the best knowledge of the
Credit Parties, no claim is being asserted, with respect to any such tax, fee or
other charge.
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6.12 ERISA
Except as could not reasonably be expected to have a Material Adverse
Effect:
(a) To the knowledge of the Credit Parties, during the five-year period
prior to the date on which this representation is made or deemed made: (i) no
ERISA Event has occurred and no event or condition has occurred or exists as a
result of which any ERISA Event could reasonably be expected to occur, with
respect to any Plan; (ii) no "accumulated funding deficiency," as such term is
defined in Section 302 of ERISA and Section 412 of the Code, whether or not
waived, has occurred with respect to any Plan; (iii) each Plan has been
maintained, operated, and funded in compliance with its own terms and in
material compliance with the provisions of ERISA, the Code, and any other
applicable federal or state laws; and (iv) no lien in favor of the PBGC or a
Plan has arisen or is reasonably likely to arise on account of any Plan.
(b) The actuarial present value of all "benefit liabilities" (as
defined in Section 4001(a)(16) of ERISA), whether or not vested, under each
Single Employer Plan, as of the last annual valuation date prior to the date on
which this representation is made or deemed made (determined, in each case, in
accordance with Financial Accounting Standards Board Statement 87, utilizing the
actuarial assumptions used in such Plan's most recent actuarial valuation
report), did not exceed as of such valuation date the fair market value of the
assets of such Plan.
(c) No member of the Consolidated Group nor any ERISA Affiliate has
incurred, or, to the best knowledge of the Credit Parties, could be reasonably
expected to incur, any withdrawal liability under ERISA to any Multiemployer
Plan or Multiple Employer Plan. No member of the Consolidated Group nor any
ERISA Affiliate would become subject to any withdrawal liability under ERISA if
any member of the Consolidated Group or any ERISA Affiliate were to withdraw
completely from all Multiemployer Plans and Multiple Employer Plans as of the
valuation date most closely preceding the date on which this representation is
made or deemed made. No member of the Consolidated Group nor any ERISA Affiliate
has received any notification that any Multiemployer Plan is in reorganization
(within the meaning of Section 4241 of ERISA), is insolvent (within the meaning
of Section 4245 of ERISA), or has been terminated (within the meaning of Title
IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit
Parties, reasonably expected to be in reorganization, insolvent, or terminated.
(d) No prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has
occurred with respect to a Plan which has subjected or may subject any member of
the Consolidated Group or any ERISA Affiliate to any liability under Sections
406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any
agreement or other instrument pursuant to which any member of the Consolidated
Group or any ERISA Affiliate has agreed or is required to indemnify any person
against any such liability.
(e) No member of the Consolidated Group nor any ERISA Affiliates has
any material liability with respect to "expected post-retirement benefit
obligations" within the meaning of the Financial Accounting Standards Board
Statement 106. Each Plan which is a welfare plan (as
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defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section
4980B of the Code apply has been administered in compliance in all material
respects of such sections.
6.13 Governmental Regulations, Etc.
(a) No part of the proceeds of the Extensions of Credit hereunder will
be used, directly or indirectly, for the purpose of purchasing or carrying any
"margin stock" within the meaning of Regulation U, or for the purpose of
purchasing or carrying or trading in any securities. If requested by any Lender
or the Administrative Agent, the Borrower will furnish to the Administrative
Agent and each Lender a statement to the foregoing effect in conformity with the
requirements of FR Form U-1 referred to in said Regulation U. No indebtedness
being reduced or retired out of the proceeds of the Extensions of Credit
hereunder was or will be incurred for the purpose of purchasing or carrying any
margin stock within the meaning of Regulation U or any "margin security" within
the meaning of Regulation T. "Margin stock" within the meanings of Regulation U
does not constitute more than 25% of the value of the consolidated assets of the
Borrower and its Subsidiaries. None of the transactions contemplated by this
Credit Agreement (including, without limitation, the direct or indirect use of
the proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, or regulations issued pursuant thereto, or Regulation T, U or X.
(b) None of the members of the Consolidated Group is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940, each as amended. In addition,
none of the members of the Consolidated Group is (i) an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended, and is not controlled by such a company, or (ii) a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of
a "holding company" or of a "subsidiary" of a "holding company", within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
(c) No director, executive officer or principal shareholder of any
member of the Consolidated Group is a director, executive officer or principal
shareholder of any Lender. For the purposes hereof the terms "director",
"executive officer" and "principal shareholder" (when used with reference to any
Lender) have the respective meanings assigned thereto in Regulation O issued by
the Board of Governors of the Federal Reserve System.
(d) Each of the members of the Consolidated Group has obtained all
material licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its respective Property and to the conduct of its
business.
(e) None of the members of the Consolidated Group is in violation of
any applicable statute, regulation or ordinance of the United States of America,
or of any state, city, town, municipality, county or any other jurisdiction, or
of any agency thereof (including without limitation, environmental laws and
regulations), which violation could reasonably be expected to have a Material
Adverse Effect.
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(f) Each of the members of the Consolidated Group is current with all
material reports and documents, if any, required to be filed with any state or
federal securities commission or similar agency and is in full compliance in all
material respects with all applicable rules and regulations of such commissions.
6.14 Subsidiaries.
Set forth on Schedule 6.14 are all the Subsidiaries of the Borrower at
the Closing Date, the jurisdiction of their incorporation and the direct or
indirect ownership interest of the Borrower therein.
6.15 Purpose of Extensions of Credit.
Extensions of Credit hereunder may be used to refinance existing
indebtedness (including intercompany indebtedness owing to U.S. Office Products,
Inc.), to finance working capital, capital expenditures and other lawful
corporate purposes, including acquisitions permitted hereunder.
6.16 Environmental Matters.
Except as could not reasonably be expected to have a Material Adverse
Effect:
(a) Each of the facilities and properties owned, leased or operated by
the members of the Consolidated Group (the "Properties") and, to the knowledge
of the Credit Parties, all operations at the Properties are in compliance with
all applicable Environmental Laws, and there is no violation of any
Environmental Law with respect to the Properties or the businesses operated by
the members of the Consolidated Group (the "Businesses"), and, to the knowledge
of the Credit Parties, there are no conditions relating to the Businesses or
Properties that could reasonably be expected to give rise to liability under any
applicable Environmental Laws.
(b) None of the Properties contains, or, to the knowledge of the Credit
Parties, has previously contained, any Materials of Environmental Concern at, on
or under the Properties in amounts or concentrations that constitute or
constituted a violation of, or could reasonably be expected to give rise to
liability under, Environmental Laws.
(c) None of the Credit Parties has received any written or verbal
notice of, or inquiry from any Governmental Authority regarding, any violation,
alleged violation, non-compliance, liability or potential liability regarding
environmental matters or compliance with Environmental Laws with regard to any
of the Properties or the Businesses, nor does any Credit Party have knowledge or
reason to believe that any such notice will be received or is being threatened.
(d) To the knowledge of the Credit Parties, Materials of Environmental
Concern have not been transported or disposed of from the Properties, or
generated, treated, stored or disposed of at, on or under any of the Properties
or any other location, in each case by or on behalf any
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members of the Consolidated Group in violation of, or in a manner that would be
reasonably likely to give rise to liability under, any applicable Environmental
Law.
(e) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of any Credit Party, threatened, under any
Environmental Law to which any member of the Consolidated Group is or is
reasonably likely to be named as a party, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law
with respect to any member of the Consolidated Group, the Properties or the
Businesses.
(f) To the knowledge of the Credit Parties, there has been no release
or, threat of release of Materials of Environmental Concern at or from the
Properties, or arising from or related to the operations (including, without
limitation, disposal) of any member of the Consolidated Group in connection with
the Properties or otherwise in connection with the Businesses, in violation of
or in amounts or in a manner that could reasonably be expected to give rise to
liability under Environmental Laws.
SECTION 7
AFFIRMATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith have been paid in full, each
of the members of the Consolidated Group party hereto shall:
7.1 Financial Statements.
Furnish, or cause to be furnished, to the Administrative Agent for
distribution to the Lenders:
(a) Audited Financial Statements. As soon as available, but in
any event within 120 days after the end of each fiscal year, an audited
consolidated balance sheet of the Borrower and its subsidiaries as of
the end of the fiscal year and the related consolidated statements of
income, retained earnings, shareholders' equity and cash flows for the
year, audited by Price Waterhouse LLP, or other firm of independent
certified public accountants of nationally recognized standing
reasonably acceptable to the Required Lenders, setting forth in each
case in comparative form the figures for the previous year, reported
without a "going concern" or like qualification or exception, or
qualification indicating that the scope of the audit was inadequate to
permit such independent certified public accountants to certify such
financial statements without such qualification.
(b) Company-Prepared Financial Statements. As soon as
available, but in any event
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(i) within 50 days after the end of each of the first
three fiscal quarters, a company-prepared consolidated balance
sheet of the Borrower and its subsidiaries as of the end of
the quarter and related company-prepared consolidated
statements of income, retained earnings, shareholders' equity
and cash flows for such quarterly period and for the fiscal
year to date;
(ii) within 60 days after the end of the fourth
fiscal quarter, a company-prepared consolidated balance sheet
of the Borrower and its subsidiaries as of the end of the
quarter and related company-prepared consolidated statements
of income, retained earnings, shareholders' equity and cash
flows for such quarterly period and for the fiscal year to
date;
(iii) Prior to the end of each fiscal year, an annual
business plan and budget for the members of the Consolidated
Group, containing, among other things, pro forma financial
statements for the next fiscal year,
in each case setting forth in comparative form the consolidated figures
for the corresponding period or periods of the preceding fiscal year or
the portion of the fiscal year ending with such period, as applicable,
in each case subject to normal recurring year-end audit adjustments.
All such financial statements shall be complete and correct in all material
respects (subject, in the case of interim statements, to normal recurring
year-end audit adjustments) and shall be prepared in reasonable detail and, in
the case of the annual and quarterly financial statements provided in accordance
with subsections (a) and (b) above, in accordance with GAAP (subject to the
adjustments specified in Section 1.3) applied consistently throughout the
periods reflected therein and further accompanied by a description of, and an
estimation of the effect on the financial statements on account of, a change in
the application of accounting principles as provided in Section 1.3.
7.2 Certificates; Other Information.
Furnish, or cause to be furnished, to the Administrative Agent for
distribution to the Lenders:
(a) Accountant's Certificate and Reports. Concurrently with
the delivery of the financial statements referred to in subsection
7.1(a) above, a certificate of the independent certified public
accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of
any Default or Event of Default with respect to the financial covenants
contained in Section 7.9, except as specified in such certificate.
(b) Officer's Certificate. Concurrently with the delivery of
the financial statements referred to in Sections 7.1(a) and 7.1(b)
above, a certificate of a Responsible
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Officer stating that, to the best of such Responsible Officer's
knowledge and belief, (i) the financial statements fairly present in
all material respects the financial condition of the parties covered by
such financial statements, (ii) during such period the members of the
Consolidated Group have observed or performed in all material respects
the covenants and other agreements hereunder and under the other Credit
Documents relating to them, and satisfied in all material respects the
conditions, contained in this Credit Agreement to be observed,
performed or satisfied by them, and (iii) such Responsible Officer has
obtained no knowledge of any Default or Event of Default except as
specified in such certificate. Such certificate shall include the
calculations required to indicate compliance with Section 7.9. A form
of Officer's Certificate is attached as Schedule 7.2(b).
(c) Accountants' Reports. Promptly upon receipt, a copy of any
final (as distinguished from a preliminary or discussion draft)
"management letter" or other similar report submitted by independent
accountants or financial consultants to the members of the Consolidated
Group in connection with any annual, interim or special audit.
(d) Capital Budget Reports. Annually, within 30 days after the
end of each fiscal year, a capital expenditures budget for the
Consolidated Group, and quarterly within 45 days after the end of each
fiscal quarter, a report of capital expenditures, asset sales and
dispositions (including sale-leasebacks and the terms thereof) and
reinvestment of net proceeds thereof for the fiscal quarter and
including information for the fiscal year-to-date and a comparison
against both the prior fiscal year and the capital budget, in form
reasonably acceptable to the Administrative Agent, demonstrating, among
other things, compliance with the provisions of Sections 3.4(b), 7.9(d)
and 8.4(b).
(e) Public Information. Within thirty days after the same are
sent, copies of all reports (other than those otherwise provided
pursuant to subsection 7.1) and other financial information which any
member of the Consolidated Group sends to its public stockholders, and
within thirty days after the same are filed, copies of all financial
statements and non-confidential reports which any member of the
Consolidated Group may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental
Authority.
(f) Other Information. Promptly, such additional financial and
other information as the Administrative Agent, at the request of any
Lender, may from time to time reasonably request.
7.3 Notices.
Give notice to the Administrative Agent (which shall promptly transmit
such notice to each Lender) of:
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(a) Defaults. Immediately (and in any event within two (2)
Business Days) after a Responsible Officer of any Credit Party acquires
actual knowledge of the occurrence of any Default or Event of Default.
(b) Contractual Obligations. Promptly, the occurrence of any
default or event of default by any member of the Consolidated Group
under any Contractual Obligation to which it is a party which could
reasonably be expected to have a Material Adverse Effect.
(c) Legal Proceedings. Promptly, any litigation, or any
investigation or proceeding (including without limitation, any
environmental proceeding) of which any member of the Consolidated Group
has knowledge, or any material development in respect thereof of which
any member of the Consolidated Group has knowledge, affecting any
member of the Consolidated Group which has a reasonable possibility of
an adverse determination, is not covered by insurance and could
reasonably be expected to have a Material Adverse Effect.
(d) ERISA. Promptly, after any Responsible Officer of the
Borrower knows or has reason to know of the likely occurrence of a
Material Adverse Effect as a result of (i) any event or condition,
including, but not limited to, any Reportable Event, that constitutes,
or can reasonably be expected to lead to, an ERISA Event; (ii) with
respect to any Multiemployer Plan, the receipt of notice as prescribed
in ERISA or otherwise of any withdrawal liability assessed against any
of their ERISA Affiliates, or of a determination that any Multiemployer
Plan is in reorganization or insolvent (both within the meaning of
Title IV of ERISA); (iii) the failure to make full payment on or before
the due date (including extensions) thereof of all amounts which the
members of the Consolidated Group or any ERISA Affiliate are required
to contribute to each Plan pursuant to its terms and as required to
meet the minimum funding standard set forth in ERISA and the Code with
respect; or (iv) any change in the funding status of any Plan that
reasonably could be expected to have a Material Adverse Effect;
together with a description of any such event or condition or a copy of
any such notice and a statement by the chief financial officer of the
Borrower briefly setting forth the details regarding such event,
condition, or notice, and the action, if any, which has been or is
being taken or is proposed to be taken by the Credit Parties with
respect thereto. Promptly upon request, the members of the Consolidated
Group shall furnish the Administrative Agent and the Lenders with such
additional information concerning any Plan as may be reasonably
requested, including, but not limited to, copies of each annual
report/return (Form 5500 series), as well as all schedules and
attachments thereto required to be filed with the Department of Labor
and/or the Internal Revenue Service pursuant to ERISA and the Code,
respectively, for each "plan year" (within the meaning of Section 3(39)
of ERISA).
(e) Other. Promptly, any other development or event which a
Responsible Officer of the Borrower determines could reasonably be
expected to have a Material Adverse Effect.
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Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the relevant Credit Parties propose
to take with respect thereto.
7.4 Payment of Obligations.
Pay, discharge or otherwise satisfy at or before maturity or before
they become delinquent, as the case may be, in accordance with prudent business
practice (subject, where applicable, to specified grace periods) all material
obligations of each member of the Consolidated Group of whatever nature and any
additional costs that are imposed as a result of any failure to so pay,
discharge or otherwise satisfy such obligations, except when the amount or
validity of such obligations and costs is currently being contested in good
faith by appropriate proceedings and reserves, if applicable, in conformity with
GAAP with respect thereto have been provided on the books of the Consolidated
Group, as the case may be.
7.5 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now
conducted by it on the date hereof and similar or related businesses with, and
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges, licenses and
franchises necessary or desirable in the normal conduct of its business; comply
with all Contractual Obligations and Requirements of Law applicable to it except
to the extent that failure to comply therewith would not, in the aggregate, have
a Material Adverse Effect.
7.6 Maintenance of Property; Insurance.
Keep all material property used in its business in reasonably good
working order and condition (ordinary wear and tear excepted); maintain with
financially sound and reputable insurance companies casualty, liability and such
other insurance (which may include plans of self-insurance) with such coverage
and deductibles, and in such amounts as are consistent with prudent business
practice and in any event consistent with normal industry practice (except to
any greater extent as may be required by the terms of any of the other Credit
Documents); and furnish to the Administrative Agent, upon written request, full
information as to the insurance carried.
7.7 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and
correct entries in conformity with GAAP and all Requirements of Law shall be
made of all dealings and transactions in relation to its businesses and
activities; and permit, during regular business hours and upon reasonable notice
by the Administrative Agent, the Administrative Agent to visit and inspect any
of its properties and examine and make abstracts (including photocopies) from
any of its books and records (other than materials protected by the
attorney-client privilege or materials which the Credit Parties may not disclose
without violation of a confidentiality obligation binding upon them) at any
reasonable time, and to discuss the business, operations, properties
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and financial and other condition of the members of the Consolidated Group with
officers and employees of the members of the Consolidated Group and with their
independent certified public accountants. The cost of the inspection referred to
in the preceding sentence shall be for the account of the Lenders unless an
Event of Default has occurred and is continuing, in which case the cost of such
inspection shall be for the account of the Credit Parties.
7.8 Environmental Laws.
(a) Comply in all material respects with, and take reasonable actions
to ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws and obtain and comply in all
material respects with and maintain, and take reasonable actions to ensure that
all tenants and subtenants obtain and comply in all material respects with and
maintain, any and all licenses, approvals, notifications, registrations or
permits required by applicable Environmental Laws except to the extent that
failure to do so could not reasonably be expected to have a Material Adverse
Effect;
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws except to the extent that the same are being contested in good faith by
appropriate proceedings and the failure to do or the pendency of such
proceedings could not reasonably be expected to have a Material Adverse Effect;
and
(c) Defend, indemnify and hold harmless the Administrative Agent and
the Lenders, and their respective employees, agents, officers and directors,
from and against any and all claims, demands, penalties, fines, liabilities,
settlements, damages, costs and expenses of whatever kind or nature known or
unknown, contingent or otherwise, arising out of, or in any way relating to the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the members of the Consolidated Group or the
Properties, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, reasonable attorney's and
consultant's fees, investigation and laboratory fees, response costs, court
costs and litigation expenses, except to the extent that any of the foregoing
arise out of the gross negligence or willful misconduct of the party seeking
indemnification therefor. The agreements in this paragraph shall survive
repayment of the Loans and all other amounts payable hereunder, and termination
of the Commitments.
7.9 Financial Covenants.
(a) Consolidated Leverage Ratio. As of the end of each fiscal
quarter, the Consolidated Leverage Ratio shall be not greater than
<TABLE>
<CAPTION>
<S> <C>
for the fiscal quarter ending on or about October 30, 1998 4.30:1.0
for the fiscal quarter ending on or about July 30 of each year thereafter 4.75:1.0
for each other fiscal quarter ending after the fiscal quarter ending on or about October 30, 1998 4.0:1.0
</TABLE>
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(b) Consolidated Fixed Charge Coverage Ratio. As of the end of each
fiscal quarter to occur during the periods shown, the Consolidated Fixed Charge
Coverage Ratio shall be not less than 3.0:1.0.
(c) Consolidated Net Worth. As of the end of each fiscal quarter (after
giving effect to the IPO), Consolidated Net Worth shall be not less than
$90,000,000 plus the net cash proceeds from the IPO plus on the last day of each
fiscal quarter to occur after the Closing Date, 50% of Consolidated Net Income
for the fiscal quarter then ended, such increases to be cumulative, plus 100% of
the net proceeds from Equity Transactions occurring after the Closing Date.
(d) Capital Expenditures. Members of the Consolidated Group will not
make Capital Expenditures in any fiscal year in excess of:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year 1998 $5,000,000
Fiscal year 1999 $6,000,000
Fiscal year 2000 $7,000,000
Fiscal year 2001 $8,000,000
Fiscal year 2002 $9,000,000
Fiscal year 2003 $10,000,000
</TABLE>
The unused portion of Capital Expenditures permitted but not used in any fiscal
year may be carried over and used in the next fiscal year (one-year carry-over).
7.10 Agency Fees.
Pay to the Administrative Agent the annual agency fee and comply with
the other agreements provided for in the Administrative Agent's Fee Letter.
7.11 Additional Guaranties and Stock Pledges.
(a) Domestic Subsidiaries. Where Domestic Subsidiaries of the Borrower
which are not Credit Parties hereunder (the "Non-Guarantor Subsidiaries") shall
at any time constitute more than (the "Threshold Requirement"):
(i) in any instance for any such Non-Guarantor Subsidiary,
five percent (5%) of consolidated assets for the Consolidated Group or
five percent (5%) of consolidated revenues for the Consolidated Group,
or
(ii) in the aggregate for all such Non-Guarantor Subsidiaries,
ten percent (10%) of consolidated assets for the Consolidated Group or
ten percent (10%) of consolidated revenues for the Consolidated Group,
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then the Borrower shall (i) promptly notify the Administrative Agent thereof,
and promptly cause such Domestic Subsidiary or Subsidiaries to become a
Guarantor by execution of a Joinder Agreement, such that immediately after
joinder as a Guarantor, the remaining Non-Guarantor Subsidiaries shall not in
any instance, or collectively, exceed the Threshold Requirement, (ii) deliver
with the Joinder Agreement, supporting resolutions, incumbency certificates,
corporate formation and organizational documentation and opinions of counsel as
the Administrative Agent may reasonably request, and (iii) deliver stock
certificates and related pledge agreements or pledge joinder agreements
evidencing the pledge of 100% of the Voting Stock of all Domestic Subsidiaries
(whether or not they are Guarantors) and 65% of the Voting Stock of all Foreign
Subsidiaries, together with undated stock transfer powers executed in blank.
(b) Foreign Subsidiaries. At any time any Person becomes a Foreign
Subsidiary, the Borrower will promptly notify the Administrative Agent thereof
and cause (i) delivery of supporting resolutions, incumbency certificates,
corporation formation and organizational documentation and opinions of counsel
as the Administrative Agent may reasonably request, and (ii) delivery of stock
certificates (where required for perfection under local law) and a related
pledge agreement or pledge joinder agreement evidencing the pledge of 65% of the
Voting Stock of such Foreign Subsidiary and of 65% of the Voting Stock of each
of its Domestic Subsidiaries and 65% of the Voting Stock of each of its Foreign
Subsidiaries, together in each case with undated stock transfer powers executed
in blank.
7.12 Ownership of Subsidiaries.
Except to the extent otherwise permitted in Section 8.4(b) and Section
8.7 and to the extent as would not cause a Change of Control and except as set
forth on Schedule 6.14, the Borrower shall, directly or indirectly, own at all
times 100% of the Voting Stock of each of its Subsidiaries.
7.13 Use of Proceeds.
Extensions of Credit will be used solely for the purposes provided in
Section 6.15.
7.14 Year 2000 Compatibility.
Take all action necessary to assure that its computer based systems are
able to operate and effectively process data including dates on and after
January 1, 2000, and, at the reasonable request of the Administrative Agent or
the Required Lenders, provide evidence to the Lenders of such year 2000
compatibility.
7.15 Further Assurances in respect of Assumed Mortgage
Indebtedness.
As of the Closing Date, it is the present intention of the Borrower, as
a general matter, to lease, rather than own, real property in its business. To
that end, the Borrower plans to market real property owned by it with an intent
to lease back the real property necessary and useful in its operations and to
dispose of real property which is not needed in the operation of its business.
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Consistent with this approach, the Borrower agrees that in respect of real
property constituting an acquisition permitted under Section 8.4, including such
real property which is subject to a mortgage lien permitted hereunder ("Acquired
Real Property"), it will, and will cause its Domestic Subsidiaries to, sell and
lease-back or sell and dispose of such Acquired Real Property, within 18 months
from the date of acquisition, in the case of Acquired Real Property with a fair
market value of less than $5 million for any individual property, and within 12
months from the date of acquisition in the case of Acquired Real Property with a
fair market value of $5 million or more for any individual property (the
"Acquired Real Property Disposition Period"). In the event that any Acquired
Real Property remains at the end of the applicable Acquired Real Property
Disposition Period, (i) in the case of properties with a fair market value of $5
million or more for any individual property, the Borrower will cause such
properties to be released from the mortgage Liens in favor of other lenders, if
any, and grant mortgage Liens in favor of the Administrative Agent to secure the
Obligations hereunder, together with the items referenced in Section 5.3; and
(ii) in the case of properties with a fair market value of less than $5 million
for any individual property, then if and to the extent the fair market value of
all such properties shall exceed $15 million in the aggregate, the Borrower will
cause a sufficient number of such properties to be released from the mortgage
Liens in favor of other lenders, if any, and grant mortgage Liens in favor of
the Administrative Agent to secure the Obligations hereunder, together with the
items referenced in Section 5.3, such that after giving effect thereto the fair
market value of such properties not subject to the mortgage Liens in favor of
the Administrative Agent to secure the Obligations hereunder shall not exceed
$15 million in the aggregate. Failure to release Acquired Real Property from the
mortgage Liens and to provide mortgage Liens in favor of the Administrative
Agent to secure the Obligations as required hereunder (together with the other
items referenced in Section 5.3) by the end of the Acquired Real Property
Disposition Period will constitute a default under Section 8.2, in the absence
of a consent by the Required Lenders.
SECTION 8
NEGATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith, have been paid in full, no
member of the Consolidated Group shall:
8.1 Indebtedness.
Contract, create, incur, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness arising or existing under this Credit
Agreement and the other Credit Documents;
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(b) Indebtedness set forth in Schedule 8.1, and renewals,
refinancings and extensions thereof on terms and conditions no less
favorable than for such existing Indebtedness;
(c) Capital Lease Obligations and Indebtedness incurred, in
each case, to provide all or a portion of the purchase price or costs
of construction of an asset or, in the case of a sale/leaseback
transaction as described in Section 8.11, to finance the value of such
asset owned by a member of the Consolidated Group, provided that (i)
such Indebtedness when incurred shall not exceed the purchase price or
cost of construction of such asset or, in the case of a sale/leaseback
transaction, the fair market value of such asset, (ii) no such
Indebtedness shall be refinanced for a principal amount in excess of
the principal balance outstanding thereon at the time of such
refinancing plus the reasonable expenses of such refinancing, and (iii)
the total amount of all such Indebtedness shall not exceed $5,000,000
at any time outstanding;
(d) Indebtedness and obligations in connection with Permitted
Securitization Transactions; provided that the total Attributed
Principal Amount for all such financings shall not exceed $50,000,000
at any time;
(e) Indebtedness and obligations owing under interest rate
protection agreements relating to the Obligations hereunder and under
interest rate, commodities and foreign currency exchange protection
agreements entered into in the ordinary course of business to manage
existing or anticipated risks and not for speculative purposes;
(f) unsecured intercompany Indebtedness owing by a member of
the Consolidated Group to another member of the Consolidated Group;
(g) Subordinated Debt of the Borrower;
(h) mortgage Indebtedness assumed in connection with an
acquisition permitted under Section 8.4, and any refinancing,
refunding, renewal or extension thereof, provided that (i) such
Indebtedness was in existence as of the date of the acquisition and was
not incurred or assumed in contemplation thereof, (ii) the amount of
any such mortgage Indebtedness shall not be increased in connection
with any refinancing, refunding, renewal or extension (exclusive of
reasonable premiums, fees and expenses in connection therewith), and
(iii) the Borrower shall be compliance with the requirements of Section
7.15;
(i) other unsecured Indebtedness of the Borrower of up to
$5,000,000 in the aggregate at any time outstanding; and
(j) Support Obligations with respect to Indebtedness permitted
under this Section 8.1.
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8.2 Liens.
Contract, create, incur, assume or permit to exist any Lien with
respect to any of their respective property or assets of any kind (whether real
or personal, tangible or intangible), whether now owned or hereafter acquired,
except for Permitted Liens.
8.3 Nature of Business.
Alter the character of their business in any material respect from that
conducted as of the Closing Date and similar or related businesses.
8.4 Consolidation, Merger, Sale or Purchase of Assets, etc.
Other than those transactions contemplated in the Borrower's Form S-1
Registration Statement under the Securities Act of 1933 with respect to the IPO,
(a) Enter into a transaction of merger or consolidation,
except
(i) a member of the Consolidated Group may be a party
to a transaction of merger or consolidation with another member of the
Consolidated Group, provided that (A) if the Borrower is a party
thereto, it shall be the surviving corporation, (B) if a Guarantor is a
party thereto and the Borrower is not a party thereto, a Guarantor
shall be the surviving corporation or the surviving corporation shall
be a Domestic Subsidiary and shall become a Guarantor hereunder as an
Additional Credit Party pursuant to Section 7.11 concurrently
therewith, and (C) no Default or Event of Default shall exist either
immediately prior to or immediately after giving effect thereto; and
(ii) a member of the Consolidated Group (other than
the Borrower) may be a party to a transaction of merger or
consolidation with any other Person, provided that (A) the provisions
of Section 7.11 regarding joinder of certain Subsidiaries as Additional
Credit Parties hereunder shall be complied with, (B) no Default or
Event of Default shall exist either immediately prior to or immediately
after giving effect thereto, and (C) the provisions of subsection (c)
of this Section shall be complied with.
(b) Sell, lease, transfer or otherwise dispose of assets,
property and/or operations (including any sale-leaseback transaction, but
excluding the sale of inventory in the ordinary course of business, the sale or
disposition of plant, property and equipment which is no longer useful in the
business or as to which the proceeds therefrom are reinvested in plant, property
and equipment within six months thereof), other than to another Credit Party,
which
(i) in the aggregate in any fiscal year shall
constitute more than ten percent (10%) of total assets for the
Consolidated Group as of the immediately preceding fiscal year, or in
the aggregate in any fiscal year shall account for more than ten
percent (10%) of Consolidated Net Income for the immediately preceding
fiscal year; or
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(ii) would cause a Default or Event of Default to
exist after giving effect thereto on a Pro Forma Basis,
without the prior written consent of the Required Lenders (which consent shall
not be unreasonably withheld or delayed).
(c) Acquire all or any portion of the capital stock or other
ownership interest in any Person which is not a Subsidiary or all or any
substantial portion of the assets, property and/or operations of a Person which
is not a Subsidiary, without the prior written consent of the Required Lenders
(which consent shall not be unreasonably withheld or delayed), unless
(i) in the case of an acquisition of capital stock or
other ownership interest after giving effect thereto, such Person will
not be a Subsidiary, then such acquisition will not cause a violation
of Section 8.5;
(ii) in the case of an acquisition of capital stock
or other ownership interest, after giving effect thereto, such Person
will be a Subsidiary, or in the case of an acquisition of assets,
property and/or operations, then
(A) the cost of any such acquisition
(or series of related transactions) shall not exceed $50 million in any
instance;
(B) the acquisition is in the same or a
similar or related line of business as that of the Credit Parties;
(C) the Board of Directors of the Person
which is the subject of the acquisition shall have approved the
acquisition; and
(D) no Default or Event of Default would
exist after giving effect thereto on a Pro Forma Basis.
(d) In the case of the Borrower and any Subsidiary which is
not wholly-owned, liquidate, wind-up or dissolve, whether voluntarily or
involuntarily (or suffer to permit any such liquidation or dissolution).
8.5 Advances, Investments and Loans.
Lend money or extend credit or make advances to any Person, or purchase
or acquire any stock, obligations or securities of, or any other interest in, or
make any capital contribution to, or otherwise make an Investment in, any Person
except for Permitted Investments.
8.6 Transactions with Affiliates.
Enter into or permit to exist any transaction or series of
transactions, whether or not in the ordinary course of business, with any
officer, director, shareholder or Affiliate other than (i)
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transactions permitted by Section 8.1, Section 8.4(b), Section 8.5 or Section
8.10, (ii) customary fees and expenses paid to directors, (iii) transactions
between the Borrower and a wholly owned Domestic Guarantor, (iv) transactions
pursuant to agreements existing as of the Closing Date and set forth on Schedule
8.6 hereto [to include Ledecky Services Agreement described on p. 38 of Form
S-1], and (v) any other transaction that is on terms and conditions
substantially as favorable as would be obtainable in a comparable arm's-length
transaction with a Person other than an officer, director, shareholder or
Affiliate.
8.7 Ownership of Equity Interests.
Issue, sell, transfer, pledge or otherwise dispose of any partnership
interests, shares of capital stock or other equity or ownership interests
("Equity Interests") in any member of the Consolidated Group, except (i)
issuance, sale or transfer of Equity Interests to a Credit Party by a Subsidiary
of such Credit Party, (ii) in connection with a transaction permitted by Section
8.4, or (iii) as needed to qualify directors under applicable law.
8.8 Fiscal Year.
Change its fiscal year end from the last Saturday in April of each
year.
8.9 Prepayments of Indebtedness, etc.
(a) After the issuance thereof, amend or modify (or permit the
amendment or modification of), the terms of any other Indebtedness in a manner
adverse to the interests of the Lenders (including specifically shortening any
maturity or average life to maturity or requiring any payment sooner than
previously scheduled or increasing the interest rate or fees applicable
thereto);
(b) Make any prepayment, redemption, defeasance or acquisition for
value of (including without limitation, by way of depositing money or securities
with the trustee with respect thereto before due for the purpose of paying when
due), or refund, refinance or exchange of any Funded Debt (other than the
Obligations or intercompany Indebtedness permitted hereunder) other than (a)
regularly scheduled payments of principal and interest, (b) Funded Debt having
an interest rate in excess of the Base Rate, and (c) other Funded Debt not
exceeding $250,000 in any instance and $500,000 in the aggregate in any calendar
year.
8.10 Restricted Payments.
Make or permit any Restricted Payments, unless and to the extent that
no Default or Event of Default shall exist immediately prior or after giving
effect thereto on a Pro Forma Basis.
8.11 No Further Negative Pledges.
Except with respect to prohibitions against other encumbrances on
specific Property encumbered to secure payment of particular Indebtedness (which
Indebtedness relates solely to
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such specific Property, and improvements and accretions thereto, and is
otherwise permitted hereby), no member of the Consolidated Group will enter
into, assume or become subject to any agreement prohibiting or otherwise
restricting the creation or assumption of any Lien upon its material properties
or assets, whether now owned or hereafter acquired, or requiring the grant of
any material security for such obligation if security is given for some other
obligation.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. Any Credit Party shall
(i) default in the payment when due of any principal of any of
the Loans or of any reimbursement obligations arising from drawings
under Letters of Credit and such default shall continue for the lesser
of three (3) Business Days or until the Termination Date; or
(ii) default, and such defaults shall continue for three (3)
or more Business Days, in the payment when due of any interest on the
Loans or on any reimbursement obligations arising from drawings under
Letters of Credit, or of any Fees or other amounts owing hereunder,
under any of the other Credit Documents or in connection herewith or
therewith; or
(b) Representations. Any representation, warranty or statement made or
deemed to be made herein, in any of the other Credit Documents, or in any
statement or certificate delivered or required to be delivered pursuant hereto
or thereto shall prove untrue in any material respect on the date as of which it
was deemed to have been made; or
(c) Covenants.
(i) Default in the due performance or observance of any term,
covenant or agreement contained in Section 7.3(a), 7.9, 7.11, 7.13 or
8.1 through 8.12, inclusive, or any condition contained in Section 5.3;
(ii) Default in the due performance or observance by it of any
term, covenant or agreement (other than those referred to in subsections
(a), (b) or (c)(i) of this Section 9.1) contained in this Credit
Agreement and such default shall continue unremedied for a period of at
least 30 days after the earlier of a responsible officer of a Credit
Party becoming aware of such default or notice thereof by the
Administrative Agent; or
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(d) Other Credit Documents. (i) Any Credit Party shall default in the
due performance or observance of any material term, covenant or agreement in any
of the other Credit Documents (subject to applicable grace or cure periods, if
any), or (ii) except as to the Credit Party which is dissolved, released or
merged or consolidated out of existence as the result of or in connection with a
dissolution, merger or disposition permitted by Section 8.4(a), Section 8.4(b)
or Section 8.4(c), any Credit Document shall fail to be in full force and effect
or to give the Administrative Agent and/or the Lenders any material part of the
Liens, rights, powers and privileges purported to be created thereby; or
(e) Guaranties. Except as to the Credit Party which is dissolved,
released or merged or consolidated out of existence as the result of or in
connection with a dissolution, merger or disposition permitted by Section
8.4(a), Section 8.4(b) or Section 8.4(c), the guaranty given by any Guarantor
hereunder or any material provision thereof shall cease to be in full force and
effect, or any Guarantor hereunder or any Person acting by or on behalf of such
Guarantor shall deny or disaffirm such Guarantor's obligations under such
guaranty, or any Guarantor shall default (subject to applicable grace or cure
period, if any) in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to any guaranty; or
(f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to
any Credit Party; or
(g) Defaults under Other Agreements. With respect to any Indebtedness
(other than Indebtedness outstanding under this Credit Agreement) in excess of
$5,000,000 in the aggregate for the Consolidated Group taken as a whole, (A) (1)
any member of the Consolidated Group shall default in any payment (beyond the
applicable grace period with respect thereto, if any) with respect to any such
Indebtedness, or (2) the occurrence and continuance of a default in the
observance or performance relating to such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event or condition shall occur or condition exist, the effect of which default
or other event or condition is to cause, or permit, the holder or holders of
such Indebtedness (or trustee or agent on behalf of such holders) to cause
(determined without regard to whether any notice or lapse of time is required),
any such Indebtedness to become due prior to its stated maturity; or (B) any
such Indebtedness shall be declared due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment, prior to the stated
maturity thereof; or
(h) Judgments. Any member of the Consolidated Group shall fail within
60 days of the date due and payable to pay, bond or otherwise discharge any
judgment, settlement or order for the payment of money which judgment,
settlement or order, when aggregated with all other such judgments, settlements
or orders due and unpaid at such time, exceeds $1,000,000, and which is not
covered by insurance, stayed on appeal (or for which no motion for stay is
pending) or is not otherwise being executed; or
(i) ERISA. Any of the following events or conditions, if such event or
condition could reasonably be expected to have a Material Adverse Effect: (1)
any "accumulated funding
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deficiency," as such term is defined in Section 302 of ERISA and Section 412 of
the Code, whether or not waived, shall exist with respect to any Plan, or any
lien shall arise on the assets of a member of the Consolidated Group or any
ERISA Affiliate in favor of the PBGC or a Plan; (2) an ERISA Event shall occur
with respect to a Single Employer Plan, which is, in the reasonable opinion of
the Administrative Agent, likely to result in the termination of such Plan for
purposes of Title IV of ERISA; (3) an ERISA Event shall occur with respect to a
Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable
opinion of the Administrative Agent, likely to result in (i) the termination of
such Plan for purposes of Title IV of ERISA, or (ii) a member of the
Consolidated Group or any ERISA Affiliate incurring any liability in connection
with a withdrawal from, reorganization of (within the meaning of Section 4241 of
ERISA), or insolvency of (within the meaning of Section 4245 of ERISA) such
Plan; or (4) any prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall
occur which may subject a member of the Consolidated Group or any ERISA
Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA
or Section 4975 of the Code, or under any agreement or other instrument pursuant
to which a member of the Consolidated Group or any ERISA Affiliate has agreed or
is required to indemnify any person against any such liability; or
(j) Ownership. There shall occur a Change of Control.
9.2 Acceleration; Remedies.
Upon the occurrence and during the continuance of an Event of Default,
and at any time thereafter, the Administrative Agent shall, upon the request and
direction of the Required Lenders, by written notice to the Credit Parties take
any of the following actions:
(i) Termination of Commitments. Declare the Commitments
terminated whereupon the Commitments shall be immediately terminated.
(ii) Acceleration. Declare the unpaid principal of and any
accrued interest in respect of all Loans, any reimbursement obligations
arising from drawings under Letters of Credit and any and all other
indebtedness or obligations of any and every kind owing by the Credit
Parties to the Administrative Agent and/or any of the Lenders hereunder
to be due whereupon the same shall be immediately due and payable
without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by each of the Credit Parties.
(iii) Cash Collateral. Direct the Borrowers to pay (and each
Borrower agrees that upon receipt of such notice, or upon the occurrence
of an Event of Default under Section 9.1(f), it will immediately pay) to
the Administrative Agent additional cash, to be held by the
Administrative Agent, for the benefit of the Lenders, in a cash
collateral account as additional security for the LOC Obligations in
respect of subsequent drawings under all then outstanding Letters of
Credit in an amount equal to the maximum aggregate amount which may be
drawn under all Letters of Credits then outstanding.
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(iv) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents and all rights
of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(f) shall occur, then (a) if such Event of Default occurs with respect to the
Borrower, (i) with respect to the Borrower, the Commitments shall automatically
terminate and all Loans, all reimbursement obligations arising from drawings
under Letters of Credit, all accrued interest in respect thereof, all accrued
and unpaid Fees and other indebtedness or obligations owing to the
Administrative Agent and/or any of the Lenders hereunder automatically shall
immediately become due and payable without presentment, demand, protest or the
giving of any notice or other action by the Administrative Agent or the Lenders,
all of which are hereby waived by the Credit Parties, and (ii) with respect to
any other Credit Party, all obligations of such Credit Party hereunder
automatically shall immediately become due and payable without presentment,
demand, protest or the giving of any notice or other action by the
Administrative Agent or the Lenders, all of which are hereby waived by such
Credit Party; (b) if such Event of Default occurs with respect to any other
Credit Party, all obligations of such Credit Party hereunder automatically shall
immediately become due and payable without presentment, demand, protest or the
giving of any notice or other action by the Administrative Agent or the Lenders,
all of which are hereby waived by such Credit Party; and (c) nothing in this
sentence shall be construed to prevent the Administrative Agent or the Lenders
from exercising any other remedies it or they may have under this Section 9.2.
SECTION 10
AGENCY PROVISIONS
10.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity, the "Administrative Agent") of such
Lender to act as specified herein and the other Credit Documents, and each such
Lender hereby authorizes the Administrative Agent as the Administrative Agent
for such Lender, to take such action on its behalf under the provisions of this
Credit Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of the
other Credit Documents, together with such other powers as are reasonably
incidental thereto. Each Lender further directs and authorizes the
Administrative Agent to execute releases (or similar agreements) to give effect
to the provisions of this Credit Agreement and the other Credit Documents,
including specifically without limitation the provisions of Section 8.4 hereof.
Notwithstanding any provision to the contrary elsewhere herein and in the other
Credit Documents, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein and therein, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Credit Agreement or any of the other Credit Documents, or shall otherwise exist
against the Administrative Agent. The provisions of this Section are solely for
the benefit of the Administrative Agent and the Lenders and none of the Credit
Parties shall have any rights as a third party beneficiary of the provisions
hereof. In
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performing its functions and duties under this Credit Agreement and the other
Credit Documents, the Administrative Agent shall act solely as Administrative
Agent of the Lenders and does not assume and shall not be deemed to have assumed
any obligation or relationship of agency or trust with or for any Credit Party
or any of their respective Affiliates.
10.2 Delegation of Duties.
The Administrative Agent may execute any of its duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
10.3 Exculpatory Provisions.
The Administrative Agent and its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall not be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful misconduct), or
(ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by any of the Credit Parties
contained herein or in any of the other Credit Documents or in any certificate,
report, document, financial statement or other written or oral statement
referred to or provided for in, or received by the Administrative Agent under or
in connection herewith or in connection with the other Credit Documents, or
enforceability or sufficiency therefor of any of the other Credit Documents, or
for any failure of any Credit Party to perform its obligations hereunder or
thereunder. The Administrative Agent shall not be responsible to any Lender for
the effectiveness, genuineness, validity, enforceability, collectability or
sufficiency of this Credit Agreement, or any of the other Credit Documents or
for any representations, warranties, recitals or statements made herein or
therein or made by the Borrower or any Credit Party in any written or oral
statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Administrative Agent to the Lenders or by or on behalf
of the Credit Parties to the Administrative Agent or any Lender or be required
to ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Loans or the use of the Letters of Credit
or of the existence or possible existence of any Default or Event of Default or
to inspect the properties, books or records of the Credit Parties or any of
their respective Affiliates.
10.4 Reliance on Communications.
The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to any of
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the Credit Parties, independent accountants and other experts selected by the
Administrative Agent with reasonable care). The Administrative Agent may deem
and treat the Lenders as the owners of their respective interests hereunder for
all purposes unless a written notice of assignment, negotiation or transfer
thereof shall have been filed with the Administrative Agent in accordance with
Section 11.3(b) hereof. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Credit Agreement or under any
of the other Credit Documents unless it shall first receive such advice or
concurrence of the Required Lenders as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Administrative Agent shall in all cases be fully protected
in acting, or in refraining from acting, hereunder or under any of the other
Credit Documents in accordance with a request of the Required Lenders (or to the
extent specifically provided in Section 11.6, all the Lenders) and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all the Lenders (including their successors and assigns).
10.5 Notice of Default.
The Administrative Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless the
Administrative Agent has received notice from a Lender or a Credit Party
referring to the Credit Document, describing such Default or Event of Default
and stating that such notice is a "notice of default." In the event that the
Administrative Agent receives such a notice, the Administrative Agent shall give
prompt notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders.
10.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Administrative
Agent and its officers, directors, employees, Administrative Agents,
attorneys-in-fact or affiliates has not made any representations or warranties
to it and that no act by the Administrative Agent or any affiliate thereof
hereinafter taken, including any review of the affairs of any Credit Party or
any of their respective Affiliates, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower,
the other Credit Parties or their respective Affiliates and made its own
decision to make its Loans hereunder and enter into this Credit Agreement. Each
Lender also represents that it will, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Credit Agreement, and to make such investigation as it deems necessary to
inform itself as to the business, assets, operations, property, financial and
other conditions, prospects and creditworthiness of the Borrower, the other
Credit Parties and their respective Affiliates. Except for notices, reports and
other documents expressly required to be
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furnished to the Lenders by the Administrative Agent hereunder, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, operations,
assets, property, financial or other conditions, prospects or creditworthiness
of the Borrower, the other Credit Parties or any of their respective Affiliates
which may come into the possession of the Administrative Agent or any of its
officers, directors, employees, Administrative Agents, attorneys-in-fact or
affiliates.
10.7 Indemnification.
The Lenders agree to indemnify the Administrative Agent in its capacity
as such (to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to their respective
Commitments (or if the Commitments have expired or been terminated, in
accordance with the respective principal amounts of outstanding Loans and
Participation Interests of the Lenders), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including without limitation at any time following the final payment of all of
the obligations of the Borrower hereunder and under the other Credit Documents)
be imposed on, incurred by or asserted against the Administrative Agent in its
capacity as such in any way relating to or arising out of this Credit Agreement
or the other Credit Documents or any documents contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or any
action taken or omitted by the Administrative Agent under or in connection with
any of the foregoing; provided that no Lender shall be liable for the payment of
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
gross negligence or willful misconduct of the Administrative Agent. If any
indemnity furnished to the Administrative Agent for any purpose shall, in the
opinion of the Administrative Agent, be insufficient or become impaired, the
Administrative Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional indemnity is
furnished. The agreements in this Section shall survive the repayment of the
Loans, LOC Obligations and other obligations under the Credit Documents and the
termination of the Commitments hereunder.
10.8 Administrative Agent in its Individual Capacity.
The Administrative Agent and its affiliates may make loans to, accept
deposits from and generally engage in any kind of business with the Borrower,
its Subsidiaries or their respective Affiliates as though the Administrative
Agent were not the Administrative Agent hereunder. With respect to the Loans
made by and all obligations of the Borrower hereunder and under the other Credit
Documents, the Administrative Agent shall have the same rights and powers under
this Credit Agreement as any Lender and may exercise the same as though it were
not the Administrative Agent, and the terms "Lender" and "Lenders" shall include
the Administrative Agent in its individual capacity.
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10.9 Successor Administrative Agent.
The Administrative Agent may, at any time, resign upon 20 days' written
notice to the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Administrative Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Administrative Agent shall select a
successor Administrative Agent provided such successor is a Lender hereunder or
a commercial bank organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations as Administrative Agent, as
appropriate, under this Credit Agreement and the other Credit Documents and the
provisions of this Section 10.9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Credit Agreement.
SECTION 11
MISCELLANEOUS
11.1 Notices.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below with receipt confirmed by machine or voice, (iii) the day
following the day on which the same has been delivered prepaid to a reputable
national overnight air courier service, or (iv) the third Business Day following
the day on which the same is sent by certified or registered mail, postage
prepaid, in each case to the respective parties at the address, in the case of
the Borrower, Guarantors and the Administrative Agent, set forth below, and, in
the case of the Lenders, set forth on Schedule 11.1, or at such other address as
such party may specify by written notice to the other parties hereto:
if to the Borrower or the Guarantors:
School Specialty, Inc.
100 N. Bluemound Drive
Appleton, Wisconsin 54913-1579
Attn: Donald J. Noskowiak
Telephone: 920-734-2756, Ext. 258
Telecopy: 920-734-6276
with a copy to:
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Joseph F. Franzoi, IV
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, Wisconsin 54952-2398
Telephone: 920-725-3916
Telecopy: 920-725-0998
and a copy to:
Russell J. Bruemmer
Wilmer, Cutler & Pickering
2445 M Street, NW
Washington, DC 20037-1420
Telephone: 202-663-6804
Telecopy: 202-663-6363
if to the Administrative Agent:
NationsBank, N.A.
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Agency Services
Telephone: (704) ________
Telecopy: (704) 386-9923
with a copy to:
NationsBank, N.A.
Corporate Finance Group
6610 Rockledge Drive, 6th Floor
MD2-600-06-13
Bethesda, Maryland 20817-1876
Attn: Michael R. Heredia
Telephone: (301) 571-0724
Telecopy: (301) 571-0719
11.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence and during the continuance of an Event of Default, each Lender is
authorized at any time and from time to time, without presentment, demand,
protest or other notice of any kind (all of which rights being hereby expressly
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waived), to set-off and to appropriate and apply any and all deposits (general
or special) and any other indebtedness at any time held or owing by such Lender
(including, without limitation branches, agencies or Affiliates of such Lender
wherever located) to or for the credit or the account of any Credit Party
against obligations and liabilities of such Person to such Lender hereunder,
under the Notes, the other Credit Documents or otherwise, irrespective of
whether such Lender shall have made any demand hereunder and although such
obligations, liabilities or claims, or any of them, may be contingent or
unmatured, and any such set-off shall be deemed to have been made immediately
upon the occurrence of an Event of Default even though such charge is made or
entered on the books of such Lender subsequent thereto. Any Person purchasing a
participation in the Loans and Commitments hereunder pursuant to Section 3.13 or
Section 11.3(d) may exercise all rights of set-off with respect to its
participation interest as fully as if such Person were a Lender hereunder.
11.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto; provided that none of the Credit Parties may assign or
transfer any of its interests without prior written consent of the Lenders;
provided further that the rights of each Lender to transfer, assign or grant
participations in its rights and/or obligations hereunder shall be limited as
set forth in this Section 11.3, provided however that nothing herein shall
prevent or prohibit any Lender from (i) pledging its Loans hereunder to a
Federal Reserve Bank in support of borrowings made by such Lender from such
Federal Reserve Bank, or (ii) granting assignments or selling participations in
such Lender's Loans and/or Commitments hereunder to its parent company and/or to
any Affiliate or Subsidiary of such Lender.
(b) Assignments. Each Lender may assign all or a portion of its rights
and obligations hereunder, pursuant to an assignment agreement substantially in
the form of Schedule 11.3(b), to (i) any Lender or any Affiliate or Subsidiary
of a Lender, or (ii) any other commercial bank, financial institution or
"accredited investor" (as defined in Regulation D of the Securities and Exchange
Commission) reasonably acceptable to the Administrative Agent and, so long as no
Default or Event of Default has occurred and is continuing, the Borrower;
provided that (i) any such assignment (other than any assignment to an existing
Lender) shall be in a minimum aggregate amount of $5,000,000 (or, if less, the
remaining amount of the Commitment being assigned by such Lender) of the
Commitments and in integral multiples of $1,000,000 above such amount and (ii)
each such assignment shall be of a constant, not varying, percentage of all such
Lender's rights and obligations under this Credit Agreement. Any assignment
hereunder shall be effective upon delivery to the Administrative Agent of
written notice of the assignment together with a transfer fee of $3,500 payable
by the Assigning Lender to the Administrative Agent for its own account from and
after the later of (i) the effective date specified in the applicable assignment
agreement and (ii) the date of recording of such assignment in the Register
pursuant to the terms of subsection (c) below. The assigning Lender will give
prompt notice to the Administrative Agent and the Borrower of any such
assignment. Upon the effectiveness of any such assignment (and after notice to,
and (to the extent required pursuant to the terms hereof), with the consent of,
the Borrower as provided herein), the assignee shall become a "Lender" for all
purposes of this Credit Agreement
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and the other Credit Documents and, to the extent of such assignment, the
assigning Lender shall be relieved of its obligations hereunder to the extent of
the Loans and Commitment components being assigned. Along such lines the
Borrower agrees that upon notice of any such assignment and surrender of the
appropriate Note or Notes, it will promptly provide to the assigning Lender and
to the assignee separate promissory notes in the amount of their respective
interests substantially in the form of the original Note (but with notation
thereon that it is given in substitution for and replacement of the original
Note or any replacement notes thereof). By executing and delivering an
assignment agreement in accordance with this Section 11.3(b), the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim; (ii) except
as set forth in clause (i) above, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Credit
Agreement, any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement, any
of the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto or the financial condition of any Credit Party or any
of their respective Affiliates or the performance or observance by any Credit
Party of any of its obligations under this Credit Agreement, any of the other
Credit Documents or any other instrument or document furnished pursuant hereto
or thereto; (iii) such assignee represents and warrants that it is legally
authorized to enter into such assignment agreement; (iv) such assignee confirms
that it has received a copy of this Credit Agreement, the other Credit Documents
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such assignment agreement;
(v) such assignee will independently and without reliance upon the
Administrative Agent, such assigning Lender or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Credit Agreement and the other Credit Documents; (vi) such assignee
appoints and authorizes the Administrative Agent to take such action on its
behalf and to exercise such powers under this Credit Agreement or any other
Credit Document as are delegated to the Administrative Agent by the terms hereof
or thereof, together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Credit Agreement and the other
Credit Documents are required to be performed by it as a Lender.
(c) Maintenance of Register. The Administrative Agent shall maintain at
one of its offices in Charlotte, North Carolina a copy of each Lender assignment
agreement delivered to it in accordance with the terms of subsection (b) above
and a register for the recordation of the identity of the principal amount, type
and Interest Period of each Loan outstanding hereunder, the names, addresses and
the Commitments of the Lenders pursuant to the terms hereof from time to time
(the "Register"). The Administrative Agent will make reasonable efforts to
maintain the accuracy of the Register and to promptly update the Register from
time to time, as necessary. The entries in the Register shall be conclusive in
the absence of manifest error and the Borrower, the Administrative Agent and the
Lenders may treat each Person whose name is recorded in the Register pursuant to
the terms hereof as a Lender hereunder for all purposes of this Credit
Agreement. The Register
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shall be available for inspection by the Borrower and each Lender, at any
reasonable time and from time to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer, grant or assign
participations in all or any part of such Lender's rights, obligations, or
rights and obligations hereunder (including all or a portion of its Commitments
or its Loans); provided that (i) such selling Lender shall remain a "Lender" for
all purposes under this Credit Agreement (such selling Lender's obligations
under the Credit Documents remaining unchanged) and the participant shall not
constitute a Lender hereunder, (ii) no such participant shall have, or be
granted, rights to approve any amendment or waiver relating to this Credit
Agreement or the other Credit Documents except to the extent any such amendment
or waiver would (A) reduce the principal of or rate of interest on or Fees in
respect of any Loans in which the participant is participating, (B) postpone the
date fixed for any payment of principal (including extension of the Termination
Date or the date of any mandatory prepayment), interest or Fees in which the
participant is participating, (C) except as expressly provided in the Credit
Documents, release all or substantially all of the Guarantors from their
guaranty obligations hereunder, or (D) except as permitted under Section 8.4(b),
release all or substantially all of the collateral, and (iii) sub-participations
by the participant (except to an affiliate, parent company or affiliate of a
parent company of the participant) shall be prohibited. In the case of any such
participation, the participant shall not have any rights under this Credit
Agreement or the other Credit Documents (the participant's rights against the
selling Lender in respect of such participation to be those set forth in the
participation agreement with such Lender creating such participation) and all
amounts payable by and other obligations of the Borrower hereunder shall be
determined as if such Lender had not sold such participation, provided, however,
that such participant shall be entitled to receive additional amounts under
Sections 3.6, 3.9, 3.10 and 3.11 on the same basis as if it were a Lender (but
not in excess of amounts available to the Lender from which the participant took
its interest).
11.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Administrative Agent or any
Lender in exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Administrative Agent or any
Lender and any of the Credit Parties shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Administrative Agent or any Lender
would otherwise have. No notice to or demand on any Credit Party in any case
shall entitle the Borrower or any other Credit Party to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Administrative Agent or the Lenders to any other or further action
in any circumstances without notice or demand.
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11.5 Payment of Expenses, etc.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Administrative Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit Agreement
and the other Credit Documents and the documents and instruments referred to
therein (including, without limitation, the reasonable fees and expenses of
Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any
amendment, waiver or consent relating hereto and thereto including, but not
limited to, any such amendments, waivers or consents resulting from or related
to any work-out, renegotiation or restructure relating to the performance by the
Credit Parties under this Credit Agreement and (B) of the Administrative Agent
and the Lenders in connection with enforcement of the Credit Documents and the
documents and instruments referred to therein (including, without limitation, in
connection with any such enforcement, the reasonable fees and disbursements of
counsel for the Administrative Agent and each of the Lenders); (ii) pay and hold
each of the Lenders harmless from and against any and all present and future
stamp and other similar taxes with respect to the foregoing matters and save
each of the Lenders harmless from and against any and all liabilities with
respect to or resulting from any delay or omission (other than to the extent
attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender,
its officers, directors, employees, representatives and Administrative Agents
from and hold each of them harmless against any and all losses, liabilities,
claims, damages or expenses incurred by any of them as a result of, or arising
out of, or in any way related to, or by reason of (A) any investigation,
litigation or other proceeding (whether or not any Lender is a party thereto)
related to the entering into and/or performance of any Credit Document or the
use of proceeds of any Loans (including other extensions of credit) hereunder or
the consummation of any other transactions contemplated in any Credit Document,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation, litigation or other
proceeding or (B) the presence or Release of any Materials of Environmental
Concern at, under or from any Property owned, operated or leased by the Borrower
or any of its Subsidiaries, or the failure by the Borrower or any of its
Subsidiaries to comply with any Environmental Law (but excluding, in the case of
either of clause (A) or (B) above, any such losses, liabilities, claims, damages
or expenses to the extent incurred by reason of gross negligence or willful
misconduct on the part of the Person to be indemnified).
11.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Required Lenders and the
Borrower, provided, however, that:
(a) without the consent of each Lender affected thereby,
neither this Credit Agreement nor any of the other Credit Documents may
be amended to
(i) extend the final maturity of any Loan or the time
of payment of any reimbursement obligation, or any portion
thereof, arising from drawings under
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Letters of Credit, or extend or waive any principal
amortization payment of any Loan, or any portion thereof,
(ii) reduce the rate or extend the time of payment of
interest (other than as a result of waiving the applicability
of any increase in interest rates after the occurrence of an
Event of Default or on account of a failure to deliver
financial statements on a timely basis) thereon or Fees
hereunder,
(iii) reduce or waive the principal amount of any Loan or
of any reimbursement obligation, or any portion thereof,
arising from drawings under Letters of Credit,
(iv) increase the Commitment of a Lender over the amount
thereof in effect (it being understood and agreed that a
waiver of any Default or Event of Default or mandatory
reduction in the Commitments shall not constitute a change in
the terms of any Commitment of any Lender),
(v) except as permitted under Section 8.4(b), release
all or substantially all of the collateral,
(vi) except as the result of or in connection with a
dissolution, merger or disposition of a Subsidiary permitted
under Section 8.4, release the Borrower or all or
substantially all of the Guarantors from its or their
obligations under the Credit Documents,
(vii) amend, modify or waive any provision of this
Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12,
3.13, 3.14, 9.1(a), 11.2, 11.3, 11.5 or 11.9,
(viii) reduce any percentage specified in, or otherwise
modify, the definition of Required Lenders, or
(ix) consent to the assignment or transfer by the
Borrower (or another Credit Party) of any of its rights and
obligations under (or in respect of) the Credit Documents
except as permitted thereby;
(b) without the consent of the Agent, no provision of
Section 10 may be amended;
(c) without the consent of the Issuing Lender, no provision of
Section 2.2 may be amended.
Notwithstanding the fact that the consent of all the Lenders is
required in certain circumstances as set forth above, (x) each Lender is
entitled to vote as such Lender sees fit on any bankruptcy reorganization plan
that affects the Loans, and each Lender acknowledges that the
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provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous
consent provisions set forth herein and (y) the Required Lenders may consent to
allow a Credit Party to use cash collateral in the context of a bankruptcy or
insolvency proceeding.
11.7 Counterparts.
This Credit Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart.
11.8 Headings.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
11.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 2.2(i), 3.9, 3.11, 10.7 or 11.5 shall survive the execution and delivery
of this Credit Agreement, the making of the Loans, the issuance of the Letters
of Credit, the repayment of the Loans, LOC Obligations and other obligations
under the Credit Documents and the termination of the Commitments hereunder, and
all representations and warranties made by the Credit Parties herein shall
survive delivery of the Notes and the making of the Loans hereunder.
11.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Any legal action or proceeding with respect to this Credit Agreement or any
other Credit Document may be brought in the courts of the State of New York in
New York County, or of the United States for the Southern District of New York,
and, by execution and delivery of this Credit Agreement, each of the Credit
Parties hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the nonexclusive jurisdiction of such courts.
Each of the Credit Parties further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to it at the address set out for notices pursuant to Section 11.1, such
service to become effective three (3) days after such mailing. Nothing herein
shall affect the right of the Administrative Agent to serve process in any other
manner permitted by law or to commence legal proceedings or to otherwise proceed
against any Credit Party in any other jurisdiction.
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(b) Each of the Credit Parties hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Credit Agreement or any other Credit Document brought in the courts referred to
in subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE AGENT,
THE LENDERS, THE BORROWER AND THE CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
11.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
11.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
11.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at such time on or
after the Closing Date when it shall have been executed by the Borrower, the
Guarantors and the Administrative Agent, and the Administrative Agent shall have
received copies hereof (telefaxed or otherwise) which, when taken together, bear
the signatures of each Lender, and thereafter this Credit Agreement shall be
binding upon and inure to the benefit of the Borrower, the Guarantors, the
Administrative Agent and each Lender and their respective successors and
assigns.
(b) The term of this Credit Agreement shall be until no Loans, LOC
Obligations or any other amounts payable hereunder or under any of the other
Credit Documents shall remain outstanding and until all of the Commitments
hereunder shall have expired or been terminated.
11.14 Confidentiality.
The Administrative Agent and the Lenders agree to keep confidential
(and to cause their respective affiliates, officers, directors, employees,
Administrative Agents and representatives to
87
<PAGE>
keep confidential) all information, materials and documents furnished to the
Administrative Agent or any such Lender by or on behalf of any Credit Party
(whether before or after the Closing Date) which relates to the Borrower or any
of its Subsidiaries (the "Information"). Notwithstanding the foregoing, the
Administrative Agent and each Lender shall be permitted to disclose Information
(i) to its affiliates, officers, directors, employees, agents and
representatives (provided they have been informed of the confidential nature of
such Information and have agreed to abide by the provisions of this Section
11.14) in connection with its participation in any of the transactions evidenced
by this Credit Agreement or any other Credit Documents or the administration of
this Credit Agreement or any other Credit Documents; (ii) to the extent required
by applicable laws and regulations or by any subpoena or similar legal process,
or requested by any Governmental Authority, and, where permissable in connection
therewith, after notice to the Borrower reasonably calculated to afford the
Borrower an opportunity to contest the disclosure; (iii) to the extent such
Information (A) becomes publicly available other than as a result of a breach of
this Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Administrative Agent or such Lender on a
non-confidential basis from a source other than a Credit Party or (C) was
available to the Administrative Agent or such Lender on a non-confidential basis
prior to its disclosure to the Administrative Agent or such Lender by a Credit
Party; (iv) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee or
participant) first specifically agrees in a writing furnished to and for the
benefit of the Credit Parties to be bound by the terms of this Section 11.14; or
(v) to the extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 11.14 shall obligate the
Administrative Agent or any Lender to return any materials furnished by the
Credit Parties.
11.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower that
at least one of the following statements is an accurate representation as to the
source of funds to be used by such Lender in connection with the financing
hereunder:
(a) no part of such funds constitutes assets allocated to any
separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds constitutes
assets allocated to any separate account maintained by such Lender,
such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total
assets of such account as of the date of such purchase (and, for
purposes of this subsection (b), all employee benefit plans maintained
by the same employer or employee organization are deemed to be a single
plan);
(c) to the extent that any part of such funds constitutes
assets of an insurance company's general account, such insurance
company has complied with all of the requirements of the regulations
issued under Section 401(c)(1)(A) of ERISA; or
88
<PAGE>
(d) such funds constitute assets of one or more specific
benefit plans which such Lender has identified in writing to the Borrower.
As used in this Section 11.15, the terms "employee benefit plan" and "separate
account" shall have the respective meanings assigned to such terms in Section 3
of ERISA.
11.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[Signature Page to Follow]
89
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: SCHOOL SPECIALTY, INC.
a Delaware corporation
By:
--------------------------
Name:
Title:
GUARANTORS: CHILDCRAFT EDUCATION CORP.,
a New York corporation
By:
--------------------------
Name:
Title:
RE-PRINT LLC,
a Delaware limited liability company
By:
--------------------------
Name:
Title:
BIRD-IN-HAND WOODWORKS, INC.,
a New Jersey corporation
By:
--------------------------
Name:
Title:
SAX ARTS & CRAFTS, INC.,
a Delaware corporation
By:
--------------------------
Name:
Title:
<PAGE>
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By:
--------------------------
Name:
Title:
<PAGE>
Schedule 2.1(a)
Schedule of Lenders and Commitments
<TABLE>
<CAPTION>
Revolving Revolving LOC
Lender Committed Amount Commitment Percentage Committed Amount
------ ---------------- --------------------- ----------------
<S> <C> <C> <C>
</TABLE>
<PAGE>
Schedule 2.1(b)(i)
FORM OF NOTICE OF BORROWING
NationsBank, N.A. NationsBank, N.A.,
as Administrative Agent for the Lenders as Swingline Lender
101 N. Tryon Street 101 N. Tryon Street
Independence Center, 15th Floor Independence Center, 15th Floor
NC1-001-15-04 NC1-001-15-04
Charlotte, North Carolina 28255 Charlotte, North Carolina 28255
Attention: Agency Services Attention: Agency Services
RE: Credit Agreement dated as of June __, 1998 (as amended and
modified, the "Credit Agreement") among School Specialty,
Inc., the Guarantors and Lenders identified therein and
NationsBank, N.A., as Administrative Agent. Terms used but not
otherwise defined herein shall have the meanings provided in
the Credit Agreement.
Ladies and Gentlemen:
The undersigned hereby gives notice of a request for Revolving Loan pursuant to
Section 2.1(b) of the Credit Agreement or of a request for Swingline Loan
pursuant to Section 2.3(b) of the Credit Agreement as follows:
Revolving Loan
- ---------------------
Swingline Loan
- ---------------------
(A) Date of Borrowing
(which is a Business Day)
-----------------------------------
(B) Principal Amount of
Borrowing
-----------------------------------
(C) Interest rate basis
-----------------------------------
(D) Interest Period and the
last day thereof
-----------------------------------
In accordance with the requirements of Section 5.2 of the Credit Agreement, the
undersigned Borrower hereby certifies that:
(a) The representations and warranties contained in the Credit
Agreement and the other Credit Documents are true and correct in all material
respects as of the date of this request, and will be true and correct after
giving effect to the requested Extension of Credit (except for those which
expressly related to an earlier date).
(b) No Default or Event of Default exists, or will exist after giving
effect to the requested Extension of Credit.
2
<PAGE>
(c) As to any Credit Party, no involuntary action has been commenced
under applicable bankruptcy, insolvency or other similar law in effect, or any
case, proceeding or other action for the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) as to any
Credit Party or as to any substantial party of the property of any Credit Party
or for the winding up or liquidation of its affairs, and remains undismissed,
undischarged or unbonded.
(d) No circumstances, events or conditions have occurred since the date
of the audited financial statements referenced in Section 7.1 of the Credit
Agreement which could reasonably be expected to have a Material Adverse Effect.
(e) All conditions set forth in Section 2.1 as to the making of
Revolving Loans or in Section 2.3 as to the making of Swingline Loans, as
appropriate, have been satisfied.
Very truly yours,
SCHOOL SPECIALTY, INC.
By:
-----------------------------------
Name:
Title:
3
<PAGE>
Schedule 2.1(e)
FORM OF REVOLVING NOTE
June __, 1998
FOR VALUE RECEIVED, the undersigned Borrower, hereby promises to pay to
the order of ______________________, and its successors and assigns, on or
before the Termination Date to the office of the Administrative Agent in
immediately available funds as provided in the Credit Agreement,
(i) in the case of Revolving Loans, such Lender's Revolving
Committed Amount or, if less, the aggregate unpaid principal amount of
all Revolving Loans made by such Lender to the undersigned; and
(ii) in the case of Swingline Loans, if such lender is the
Swingline Lender, the aggregate Swingline Committed Amount or, if less,
the aggregate unpaid principal amount of all Swingline Loans made to
the undersigned;
together with interest thereon at the rates and as provided in the Credit
Agreement.
This Note is one of the Revolving Notes referred to in the Credit
Agreement dated as of June __, 1998 (as amended and modified, the "Credit
Agreement") among School Specialty, Inc., a Delaware corporation, the Guarantors
and Lenders identified therein and NationsBank, N.A., as Administrative Agent.
Terms used but not otherwise defined herein shall have the meanings provided in
the Credit Agreement.
The holder may endorse and attach a schedule to reflect borrowings
evidenced by this Note and all payments and prepayments thereon; provided that
any failure to endorse such information shall not affect the obligation of the
undersigned Borrower to pay amounts evidenced hereby.
Upon the occurrence of an Event of Default, all amounts evidenced by
this Note may, or shall, become immediately due and payable as provided in the
Credit Agreement without presentment, demand, protest or notice of any kind, all
of which are waived by the undersigned Borrower. In the event payment of amounts
evidenced by this Note is not made at any stated or accelerated maturity, the
undersigned Borrower agrees to pay, in addition to principal and interest, all
costs of collection, including reasonable attorneys' fees.
This Note and the Loans and amounts evidenced hereby may be transferred
only as provided in the Credit Agreement.
This Note shall be governed by, and construed and interpreted in
accordance with, the law of the State of New York.
4
<PAGE>
In WITNESS WHEREOF, the undersigned Borrower has caused this Note to be
duly executed as of the date first above written.
SCHOOL SPECIALTY, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
Title:
5
<PAGE>
Schedule 2.2(b)-1
Existing Letters of Credit
6
<PAGE>
Schedule 2.2(b)-2
Form of Notice of Request for Letter of Credit
[Date]
NationsBank, N.A. NationsBank, N.A.
as Issuing Lender under the as Administrative Agent under the
Credit Agreement referred to below Credit Agreement referred to below
101 N. Tryon Street 101 N. Tryon Street
Independence Center, 15th Floor Independence Center, 15th Floor
NC1-001-15-04 NC1-001-15-04
Charlotte, North Carolina 28255 Charlotte, North Carolina 28255
Attention: Agency Services
Re: Credit Agreement dated as of June __, 1998 (as amended and
modified, the "Credit Agreement") among School Specialty,
Inc., the Guarantors and Lenders identified therein and
NationsBank, N.A., as Administrative Agent. Terms used but not
otherwise defined herein shall have the meanings provided in
the Credit Agreement.
Ladies and Gentlemen:
The undersigned, pursuant to Section 2.2(b) of the Credit Agreement,
hereby requests that the following Letters of Credit be made on [date] as
follows:
(1) Account Party:
(2) For use by:
(3) Beneficiary:
(4) Face Amount of Letter of Credit:
(5) Date of Issuance:
Delivery of Letter of Credit should be made as follows:
In accordance with the requirements of Section 5.2 of the Credit
Agreement, the undersigned Borrower hereby certifies that:
(a) The representations and warranties contained in the Credit
Agreement and the other Credit Documents are true and correct in all material
respects as of the date of this request, and will be true and correct after
giving effect to the requested Extension of Credit (except for those which
expressly relate to an earlier date).
(b) No Default or Event of Default exists, or will exist after giving
effect to the requested Extension of Credit.
7
<PAGE>
(c) As to any Credit Party, no involuntary action has been commenced
under applicable bankruptcy, insolvency or other similar law in effect, or any
case, proceeding or other action for the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) as to any
Credit Party or as to any substantial part of the property of any Credit Party
or for the winding up or liquidation of its affairs, and remains undismissed,
undischarged or unbonded.
(d) No circumstances, events or conditions have occurred since the date
of the audited financial statements referenced in Section 7.1 of the Credit
Agreement which could reasonably be expected to have a Material Adverse Effect.
(e) All conditions set forth in Section 2.2 as to the issuance of a
Letter of Credit have been satisfied.
Very truly yours,
SCHOOL SPECIALTY, INC.
By:
-----------------------------------
Name:
Title:
8
<PAGE>
Schedule 3.2
Form of Notice of Extension/Conversion
NationsBank, N.A.,
as Administrative Agent for the Lenders
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Re: Credit Agreement dated as of June __, 1998 (as amended and
modified, the "Credit Agreement") among School Specialty,
Inc., the Guarantors and Lenders identified therein and
NationsBank, N.A., as Administrative Agent. Terms used but not
otherwise defined herein shall have the meanings provided in
the Credit Agreement.
Ladies and Gentlemen:
The undersigned hereby gives notice pursuant to Section 3.2 of the
Credit Agreement that it requests an extension or conversion of a Revolving Loan
outstanding under the Credit Agreement, and in connection therewith sets forth
below the terms on which such extension or conversion is requested to be made:
(A) Date of Extension or Conversion
(which is the last day of the
applicable Interest Period)
-----------------------------------
(B) Principal Amount of
Extension or Conversion
-----------------------------------
(C) Interest rate basis
-----------------------------------
(D) Interest Period and the
last day thereof
-----------------------------------
In accordance with the requirements of Section 5.2 of the Credit
Agreement, the undersigned Borrower hereby certifies that:
(a) The representations and warranties contained in the Credit
Agreement and the other Credit Documents are true and correct in all
material respects as of the date of this request, and will be true and
correct after giving effect to the requested Extension of Credit
(except for those which expressly relate to an earlier date).
(b) No Default or Event of Default exists, or will exist after
giving effect to the requested Extension of Credit.
9
<PAGE>
(c) As to any Credit Party, no involuntary action has been
commenced under applicable bankruptcy, insolvency or other similar law
in effect, or any case, proceeding or other action for the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) as to any Credit Party or as to any substantial
part of the property of any Credit Party or for the winding up or
liquidation of its affairs, and remains undismissed, undischarged or
unbonded.
(d) No circumstances, events or conditions have occurred since
the date of the audited financial statements referenced in Section 7.1
of the Credit Agreement which could reasonably be expected to have a
Material Adverse Effect.
Very truly yours,
SCHOOL SPECIALTY, INC.
By:
-----------------------------------
Name:
Title:
10
<PAGE>
Schedule 5.1(i)(v)
Secretary's Certificate
Pursuant to Section 5.1(n)(v) of the Credit Agreement (the "Credit
Agreement"), dated as of June __, 1998, among School Specialty, Inc., a Delaware
corporation, the Guarantors and Lenders identified therein and NationsBank,
N.A., as Administrative Agent, the undersigned ) ___________________________
Secretary of ____________________ (the "Corporation") hereby certifies as
follows:
1. Attached hereto as Annex I is a true and complete copy of
resolutions duly adopted by the Board of Directors of the Corporation on
_______________________, 1998. The attached resolutions have not been rescinded
or modified and remain in full force and effect. The attached resolutions are
the only corporate proceedings of the Corporation now in force relating to or
affecting the matters referenced to therein.
2. Attached hereto as Annex II is a true and complete copy of the
By-laws of the Corporation as in effect on the date hereof.
3. Attached hereto as Annex III is a true and complete copy of the
Certificate of Incorporation of the Corporation and all amendments thereto as in
effect on the date hereof.
4. The following persons are now duly elected and qualified principal
officers of the Corporation, holding the offices indicated, and the signature
appearing opposite his name below is his true and genuine signature, and such
officer is duly authorized to execute and deliver on behalf of the Corporation,
the Credit Agreement, the Notes to be issued pursuant thereto and the other
Credit Documents to act as a Responsible Officer on behalf of the Corporation
under the Credit Agreement.
<TABLE>
<CAPTION>
Name Office Signature
<S> <C> <C>
------------------------
</TABLE>
IN WITNESS WHEREOF, the undersigned has hereunto set his/her name and
affixed the corporate seal of the Corporation.
-----------------------------
Secretary
(CORPORATE SEAL)
Date: , 1998
-----------------------
I, , of
--------------------- -------------------------------
, hereby certify that , whose
- ------------------------- ---------------------
genuine signature appears above, is, and has been at all times since
, a duly elected, qualified and acting
- ---------------------- -------------------
of
--------------------------------------.
11
<PAGE>
of
-------------------------------
----------------------------------
, 1997
------------------------------
12
<PAGE>
Schedule 6.6
Description of Legal Proceedings
13
<PAGE>
Schedule 6.8
Liens
14
<PAGE>
Schedule 6.14
Subsidiaries
15
<PAGE>
Schedule 7.2(b)
Form of Officer's Compliance Certificate
This Certificate is delivered in accordance with the provisions of
Section 7.2(b) of that Credit Agreement dated as of June __, 1998 (as amended,
modified and supplemented, the "Credit Agreement") among School Specialty, Inc.,
a Delaware corporation, the Guarantors and Lenders identified therein, and
NationsBank, N.A., as Administrative Agent. Terms used but not otherwise defined
herein shall have the same meanings provided in the Credit Agreement.
The undersigned, being a Responsible Officer of School Specialty, Inc.,
a Delaware corporation, hereby certifies, in my official capacity and not in my
individual capacity, that to the best of my knowledge and belief:
(a) the financial statements accompanying this Certificate fairly
present the financial condition of the parties covered by such financial
statements in all material respects;
(b) during the period the Credit Parties have observed or performed all
of their covenants and other agreements in all material respects, and satisfied
in all material respects every material condition, contained in this Credit
Agreement to be observed, performed or satisfied by them;
(c) the undersigned has no actual knowledge of any Default or Event of
Default; and
(d) detailed calculations demonstrating compliance with the financial
covenants set out in Section 7.9 of the Credit Agreement accompany this
Certificate.
This the day of , 199 .
--------------- ------------------------ --
SCHOOL SPECIALTY, INC.
By:
-----------------------------------
Name:
Title:
16
<PAGE>
Attachment to Officer's Certificate
Computation of Financial Covenants
17
<PAGE>
Schedule 7.11
Form of Joinder Agreement
THIS JOINDER AGREEMENT (the "Agreement"), dated as of
___________________, 199_, is by and between _______________________, a
__________________ (the "Applicant Guarantor"), and NATIONSBANK, N.A., in its
capacity as Administrative Agent under that certain Credit Agreement dated as of
June __, 1998 (as amended and modified, the "Credit Agreement") by and among
School Specialty, Inc., a Delaware corporation, the Guarantors and Lenders
identified therein and NationsBank, N.A., as Administrative Agent. All of the
defined terms in the Credit Agreement are incorporated herein by reference.
The Applicant Guarantor has indicated its desire to become a Guarantor
or is required by the terms of Section 7.11 of the Credit Agreement to become, a
Guarantor under the Credit Agreement.
Accordingly, the Applicant Guarantor hereby agrees as follows with the
Administrative Agent, for the benefit of the Lenders:
1. The Applicant Guarantor hereby acknowledges, agrees and confirms
that, by its execution of this Agreement, the Applicant Guarantor will be deemed
to be a party to the Credit Agreement and a "Guarantor" for all purposes of the
Credit Agreement and the other Credit Documents, and shall have all of the
obligations of a Guarantor thereunder as if it had executed the Credit Agreement
and the other Credit Documents. The Applicant Guarantor agrees to be bound by,
all of the terms, provisions and conditions contained in the Credit Documents,
including without limitation (i) all of the affirmative and negative covenants
set forth in Sections 7 and 8 of the Credit Agreement and (ii) all of the
undertakings and waivers set forth in Section 4 of the Credit Agreement. Without
limiting the generality of the foregoing terms of this paragraph 1, the
Applicant Guarantor hereby (A) jointly and severally together with the other
Guarantors, guarantees to each Lender, the Administrative Agent and the Issuing
Lender as provided in Section 4 of the Credit Agreement, the prompt payment and
performance of the Guaranteed Obligations in full when due (whether at stated
maturity, as a mandatory prepayment, by acceleration, as a mandatory cash
collateralization or otherwise) strictly in accordance with the terms thereof,
(B) agrees that if any of the Guaranteed Obligations are not paid or performed
in full when due (whether at stated maturity, as a mandatory prepayment, by
acceleration, as a mandatory cash collateralization or otherwise), the Applicant
Guarantor will, jointly and severally together with the other Guarantors,
promptly pay and perform the same, without any demand or notice whatsoever, and
that in the case of any extension of time of payment or renewal of any of the
Guaranteed Obligations, the same will be promptly paid in full when due (whether
at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory
cash collateralization or otherwise) in accordance with the terms of such
extension or renewal, (C) grants to the Administrative Agent a security interest
in its Collateral as referred in, and pursuant to the terms of, the Security
Agreement, and (D) pledges and grants a security interest to the Administrative
Agent in the Pledged Stock identified in Schedule A attached and the other
Collateral as referred in, and pursuant to the terms of, the Pledge Agreement.
2. The Applicant Guarantor acknowledges and confirms that it has
received a copy of the Credit Agreement and the Schedules and Exhibits thereto.
The information on the Schedules to the Credit Agreement, the Security Agreement
and the Pledge Agreement are amended to provide the information shown on the
attached Schedule A.
18
<PAGE>
3. The Applicant Guarantor hereby waives acceptance by the
Administrative Agent and the Lenders of the guaranty by the Applicant Guarantor
under Section 4 of the Credit Agreement upon the execution of this Joinder
Agreement by the Applicant Guarantor.
4. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute one contract.
5. This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Applicant Guarantor has caused this Joinder
Agreement to be duly executed by its authorized officers, and the Administrative
Agent, for the benefit of the Lenders, has caused the same to be accepted by its
authorized officer, as of the day and year first above written.
APPLICANT GUARANTOR
By:
----------------------------------
Name:
Title:
Address for Notices:
Attn:
Telephone:
Telecopy:
Acknowledged and accepted:
NATIONSBANK, N.A., as Administrative Agent
By:
----------------------------------
Name:
Title:
19
<PAGE>
Schedule A
to
Joinder Agreement
Schedule 1 to Security Agreement
Chief Executive Office and Locations of Collateral
<TABLE>
<CAPTION>
Chief Executive Locations of Record
Applicant Guarantor Office Collateral Owner
<S> <C> <C> <C>
</TABLE>
Schedule 1 to Pledge Agreement
Description of Pledged Shares
<TABLE>
<CAPTION>
No. of Certificate
Pledgor/Applicant Guarantor Issuer Shares No. Percentage
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
Schedule 8.1
Indebtedness
<PAGE>
Schedule 8.5
Existing Investments
<PAGE>
Schedule 11.1
Lenders and Addresses
<PAGE>
Schedule 11.3(b)
Form of Assignment and Acceptance
THIS ASSIGNMENT AND ACCEPTANCE dated as of ___________ , 1998 is
entered into between THE LENDER IDENTIFIED ON THE SIGNATURE PAGES AS THE
"ASSIGNOR" (the "Assignor") and THE PARTIES IDENTIFIED ON THE SIGNATURE
PAGES AS "ASSIGNEES" ("Assignee").
Reference is made to that Credit Agreement dated as of June __, 1998
(as amended and modified, the "Credit Agreement") among SCHOOL SPECIALTY, INC.,
a Delaware corporation (the "Borrower"), the Guarantors and Lenders identified
therein and NationsBank, N.A., as Administrative Agent. Terms defined in the
Credit Agreement are used herein with the same meanings.
1. The Assignor hereby sells and assigns, without recourse, to the
Assignees, and the Assignees hereby purchase and assume, without recourse, from
the Assignor, effective as of the Effective Date shown below, those rights and
interests of the Assignor under the Credit Agreement identified below (the
"Assigned Interests"), including the Obligations and Commitments relating
thereto, together with unpaid interest and fees relating thereto accruing from
the Effective Date. The Assignor represents and warrants that it owns interests
assigned hereby free and clear of liens, encumbrances or other claims. Each of
the Assignees represents that it is an Eligible Assignee within the meaning of
the term in the Credit Agreement. The Assignor and each of the Assignees hereby
makes and agrees to be bound by all the representations, warranties and
agreements set forth in Section 11.3 of the Credit Agreement, a copy of which
has been received by each such party. From and after the Effective Date (i) each
Assignee, if it is not already a Lender under the Credit Agreement, shall be a
party to and be bound by the provisions of the Credit Agreement and, to the
extent of the interests assigned by this Assignment and Acceptance, have the
rights and obligations of a Lender thereunder and (ii) each Assignor shall, to
the extent of the interests assigned by this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement (other than the rights of indemnification referenced in Section 11.9
of the Credit Agreement). Schedule 2.1(a) is deemed modified and amended to the
extent necessary to give effect to this Assignment.
2. This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the State of New York.
<TABLE>
<CAPTION>
3. Terms of Assignment
<S> <C> <C> <C>
(a) Date of Assignment: , 199
------------------- --
(b) Legal Name of Assignor: SEE SIGNATURE PAGE
(c) Legal Name of Assignee: SEE SIGNATURE PAGE
(d) Effective Date of Assignment: , 199
------------------- --
</TABLE>
See Schedule I attached for a description of the Loans and Obligations and
Commitments (and the percentage interests therein and relating thereto) which
are the subject of this Assignment and Acceptance.
4. The fee payable to the Paying Agent in connection with this
Assignment is enclosed.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the execution of
this instrument by their duly authorized officers as of the date first above
written.
ASSIGNOR: ASSIGNEE:
By: By:
--------------------------- ------------------------------
Name: Name:
Title: Title:
Address for Notices:
ACKNOWLEDGMENT AND CONSENT
NATIONSBANK, N.A. SCHOOL SPECIALTY, INC.
as Administrative Agent
By: By:
--------------------------- ------------------------------
Name: Name:
Title: Title:
<PAGE>
SCHEDULE I
TO ASSIGNMENT AND ACCEPTANCE
SCHOOL SPECIALTY, INC.
REVOLVING LOANS AND LETTERS OF CREDIT PRIOR TO ASSIGNMENT
<TABLE>
<CAPTION>
Revolving Revolving Revolving LOC LOC
Committed Commitment Loans Committed Obligations
Amount Percentage Outstanding Amount Outstanding
------ ---------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
ASSIGNOR
ASSIGNEES
---------------- --------------- ---------------- ---------------- -----------------
$ $ $ $
</TABLE>
<PAGE>
REVOLVING LOANS AND LETTERS OF CREDIT INTERESTS SUBJECT TO THIS ASSIGNMENT
<TABLE>
<CAPTION>
Revolving Revolving Revolving LOC LOC
Committed Commitment Loans Committed Obligations
Amount Percentage Outstanding Amount Outstanding
<S> <C> <C> <C> <C> <C>
ASSIGNOR
ASSIGNEES
------------------ ---------------- ---------------- ---------------- ---------------
$ $ $ $
</TABLE>
<PAGE>
SCHEDULE I
TO ASSIGNMENT AND ACCEPTANCE
SCHOOL SPECIALTY, INC.
REVOLVING LOANS AND LETTERS OF CREDIT AFTER ASSIGNMENT
<TABLE>
<CAPTION>
Revolving Revolving Revolving LOC LOC
Committed Commitment Loans Committed Obligations
Amount Percentage Outstanding Amount Outstanding
<S> <C> <C> <C> <C> <C>
ASSIGNOR
ASSIGNEES
----------------- ---------------- ---------------- --------------- ----------------
$ $ $ $
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
OF INCORPORATION OR
NAME ORGANIZATION
------------------------------------------------------ -------------------------------
<C> <S> <C>
1. RePrint, LLC Delaware
2. Sax Arts & Crafts, Inc. Delaware
3. Childcraft, Inc. New York
4. Bird-in-Hand Woodworks, Inc. New Jersey
5. Don Gresswell, Ltd. United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 13, 1998 (except
for Note 1 and the last paragraph of Note 3, which are as of May 14, 1998),
relating to the financial statements of School Specialty, Inc., as of April 30,
1996 and April 26, 1997 and for the four months ended April 30, 1996 and for the
fiscal year ended April 26, 1997, which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the period from January 1, 1996 to April 30, 1996 and for the year ended
April 26, 1997 listed as Exhibit 99.1 of this Registration Statement when such
schedule is read in conjunction with the financial statements referred to in our
report. The audits referred to in such report also included this schedule. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
June 3, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 2, 1996, with respect to the financial
statements of School Specialty, Inc. for the years ended December 31, 1995 and
1994 included in the Registration Statement on Form S-1 and related Prospectus
of School Specialty, Inc. for the registration of shares of its common stock. We
also consent to the application of such report to the Financial Statement
Schedule for the two years ended December 31, 1995 listed as Exhibit 99.1 of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
June 3, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement of School Specialty, Inc. on Form S-1 of our report dated
February 8, 1996, relating to the financial statements of The Re-Print
Corporation, which report appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the two years
ended December 31, 1995 listed as Exhibit 99.1 of this Registration Statement
when such schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included this
schedule. We also consent to the references to us under the heading "Experts" in
such Prospectus.
BDO SEIDMAN, LLP
Atlanta, Georgia
June 3, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Prospectus constituting part of this
Registration Statement on Form S-1 as amended of our report dated February 24,
1997, relating to the consolidated financial statements of American Academic
Suppliers Holding Corporation and Subsidiary, which appears in such Prospectus.
We also consent to the references to us under the heading "Experts".
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
June 3, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 3, 1998,
relating to the financial statements of Sax Arts and Crafts, Inc. as of December
15, 1995 and December 25, 1996 and for each of the three years in the period
ended December 25, 1996 which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
June 3, 1998
