<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1998
REGISTRATION NO. 333-46537
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
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)
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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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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)
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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
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(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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INFORMATION STATEMENT/PROSPECTUS
[LOGO]
SCHOOL SPECIALTY, INC.
DISTRIBUTION OF UP TO 12,187,723 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. The shares of School Specialty Common Stock have been approved for
inclusion, subject to notice of issuance, on the Nasdaq National Market under
the symbol "SCHS".
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. All of the executive officers and directors who held shares (or
options to purchase shares) of U.S. Office Products Common Stock, except for
Donald Ray Pate, Jr., tendered 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 9, 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 July 4, 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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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
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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") are being 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
is purchasing 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 is distributing 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 hold U.S. Office Products' current
technology solutions, print management, educational
supplies, and corporate travel services businesses,
respectively.
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6
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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, is
acquiring for $270.0 million, approximately 36,368,426
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 is undertaking or plans to
undertake the following transactions (the "Financing
Transactions"):
- Pursuant to a tender offer, U.S. Office Products is
purchasing $222.2 million principal amount 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 $131.0 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.
- U.S. Office Products is entering into a new $1.225
billion senior credit facility pursuant to an
agreement dated the date of this Information
Statement/Prospectus.
- U.S. Office Products has entered into an agreement to
issue and sell $400.0 million in 9 3/4% 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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- 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 12,187,723 shares of School Specialty
Common Stock are being distributed to stockholders of
U.S. Office Products in the School Specialty
Distribution.
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 on or about June 12, 1998 (the
"Mailing Date").
DISTRIBUTION AGENT................ American Stock Transfer & Trust Company
TAX CONSEQUENCES.................. Wilmer, Cutler & Pickering has delivered an opinion
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 are entering into an agreement (the
"Distribution 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 are being transferred to
School Specialty, (ii) liabilities are being 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 are entering 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)
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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 is being
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 are entering 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 $ 0.96 $ 0.64 $ 0.82 $ 1.14
Diluted........... $ 0.68 $ 1.06 $ 0.96 $ 0.64 $ 0.82 $ 1.14
Weighted average
shares
outstanding(5):
Basic............. 12,751 12,401 12,188 12,188 12,188 12,188
Diluted........... 13,020 12,642 12,188 12,188 12,188 12,188
</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 14.6 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..................................................................................... $ 0.91 $ 0.61
Diluted................................................................................... $ 0.91 $ 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 $ 1.06
Diluted................................................................................... $ 0.76 $ 1.06
</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 are acquiring 12,187,723 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 expected to be 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". Certain officers and directors of School
Specialty who together will hold an aggregate of 266,374 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 is entering into
a tax allocation agreement with School Specialty and the other Spin-Off
Companies (the "Tax Allocation Agreement") which provides 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 is also entering 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 is entering 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 has entered 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
15
<PAGE>
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. School Specialty, the other Spin-Off Companies and U.S. Office
Products are entering into the Distribution Agreement, the Tax Allocation
Agreement and the Employee Benefits Agreement, and the Spin-Off Companies are
entering into a Tax Indemnification Agreement. See "The Spin-Offs from U.S.
Office Products." These agreements 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 were
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 were 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 are
not more or less favorable to School Specialty than those that might have been
obtained from unaffiliated third parties.
As of June 10, 1998, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, is receiving 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 has delivered an opinion (the "Tax Opinion")
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). The Tax
Opinion is 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 represents 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 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
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<PAGE>
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 has been
no public market for the Company Common Stock. The initial public offering price
of the Company Common Stock in the Offering is being 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. 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
holds 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 includes 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 12,187,723 shares of School Specialty Common Stock will be
distributed to stockholders of U.S. Office Products in the School Specialty
Distribution.
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 is purchasing
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 is
incurring incur additional indebtedness to pay a substantial portion of
the purchase price for these shares.
- Pursuant to the Distributions, U.S. Office Products is distributing 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 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.
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<PAGE>
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
is undertaking the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products is purchasing
$222.2 million principal amount 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 $131.0 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.
- U.S. Office Products is entering into a new $1.225 billion senior credit
facility pursuant to an agreement dated the date of this Information
Statement/Prospectus.
- U.S. Office Products has entered into an agreement to issue and sell
$400.0 million in 9 3/4% 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.
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
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<PAGE>
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 is
repurchasing 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).
U.S. Office Products is financing 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 9 3/4% senior subordinated debt securities in a private placement.
U.S. Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $454.2 million. Approximately $377.4 million
was outstanding under U.S. Office Products' existing bank credit facility as of
May 23, 1998. U.S. Office Products has entered into a commitment for the USOP
Credit Facility.
The Record Date for the Distributions is occurring after acceptance of
shares in the Tender Offer. Accordingly, U.S. Office Products stockholders who
tendered their shares of U.S. Office Products Common Stock in the Tender Offer
will not receive the Distributions to the extent their U.S. Office Products
shares have been 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
160.0 million shares were validly tendered in the Tender Offer, approximately
23.2% of the shares tendered by any U.S. Office Products stockholder has been
accepted. U.S. Office Products stockholders who tendered 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
approximately 76.8% 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 approximately 36,368,426
shares of U.S. Office Products Common Stock and warrants to purchase additional
shares of U.S. Office Products Common Stock (as described below) 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.
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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) 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 options outstanding after the Tender Offer, and
(ii) all 2003 Notes that remain outstanding following the 2003 Note Tender 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 37.0% 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 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 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 after
implementation of the Strategic Restructuring Plan.
Because the Record Date for the Distributions is 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.
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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>
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(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.
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 held to consider
issuance of shares in the Equity Investment. See "Additional Information."
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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. The
Offering is expected to be for 2,125,000 shares (plus 318,750 shares subject to
the underwriters' option to purchase shares to cover over-allotments). A
preliminary prospectus dated May 18, 1998 estimated that the initial public
offering price will be between $14.00 and $16.00 per share. School Specialty
expects that the initial public offering price in the Offering will be
determined after the close of markets on the date of this Information
Statement/Prospectus. There can be no assurance that the initial public offering
price will be set at that time, that the price will be within the range set
forth in the preliminary prospectus, or that the Offering will be completed.
Information regarding the initial public offering price, and "as adjusted" pro
forma financial statements based on that price, will be set forth in the final
prospectus related to the Offering, which will be publicly available within two
business days after the price is determined. See "Additional Information."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION
Wilmer, Cutler & Pickering has delivered an opinion (the "Tax Opinion") 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 is 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 is
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 applies 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
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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 does 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 does 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 states 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. The Tax Opinion is 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 information, data,
documentation and other materials that Wilmer, Cutler & Pickering has deemed
necessary.
The Tax Opinion represents 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.
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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 has represented 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
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 has delivered an
opinion 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 has delivered an
opinion that the School Specialty Distribution satisfies 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
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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 has delivered an opinion 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. 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
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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 has delivered an opinion
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
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 is also entering 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
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 are being replaced with options
("School Specialty Options") to acquire shares of School Specialty Common
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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 375,895 U.S. Office Products Options are
held by employees of School Specialty (assuming all option holders tendered all
of the shares underlying their options in the Tender Offer). 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) 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. If the
initial public offering price cannot be determined at the time of the
adjustment, the closing price on June 10, 1998 will be substituted for the
initial public offering price in the formula. 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.
Replacement options will be issued under a stock option plan adopted 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.
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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."
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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, U.S. Office Products, School
Specialty and the Other Spin-Off Companies are entering into the Distribution
Agreement, the Tax Allocation Agreement, and the Employee Benefits Agreement and
the Spin-Off Companies are entering 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 provides
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
provides 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 became 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 is entering 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 is
borrowing $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 provides 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 provides for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement further provides 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 is also entering 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 is entering 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 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 also provides 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 (which is equal to the mid-point of the range set forth in the
preliminary prospectus dated May 18, 1998 related to the Offering) 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; 12,187,723
shares outstanding pro forma; 14,562,723 shares outstanding pro forma,
as adjusted)(1)........................................................ 12 15
Additional paid-in capital............................................... 93,301 124,929
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". School Specialty expects that the initial
public offering price in the Offering will be determined after the close of
markets on the date of this Information Statement/Prospectus. There can be
no assurance that the initial public offering price will be set at that
time, that the price will be within the range set forth in the preliminary
prospectus, or that the Offering will be completed. Information regarding
the initial public offering price, and "as adjusted" pro forma financial
statements based on that price, will be set forth in the final prospectus
related to the Offering, which will be publicly available within two
business days after the price is determined. See "Additional Information."
The approximately 14.6 million shares of Common Stock outstanding on a pro
forma basis, as adjusted, was calculated by adding to the approximately 12.2
million shares issued in the Distribution (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 $ 0.96 $ 0.64
Diluted........................... $ 0.37 $ 0.68 $ 0.96 $ 0.64
Weighted average shares
outstanding(4):.....................
Basic............................. 9,553 12,751 12,188 12,188
Diluted........................... 9,758 13,020 12,188 12,188
<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............................. $ 0.82
Diluted........................... $ 0.82
Weighted average shares
outstanding(4):.....................
Basic............................. 12,188
Diluted........................... 12,188
</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 14.6 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.................................................................................. $ 0.91 $ 0.61
Diluted................................................................................ $ 0.91 $ 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 they had purchased such
shares from the Underwriters.
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
Commission for the issuance of shares of School Specialty Common Stock in the
Offering. The Offering is expected to be for 2,125,000 shares (plus 318,750
shares subject to the underwriters' option to purchase shares to cover over-
allotments). A preliminary prospectus dated May 18, 1998 estimated that the
initial public offering price will be between $14.00 and $16.00 per share.
School Specialty expects that the initial public offering price in the Offering
will be determined after the close of markets on the date of this Information
Statement/ Prospectus. There can be no assurance that the initial public
offering price will be set at that time, that the price will be within the range
set forth in the preliminary prospectus, or that the Offering will be completed.
Information regarding the initial public offering price, and "as adjusted" pro
forma financial statements based on that price, will be set forth in the final
prospectus related to the Offering, which will be publicly available within two
business days after the price is determined. See "Additional Information." 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.
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<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 catalogs, and
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
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<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 is currently engaged in
discussions on a number of possible acquisitions, provided, however, the Company
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
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<PAGE>
franchises for certain furniture lines in specific territories and School
Specialty enjoys significant purchasing power in open furniture lines.
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.
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<PAGE>
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.
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
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<PAGE>
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
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.
53
<PAGE>
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 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
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<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.
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<PAGE>
MANAGEMENT OF SCHOOL SPECIALTY
DIRECTORS AND EXECUTIVE OFFICERS
It is anticipated that the directors and executive officers of School
Specialty prior to the closing of the Offering 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(1)......................... 64 Director
Rochelle Lamm Wallach(1).................. 50 Director
</TABLE>
- ------------------------
(1) Member of Audit and Compensation Committees
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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<PAGE>
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 created an Audit Committee prior to the
Distribution. 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 created a Compensation Committee prior to the
Distribution. 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)(3)......................... 1997 $ 141,535 $ 30,000 -- --
President, Childcraft 1998 157,646 62,633 20,000 92,000
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 Messr
Suchodolski's and Nagel's 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 being 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. If the initial public offering price cannot be determined at
the time of the adjustment, the closing price on June 10, 1998 will be
substituted for the initial offering price in the formula. 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 being replaced with options to acquire shares of School Specialty
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<PAGE>
Common Stock in connection with the 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 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. If the initial public offering price cannot be determined at
the time of the adjustment, the closing price on June 10, 1998 will be
substituted for the initial public offering price in the formula. 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 are being replaced with School
Specialty Options. As of the Distribution Date, 375,895 U.S. Office Products
Options were held by employees of School Specialty (assuming all option holders
tendered all of the shares underlying their options in the Tender Offer). 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
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<PAGE>
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 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. If the initial public
offering price cannot be determined at the time of the adjustment, the closing
price on June 10, 1998 will be substituted for the initial public offering price
in the formula. 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 has adopted 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 is 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 is receiving a stock option for Company Common Stock from School
Specialty as of June 10, 1998, 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 covers 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. If the Offering does
not occur, the exercise price of Mr. Ledecky's option will be equal to the
closing sale price of the Company Common Stock on NASDAQ on June 10, 1998 (the
date of grant). The estimated value of this option depends upon its exercise
price. 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
61
<PAGE>
prospectus for the Offering) at an assumed trading volatility of 35.0%, the
estimated value of the option is approximately $2.5 million, net of taxes at an
assumed 40% rate. Mr. Ledecky's option fully vests 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 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.
As of June 10, 1998 Daniel P. Spalding will 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 will 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
approximately $0.6 million, net of taxes at an assumed 40% rate. In addition,
management recommended option grants to certain executive officers of the
Company for approximately 5.6% of the Common Stock following 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 with U.S. Office
Products on January 13, 1998 which agreement has been amended and restated as of
June 8, 1998 (the "Ledecky Services Agreement") effective on the Distribution
Date and contingent on the consummation of the Distributions. 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 is entering 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
62
<PAGE>
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).
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 with
employees. (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 potentially 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 current 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
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<PAGE>
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 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 and Mr. Vander Zanden is the President and Chief Operating
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 May
15, 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...................................... 13,885(1) * 147,218 1.0%
Ronald Suchodolski......................................
Jonathan J. Ledecky..................................... 207,100(2) 1.9% 207,100 1.4
Richard H. Nagel........................................
Donald Ray Pate, Jr..................................... 91,777(3) * 158,444 1.1
Douglas Moskonas........................................
Leo C. McKenna.......................................... 1,116 * 1,116 *
David J. Vander Zanden..................................
Rochelle Lamm Wallach...................................
All current executive officers
and directors as a group (13 persons)................. 315,251 2.9 565,251 3.9
5% STOCKHOLDERS
FMR Corp.(4)............................................ 1,343,676 11.0 1,343,676 9.2
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(4)............. 704,760 5.8 704,760 4.8
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--1998 Stock Incentive Plan" 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.
66
<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. If the initial public offering price cannot be determined at
the time of the adjustment, the closing price on June 10, 1998 will be
substituted for the initial public offering price in the formula. 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.
67
<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"). Immediately following
the Distribution and the Offering, School Specialty is expected to have
outstanding approximately 14,562,723 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.
68
<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
After the offering, School Specialty intends to consider adoption of 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 12.2 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 $83,300 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....................... 12(c) 12 3(d) 15
Additional paid-in capital......... 93,301(c) 93,301 31,628(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 12,188(k)
Diluted............................ 13,020 12,188(k)
Net income per share:
Basic.............................. $ 0.69 $ 0.82
Diluted............................ $ 0.68 $ 0.82
<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.............................. 14,563(l)
Diluted............................ 14,563(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 12,188(k)
Diluted................. 9,758 12,188(k)
Net income per share:
Basic................... $ 0.38 $ 0.64
Diluted................. $ 0.37 $ 0.64
<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................... 14,563(l)
Diluted................. 14,563(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 12,188(k)
Diluted................... 10,196 12,188(k)
Net income per share:
Basic..................... $ 0.81 $ 0.96
Diluted................... $ 0.80 $ 0.96
<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..................... 14,563(l)
Diluted................... 14,563(l)
Net income per share:
Basic..................... $ 0.91
Diluted................... $ 0.91
</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 12,188 shares of common stock.
(d) Adjustment to reflect $31,631 of proceeds (net of expenses and underwriting
discount) from the sale of 2,375 shares of Common Stock as part of the
Offering (assuming an initial public offering price of $15 per share, which
is the mid-point of the range set forth in the preliminary prospectus dated
May 18, 1998 related to the offering) and the utilization of the proceeds to
repay long-term debt. School Specialty expects that the initial public
offering price in the Offering will be determined after the close of markets
on the date of this Information Statement/Prospectus. There can be no
assurance that the initial public offering price will be set at that time,
that the price will be within the range set forth in the preliminary
prospectus, or that the Offering will be completed.
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.
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)
(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.
(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 12,188 weighted average shares outstanding used to
calculate pro forma earnings per share is calculated based upon
approximately 109,690 shares of U.S. Office Products common stock
outstanding on the date of the School Specialty Distribution divided by
nine, which is the Distribution Ratio.
(l) The approximately 14,563 weighted average shares outstanding used to
calculate pro forma as adjusted earnings per share is based upon the
approximately 12,188 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>
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 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'
II-1
<PAGE>
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>
s
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York, New York, on June 8, 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. 4 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 8, 1998
- ------------------------------ (Principal Executive
Daniel P. Spalding Officer); Director
/s/ DONALD J. NOSKOWIAK Chief Financial Officer June 8, 1998
- ------------------------------ (Principal Financial and
Donald J. Noskowiak Accounting Officer)
/s/ DAVID J. VANDER ZANDEN President, Chief Operating June 8, 1998
- ------------------------------ Officer, and Director
David J. Vander Zanden
Director June , 1998
- ------------------------------
Rochelle Lamm Wallach
/s/ LEO C. MCKENNA Director June 8, 1998
- ------------------------------
Leo C. McKenna
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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 Reserved
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* Amended Services Agreement dated as of June 8, 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
<PAGE>
EXHIBIT 5
WILMER, CUTLER & PICKERING
2445 M Street, N.W.
Washington, D.C. 20037-1420
Telephone (202) 663-6000
Facsimile (202) 663-6363
June 9, 1998
School Specialty, Inc.
1000 North Bluemound Drive
Appleton, Wisconsin 54914
Attn: Daniel P. Spalding,
Chief Executive Officer
Gentlemen:
As special counsel for School Specialty, Inc., a Delaware corporation (the
"Company"), we are familiar with the Company's Registration Statement on Form
S-1, first filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), on February 19, 1998,
as amended by Amendment No. 1 to the Registration Statement filed with the
Commission on May 6, 1998, Amendment No. 2 to the Registration Statement filed
with the Commission on May 18, 1998, Amendment No. 3 to the Registration
Statement filed with the Commission on June 4, 1998 and Amendment No. 4 to the
Registration Statement filed with the Commission on June 9, 1998, as may be
further amended or supplemented (collectively, the "Registration Statement"),
with respect to the distribution or supplemented (collectively, the
"Registration Statement"), with respect to the distribution (the "Distribution")
of up to 12,180,161 shares of the Company's Common Stock, $.001 par value, by
U.S. Office Products Company (the "Shares") in a spin-off transaction.
In connection with the foregoing, we have examined (i) the Restated
Certificate of Incorporation of the Company filed with the Secretary of State of
Delaware on June 4, 1998, (ii) the By-Laws of the Company; (iii) the form of
stock certificate for common stock of the Company, and (iv) such records of the
corporate proceedings of the Company, such certificates of public officials and
such other documents as we deemed necessary to render this opinion.
<PAGE>
School Specialty, Inc.
June 9, 1998
Page 2
Based on such examination and assumption, we are of the opinion that:
1. The Company is a corporation duly incorporated and existing under the
laws of the State of Delaware.
2. The Shares will be duly authorized and when distributed in accordance
with the Registration Statement will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this Opinion as Exhibit 5 to the
Registration Statement and the reference to us in the Prospectus which is part
of the Registration Statement.
Very truly yours,
WILMER, CUTLER & PICKERING
By: /s/_Thomas W. White
Thomas W. White, a partner
<PAGE>
WILMER, CUTLER & PICKERING
2445 M Street, N.W.
Washington, D.C. 20037-1420
Telephone (202) 663-6000
Facsimile (202) 663-6363
June 9, 1998
To the Persons on the Attached Schedule A:
We have represented U.S. Office Products Company ("U.S. Office
Products") in connection with the distributions (each, a "Distribution" and
collectively, the "Distributions") by U.S. Office Products of all of the common
stock of Aztec Technology Partners, Inc., Workflow Management, Inc., School
Specialty, Inc., and Navigant International, Inc. ("Navigant"), all Delaware
corporations (collectively, the "Spin-Off Companies"), and the registration of
the common stock of the Spin-Off Companies pursuant to Registration Statements
on Forms S-1 as originally filed with the Securities and Exchange Commission on
February 19, 1998 as amended through the date of the final amendment dated June
9, 1998 (the "Information Statements"). We have also represented U.S. Office
Products in connection with the proposed equity investment in U.S. Office
Products by an affiliate (the "Investor") of Clayton, Dubilier & Rice, Inc.
("CD&R") and in connection with the other transactions described in the
Information Statements that are taking place in connection with the
Distributions. Professional Travel Corporation ("Professional Travel"),
Associated Travel, Inc., Aztec International, Inc., Bay State Computer Group,
Inc., Compel Corporation, School Specialty, Inc., a Wisconsin Corporation, The
Re-Print Corporation, SFI Corporation, United Envelope Company, Inc., Mile High
Office Supply, Inc., J. Thayer Company, Carithers-Wallace-Courtenay, Inc., W.J.
Saunders & Company, Inc., Office Connection, Inc., and Brasan, Inc. will be
referred to herein as the "Lead Companies." Capitalized terms not otherwise
defined in this letter shall have the meaning given such terms in the
Information Statements.
For purposes of rendering this opinion, we have reviewed the
Information Statements, including all exhibits thereto; the Investment
Agreement; the Distribution Agreement; the Tax Allocation Agreement; the Tax
Indemnification Agreement; the Employee Benefits Agreement; certain
documentation relating to the organization of the Spin-Off Companies; agreements
of merger pursuant to which U.S. Office Products acquired all of the stock of
each Lead Company through the merger of a subsidiary of U.S. Office Products
into each Lead Company; certain agreements, tax returns, and financial records
relating to past and
<PAGE>
current activities of the Lead Companies; agreements of merger and other
documentation relating to transactions pursuant to which U.S. Office Products,
Professional Travel, and the Spin-Off Companies (other than Navigant) have
acquired the assets and businesses of the Lead Companies; agreements and other
documentation pursuant to which Navigant acquired the stock of Professional
Travel; agreements and other documentation pursuant to which Professional Travel
and the Spin-Off Companies (other than Navigant) have acquired the stock of
certain subsidiaries of U.S. Office Products; and such other documents as we
have deemed relevant for purposes of this opinion. We have assumed that all
parties to agreements that we have examined have acted, and will act, in
accordance with the terms of such agreements.
We have also relied on the accuracy of the representations contained
in the letter from U.S. Office Products to us, the letters from each Spin-Off
Company to us, and the letter from the Investor to us of even date herewith
containing certain factual representations. We have also relied on the views of
Morgan Stanley & Co. Incorporated contained in its letter to us of even date
herewith (the "Morgan Stanley Letter"). We have not attempted to verify
independently such representations and opinion, but in the course of our
representation, nothing has come to our attention which would cause us to
question the accuracy thereof.
We have assumed the genuineness of all signatures, the proper
execution of all documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, and the authenticity of the originals of any such copies. The letters
of representation referenced in the preceding paragraph include representations
that, based on the knowledge of those parties, no Distribution is part of a plan
or series of transactions pursuant to which one or more persons will acquire
directly or indirectly stock representing 50% or more of either the voting power
or value of U.S. Office Products or any of the Spin-Off Companies. We have also
assumed that no Distribution is or will be part of any such plan that is outside
the knowledge of such parties as of the date of this opinion.
This opinion represents our best judgement of how a court would rule
if presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinions will not be challenged by the IRS or rejected by a
court.
On the basis of the foregoing, and our consideration of such other
matters of fact and law as we have deemed necessary or appropriate, it is our
opinion, under presently applicable U.S. federal income tax law, that:
1. Each Distribution will qualify under Section 355 of the Code.
2. No Distribution will be taxable under Section 355(e) of the
Code.
3. With respect to each Spin-Off Company, the transactions
pursuant to which such Spin-Off Company acquires the assets that it
will hold at the time of
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the Distribution, together with the Distribution of the common stock
of such Spin-Off Company, will qualify as reorganizations described in
Section 368 of the Code.
4. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of Common stock of
any Spin-Off Company. Holders of U.S. Office Products Common Stock
will recognize gain or loss on the receipt of cash in lieu of
fractional shares.
5. No gain or loss will be recognized by U.S. Office Products or
any of the Spin-Off Companies as a result of any of the Distributions.
6. A stockholder's basis in such stockholder's U.S. Office
Products Common Stock immediately before the Distributions 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 date of the Distributions.
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.
7. The holding period of the Spin-Off Companies' common stock
(including any fractional shares) received in the Distributions will
include the holding period of the U.S. Office Products Common Stock
with respect to which it was distributed.
You should be aware, however, that the requirements of Code Section 355
pertaining to business purpose, active trade or business, and absence of a
device for distribution of earnings and profits, as well as the requirement of
Code 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 Distributions. Accordingly, the IRS and/or a
court could reach a different conclusion.
BUSINESS PURPOSE. In order for a distribution of the stock of a
subsidiary to qualify under Section 355, it must be motivated, in whole or
substantial part, by one or more corporate business purposes. U.S. Office
Products has represented that the Distributions were motivated, in whole or
substantial part, to 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 stages of growth; to 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 business
3
<PAGE>
being acquired; to allow U.S. Office Products and the Spin-Off Companies to
offer their respective employees more focused compensation packages; and to make
possible the Equity Investment by the Investor and the consulting agreement with
CD&R, 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. These representations of U.S. Office Products have been
supplemented and supported by the representations made by the Investor and by
the Morgan Stanley Letter. Based on these representations and the Morgan
Stanley Letter, it is our opinion that each Distribution satisfies the business
purpose requirement of Code Section 355. 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 distribution of the stock
of a Spin-Off Company (other than Navigant) to qualify under Code Section 355,
both the Spin-Off Company and U.S. Office Products must be engaged in an active
trade or business that was actively conducted for the five year period preceding
the Distribution, taking into account only businesses that have been acquired in
transactions in which no gain or loss was recognized. In order for the
distribution of the stock of Navigant to qualify under Code Section 355,
substantially all of the assets of Navigant must consist of the stock of
Professional Travel, and Professional Travel and U.S. Office Products must meet
the requirements described in the preceding sentence. 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 made
to us and our review of documents, both as referenced above, it is our opinion
that each Distribution satisfies 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 we rely, there can be no assurance that the IRS will
not assert that the active trade or business requirement is not satisfied in the
case of any of the Distributions.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. Code
Section 355 does not apply to a transaction used principally as a device for the
distribution of the earnings and profits of the distributing corporation or the
corporation being distributed. 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 made to us, it is our
opinion that none of the Distributions is a transaction used principally as a
device for the distribution of earnings and profits of either U.S. Office
Products or any of the Spin-Off Companies. 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 we rely, there can be
4
<PAGE>
no assurance that the IRS will not assert that any of the Distributions are
transactions used principally as a device for the distribution of earnings and
profits.
This opinion is based on relevant provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated
thereunder, and interpretations of the foregoing as expressed in court decisions
and administrative determinations, as currently in effect. We undertake no
obligation to update or supplement this opinion to reflect any changes in laws
that may occur.
This opinion does not address all aspects of U.S. federal income
taxation that may be relevant to particular holders of U.S. Office Products
Common Stock and may not be applicable to holders who are not citizens or
residents of the United States. This opinion may not apply to certain classes
of taxpayers, including, without limitation, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities, persons who have
acquired U.S. Office Products Common Stock pursuant to the exercise or
termination of employee stock options or otherwise as compensation, or persons
who hold their U.S. Office Products Common Stock in a hedging transaction or as
a part of a straddle or conversion transaction.
This opinion has been prepared in connection with the filing of the
Information Statements and should not be quoted in whole or in part or otherwise
be referred to, nor otherwise be filed with or furnished to any governmental
agency or other person or entity, without our express prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Information Statements and to the references to this opinion in the Information
Statement. In giving this consent, we do not hereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
WILMER, CUTLER & PICKERING
By: /s/ William J. Wilkins
-----------------------
William J. Wilkins
A Partner
5
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SCHEDULE A
U.S. Office Products Company
Aztec Technology Partners, Inc.
Navigant International, Inc.
School Specialty, Inc.
Workflow Management, Inc.
The Lenders party from time to time to that certain Credit Agreement dated as
of June 9, 1998 among U.S. Office Products, Blue Star Group Limited, Merrill
Lynch Capital Corporation as Documentation Agent, Bankers Trust Company as
Syndication Agent and The Chase Manhattan Bank as Administrative Agent.
6
<PAGE>
/__/ Employee's Copy
/__/ Employer's Copy
[FORM OF]
SCHOOL SPECIALTY, INC.
EMPLOYMENT AGREEMENT
To Jonathan J. Ledecky:
This Agreement establishes the terms of your employment with School
Specialty, Inc., a Delaware corporation (the "Company"), as of June 10, 1998.
This Agreement is contingent on and subject to the closing of the
distribution (the "Distribution") to the U.S. Office Products Company
("USOP") stockholders of the Company's stock. If the Distribution does not
close by September 30, 1998, this Agreement will have no force or effect.
Duties You agree to serve as a senior consultant to the Company
providing strategic business advice and high level
acquisition negotiations. In that capacity, you will report
to the Company's senior management and its Board of Directors
(the "Board"). The Board can require such reports of your
activities on the Company's behalf as it reasonably deems
appropriate. It can require your services to the extent
consistent with your other contractual employment obligations
to Consolidation Capital Corporation ("CCC"), USOP, and the
other subsidiaries ("Other Spincos") of USOP whose common
stock will be distributed to the USOP stockholders concurrent
with the Company's stock, with the specific timing of your
services to be mutually agreed. You agree to comply with the
Company's generally applicable personnel policies to the
extent applicable to a person working on your schedule and
consistent with your obligations in this Agreement.
Term The term of this Agreement runs from the day following the
effective date of the Distribution (the "Closing Date")
through June 30, 2000, unless earlier terminated as provided
in this Agreement.
Salary You will receive an annual salary of $48,000 from the Closing
Date, payable in accordance with the Company's payroll
policies.
Benefits You are eligible for participation in the Company's generally
applicable benefit plans and programs (including its 401(k)
Plan) to the extent you satisfy their terms for
participation.
Employment Agreement between School Specialty and Jonathan J. Ledecky
<PAGE>
Expenses The Company will make available to you, on an as needed and
as mutually agreed basis, office space, secretarial
assistance, and supplies for the direct performance of your
services to the Company. It will pay or reimburse you for
reasonable business expenses relating to the direct
performance of such services, to limits to be mutually agreed
in advance, upon proper and timely substantiation.
Options You are receiving options for the Common Stock of the Company
in consideration for services as an employee of the Company.
Option Your options will cover 7.5% of the Company's
outstanding common stock determined as of the
Distribution Date (excluding the stock under the
Company's initial public offering), 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).
Term Your option will expire ten years from the Closing Date.
Price Your option will have a per share exercise price equal
to the offering price in the Company's initial public
offering, or if no initial public offering commences
on the Closing Date, at the fair market value of the
Company's common stock, as determined under the
Company's option plan, for the date of grant.
Schedule Your option will be fully vested when granted, but may
not be exercised until the first anniversary of the
Closing Date.
Your option will become exercisable before that first
anniversary if and to the extent that the Company
accelerates the exercisability of the options for
substantially all management optionholders.
All unexercised portions of your options will expire if,
as finally determined by a court, you violate the No
Competition provision.
Disgorging If a court finds that you violated the No Competition
Option provision, you agree that your unexercised options are
Gain retroactively forfeited as of the date of the violation
and that, if you have exercised the options since the
violation began, you will promptly pay the Company any
Option Gain, net of any taxes actually paid on the
options. For purposes of this Agreement, the "Option
Gain" per share you received on exercise of options on
or after the violation is
Stock for stock you have sold, the greater of (i) the spread
Sold between closing price on the date of exercise and the
exercise price paid ("Exercise Spread") and (ii) the
spread between the price at which you sold the stock and
the exercise price paid, and
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 2 of 10
<PAGE>
Stock for stock you have retained, the greater of (i) Exercise
Retained Spread and (ii) the spread between the closing price on
the date of the court's final determination and the
exercise price paid.
All unexpired options will vest and be exercisable at your
death.
Termination The Company can terminate your employment under this
Agreement only for "cause." "Cause" means your (i) conviction
of or guilty or nolo contendere plea to a felony demonstrably
and materially injurious to the Company's business, and
resulting in a sentence of imprisonment, or (ii), as finally
determined by a court, violation of the No Competition
provision as it applies to the Company, provided that the
Company will give you 10 days to resolve the violation before
attempting to invoke this termination provision. For a
termination under (ii), you agree to repay any salary you
received from the Company between the date of the violation
and the date of the court's determination.
Severance If your employment ends because you resign or are properly
terminated for cause, you will not receive severance or
termination pay and your salary will end. Except to the
extent the law or the terms of an applicable plan requires
otherwise, neither you nor your beneficiary or estate will
have any rights or claims under this Agreement or otherwise
to receive severance or any other compensation or to
participate in any other plan, arrangement, or benefit, after
your termination of employment, other than with respect to
your options.
No Competition Consistent with certain of your prior obligations to USOP,
you will not, until after the end of the Restricted Period,
for any reason whatsoever, directly or indirectly, for
yourself or on behalf of or in conjunction with any other
person, persons, company, partnership, corporation, or
business of whatever nature:
Competition (i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor,
consultant, or advisor, or as a sales representative, in
any business (other than an Excluded Business, as
defined below) selling any products or services in
direct competition with the Company within 100 miles of
where the Company or where any of the Company's
subsidiaries or affiliates regularly maintains any of
its or their offices with employees (the "Territory"),
where "products or services" are determined for this
clause with respect to products or services offered on
or before January 13, 1998 by the Company and/or any of
its subsidiaries or
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 3 of 10
<PAGE>
the predecessor companies combined to form the Company
in connection with Distribution and where the geographic
limitation is determined with reference to the Company
and its subsidiaries and not to USOP or the other
Spincos (e.g., competition with respect to the
Company is determined by reference to the location
where the Company or its subsidiary has an office
with employees and not to the locations of offices of
other Spincos);
Employees (ii) call upon any person who is, at that time, within
the Territory, an employee of the Company (including the
respective subsidiaries and/or affiliates thereof) in a
managerial capacity for the purpose or with the intent
of enticing such employee away from or out of the
Company's employ (including the respective subsidiaries
and/or affiliates thereof) other than a member of your
immediate family; or
Customers (iii) call upon any person or entity that is, at that
time, or that has been, within one year prior to that
time, a customer of the Company (including the
respective subsidiaries and/or affiliates thereof)
within the Territory for the purpose of soliciting or
selling products or services in direct competition with
the Company (including the respective subsidiaries
and/or affiliates thereof) within the Territory other
than on behalf of an Excluded Business.
For purposes of this Agreement, the "Restricted Period"
ends, on the later of the second anniversary of the
Closing Date and the date one year after you leave
employment with the Company and its subsidiaries and
affiliates.
For purposes of this Agreement, the "Excluded
Businesses" are the following:
(i) any electrical contracting business that, at
the time of its creation or acquisition and at
all later times, derives more than 50% of its
revenues from electrical contracting and
maintenance services, without regard to whether
it would otherwise violate the No Competition
clause because it is engaged in a business
directly competitive with the Aztec Technology
Partners, Inc. or any of its subsidiaries
(together, "Aztec"), provided that this
exclusion does not permit the business to engage
in any of the lines of business described under
"Consulting and Engineering Services," "Systems
and Network Design and Implementation Services,"
and "Software Development and Implementation
Services" in the Aztec Form S-1 filed on June 3,
1998 (the "Aztec Specified Businesses") other
than as provided under (ii) or (vi) in the
Excluded Businesses;
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 4 of 10
<PAGE>
(ii) any business whose revenue from activities
that compete with Aztec and its subsidiaries, at
the time of the business's creation or
acquisition and at all later times, is less than
$15 million per year, provided that this
exclusion does not permit the business to engage
in the Aztec Specified Businesses other than (i)
as provided under (vi) in the Excluded
Businesses or (ii) through the pending CCC
acquisitions of National Network Systems in
Denver, Colorado and of Chamber Electronics
Communications in Phoenix, Arizona
(iv) any business engaged, and only to the extent
that it is so engaged, in the business of selling,
supplying, or distributing janitorial or sanitary
products or services;
(v) any business engaged, and only to the extent
it is so engaged, in the managing or servicing of
office equipment (other than computers);
(vi) any business engaged, and only to the extent
it is so engaged, in providing internet access
services and activities supportive of such
services;
(vii) UniCapital Corporation's business as
described in its prospectus as of the date of
this Agreement; and
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 5 of 10
<PAGE>
(viii) U.S. Marketing Services Inc's ("USM")
shelf-stocking and merchandising, and point of
purchase display creation and incentive
marketing businesses, as described in its
registration statement filed on the date of this
Agreement, so long as you are solely an investor
in USM and not an officer, director, or employee
of, or consultant to, USM; provided, however,
that your service as a director will not violate
the foregoing requirement as long as you cease
to be a director no later than the 90th day
after the effective date of the registration of
USM's initial public offering;
provided, that in each case you are engaged in such
business only in a policy making role and not in the
entity's business in a manner that would involve you in
direct personal competition with the Company (and its
subsidiaries), provided further that this proviso does
not prevent your activities in furtherance of
acquisitions of Excluded Businesses, and provided
further that you will comply with your fiduciary
duties as a director of the Company in connection
with the Excluded Businesses.
To the extent permitted by your obligations to the relevant
Excluded Business, as an employee and/or director of the
Company (or its subsidiaries), you will inform the relevant
entity of any opportunities for it associated with any of the
Excluded Businesses.
In addition to (and not in lieu of) the restriction contained
in the Employees clause above, you agree that, during the
period that the restrictions contained in this No Competition
provision remain in effect, and so long as you are employed
by, or otherwise affiliated with, CCC, you will not, directly
or indirectly, offer employment with CCC to, or otherwise
allow CCC to employ, any person who
is employed by the Company or a subsidiary of the
Company at the time; or
was so employed by the Company or a subsidiary of the
Company within one year prior to such time.
Notwithstanding the above, the foregoing covenant shall
not be deemed to prohibit you from acquiring capital stock
in CCC or any Excluded Business or serving as an officer,
director or employee or consultant to CCC, or acquiring as
an investment not more than one percent (1%) of the
capital stock of a competing business, whose stock is
traded on a national securities exchange or
over-the-counter, provided that such actions do not
otherwise breach your obligations hereunder; and provided
further that actions of CCC after you have ceased to be a
director, officer, and employee of CCC will not constitute
a breach of this covenant, despite your continued stock
ownership, so long as you are not then directly assisting
any competitive actions.
Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant,
and because of the immediate and irreparable damage that
could be caused to the Company for which it would have no
other adequate remedy, you agree that the Company may enforce
the No Competition provisions by injunctions and restraining
orders.
You and the Company agree that you will not be in
violation of the No Competition provisions by virtue of
your investment in or other relationship to USOP, any of
the Spincos, or their respective subsidiaries, even if one
of those entities engages in direct competition with
another. You and the Company agree that CCC's acquisition
or retention of Wilson Electric Company, Inc. ("Wilson")
and Wilson's engaging in any lines of business in place as
of the Closing Date do not violate the No Competition
provision.
You and the Company agree that the No Competition provisions
impose a reasonable restraint on you in light of the
Company's activities and
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 6 of 10
<PAGE>
business (including the Company's subsidiaries and/or
affiliates) on the date of the execution of this Agreement.
The Company agrees to consider reasonably and within two
weeks of receipt any requests you make for a waiver from the
No Competition provisions for a particular acquisition.
You and the Company further agree that, if you enter into a
business or pursue other activities not in competition with
the Company (including the Company's subsidiaries), or
similar activities or business in locations the operation of
which, under such circumstances, does not violate the
Competition clause of this No Competition provision, and in
any event such new business, activities, or location is not
in violation of this No Competition provision or of your
obligations under this No Competition provision, if any, you
will not be chargeable with a violation of this provision if
the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar, or a competitive (i)
business, (ii) course of activities, or (iii) location, as
applicable.
The covenants in this No Competition provision are severable
and separate, and the unenforceability of any specific
covenant does not affect the provisions of any other
covenant. Moreover, if any court of competent jurisdiction
shall determine that the scope, time, or territorial
restrictions set forth are unreasonable, then it is the
intention of the parties that such restrictions be enforced
to the fullest extent which the court deems reasonable, and
the Agreement shall thereby be reformed.
All of the covenants in this No Competition provision shall
be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim
or cause of action by you against the Company, whether
predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of
such covenants. It is specifically agreed that the Restricted
Period, during which your agreements and covenants made in
this provision shall be effective, is computed by excluding
from such computation any time during which you are in
violation of any provision of the No Competition provision.
Notwithstanding any of the foregoing, if any applicable law
reduces the time period during which you are prohibited from
engaging in any competitive activity described in this
provision, you agree that the period for prohibition shall be
the maximum time permitted by law.
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 7 of 10
<PAGE>
You specifically agree that USOP and the Company have
provided you with sufficient consideration for the
enforcement of the No Competition obligations for the
Restricted Period and for the assumption of such benefits by
the Company. You specifically consent to USOP's assignment to
the Company of the right to enforce the No Competition
provisions of the Amended Ledecky Services Agreement, as
those provisions are incorporated in this Agreement.
Other The Company acknowledges that you are also employed by CCC,
Employment USOP, and the Other Spincos, and agrees that such dual
employment does not breach this Agreement, unless and to the
extent that you thereby violate the No Competition
provisions.
Return of All records, designs, patents, business plans, financial
Company statements, manuals, memoranda, lists and other property
Property delivered to or compiled by you by or on behalf of the
Company (including the respective subsidiaries thereof) or
their representatives, vendors, or customers that pertain to
the business of the Company (including the respective
subsidiaries thereof) shall be and remain the property of the
Company, and be subject at all times to its discretion and
control. Likewise, you will make reasonably available at the
Company's request during business hours all correspondence,
reports, records, acquisition materials, charts, advertising
materials and other similar data pertaining to the business,
activities, or future plans of the Company that you have
collected or obtained.
Trade Secrets You agree that you will not, during or after the term of this
Agreement with the Company, disclose the specific terms of
the Company's (including the respective subsidiaries thereof)
relationships or agreements with its or their respective
significant vendors or customers or any other significant and
material trade secret of the Company (including the
respective subsidiaries thereof) whether in existence or
proposed, to any person, firm, partnership, corporation or
business for any reason or purpose whatsoever. For CCC or any
other businesses with which you are affiliated or in which
you are a stockholder, you may reach agreement on comparable
terms with significant vendors to the Company, so long as you
do not provide copies of or otherwise disclose the specific
terms of the Company's relationships or agreements.
Indemnification If you are made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by the Company against you), by reason of the fact
that you are or were performing services under this Agreement
then the Company must indemnify you against all expenses
(including attorneys'
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 8 of 10
<PAGE>
fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by you in connection
therewith to the fullest extent provided by Delaware law and
in accordance with the Company's Bylaws.
No Prior You hereby represent and warrant to the Company that your
Agreements execution of this Agreement, your services to the Company,
and the performance of your agreements hereunder will not
violate or be a breach of any agreement with a former or
current employer, client, or any other person or entity.
Further, you agree to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses
of investigation, by any such third party that such third
party may now have or may hereafter come to have against the
Company based upon or arising out of any non-competition
agreement, invention, or secrecy agreement between you and
such third party that was in existence as of the date of this
Agreement.
Complete This Agreement is not a promise of future employment. You
Agreement have no oral representations, understandings, or agreements
with the Company or any of its officers, directors, or
representatives covering the same subject matter as this
Agreement. This written Agreement is the final, complete, and
exclusive statement and expression of the agreement between
the Company and you with respect to all the terms of this
Agreement, and it cannot be varied, contradicted, or
supplemented by evidence of any prior or contemporaneous oral
or written agreements. This written Agreement may not be
later modified except by a further writing signed by a duly
authorized officer of the Company and you, and no term of
this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
Notice Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: School Specialty, Inc.
1000 North Bluemound Drive
Appleton, Wisconsin 54914
Attention: Chief Executive Officer
To Employee: Jonathan J. Ledecky
1400 34th St., N.W.
Washington, D.C. 20007
Notice shall be deemed given and effective three days after
the deposit in the U.S. mail of a writing addressed as above
and sent first class mail, certified, return receipt
requested, or when actually received. Either party
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 9 of 10
<PAGE>
may change the address for notice by notifying the other
party of such change in accordance with this Notice
provision.
Severability If any portion of this Agreement is held invalid or
inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and
possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. This severability
provision shall be in addition to, and not in place of, the
comparable provisions in the No Competition provision.
Governing Law This Agreement shall in all respects be construed
according to the laws of the State of Delaware, other than
those relating to conflicts of laws. Any decision as to
breaches of this Agreement or any provision herein shall be
made pursuant to a final, nonappealable decision of a court.
Binding Effect This Agreement binds and benefits the Company, each of its
and Assignment successors or assigns, and your heirs and the personal
representatives of your estate. Without the Company's prior
written consent, you may not assign or delegate this
Agreement or any or all rights, duties, obligations, or
interests under it.
Superseding Contingent upon the Closing and effective only in that event,
Effect this Agreement supersedes any prior oral or written
employment or severance agreements between you and the
Company (specifically excluding your options to purchase
Company stock). Except as set forth above, this Agreement
supersedes all prior or contemporaneous negotiations,
commitments, agreements, and writings with respect to the
subject matter of this Agreement. All such other
negotiations, commitments, agreements, and writings will have
no further force or effect; and the parties to any such other
negotiation, commitment, agreement, or writing will have no
further rights or obligations thereunder.
Negotiated You agree that you have consulted with counsel of your own
Agreement selection and have negotiated the terms of this Agreement
with the Company. You and the Company agree that this
Agreement should not be construed against either party as the
"drafter."
SCHOOL SPECIALTY, INC.
Date: By:
-------------------- -----------------------------------
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 10 of 10
<PAGE>
President and Chief Executive Officer
I agree to and accept these terms, specifically including the assignment of the
No Competition provision.
Date:
-------------------- -----------------------------------
Jonathan J. Ledecky
Employment Agreement between School Specialty and Jonathan J. Ledecky
Page 11 of 10
<PAGE>
/__/ Employee's Copy
/__/ Company's Copy
AMENDED SERVICES AGREEMENT
To Jonathan J. Ledecky:
This Agreement, amended as of June 8, 1998, establishes the terms of your
continuing employment with U.S. Office Products Company, a Delaware
corporation (the "Company"), and replaces your amended and restated
employment agreement with the Company dated as of November 4, 1997 (the "1997
Agreement"), as amended. This Agreement is contingent on and subject to the
closing of the distributions (the "Distributions") to the Company's
stockholders of the stock of Aztec Technology Partners, Inc., Navigant
International, Inc., School Speciality, Inc., and Workflow Management, Inc.
(the "Spincos"). If the Distributions do not close by September 30, 1998,
this Agreement will have no force or effect and your 1997 Agreement will
remain in place and in effect. You are resigning from the Board effective as
of and contingent on the Distributions.
Duties You agree to serve as a senior consultant to the Company
providing strategic business advice and high level
acquisition negotiations. In that capacity, you will report
to the Company's Board of Directors (the "Board"). The Board
can require such reports of your activities on the Company's
behalf as it reasonably deems appropriate. It can require
your services to the extent consistent with your other
contractual employment obligations to Consolidation Capital
Corporation ("CCC") and the Spincos, with the specific timing
of your services to be mutually agreed. You agree to comply
with the Company's generally applicable personnel policies to
the extent applicable to a person working on your schedule
and consistent with your obligations in this Agreement.
Term The term of this Agreement runs from the day following the
effective date of the Distributions (the "Closing Date")
through June 30, 2001, unless earlier terminated as provided
in this Agreement.
Salary You will receive an annual salary of $48,000 from the Closing
Date, payable in accordance with the Company's payroll
policies.
Company Your Company options will continue to vest and be exercisable
on their
<PAGE>
Options current schedules unless and until the Company properly
terminates your employment for Cause under this Agreement.
The Company will adjust the exercise price of your options
consistent with adjustments for substantially all of the
other optionholders' options.
Your existing Company options will not convert into Spinco
options.
The Company will accelerate your options if and to the extent
that the Company accelerates the exercisability of options
for substantially all management optionholders.
You waive any claim to participate in any matching or reload
program that may apply to other employees of the Company.
The unexercised portions of your Company options will expire
under their current terms or if, as finally determined by a
court, you violate the No Competition provision as it applies
to the Company.
Disgorging If a court finds that you violated the No
Option Competition provision, you agree that your
Gain unexercised options are retroactively
forfeited as of the date of the violation and
that, if you have exercised the options since
the violation began, you will promptly pay the
Company any Option Gain, net of any taxes
actually paid on the options. For purposes
of this Agreement, the "Option Gain" per share
you received on exercise of options on or
after the violation is
Stock for stock you have sold, the greater
Sold of (i) the spread between closing price
on the date of exercise and the exercise
price paid ("Exercise Spread") and (ii)
the spread between the price at which you
sold the stock and the exercise price
paid, and
Stock for stock you have retained, the greater
Retained of (i) Exercise Spread and (ii) the
spread between the closing price on the
date of the court's final determination
and the exercise price paid.
Benefits You are eligible for participation in the Company's generally
applicable benefit plans and programs (including its 401(k)
Plan) to the extent you satisfy their terms for
participation.
Expenses The Company will make available to you, on an as needed and
as mutually agreed basis, office space, secretarial
assistance, and supplies for the direct performance of your
services to the Company. It will pay or reimburse
Amended Services Agreement with Jonathan J. Ledecky Page 2 of 12
<PAGE>
you for reasonable business expenses relating to the
direct performance of such services to the Company
(including expenses incurred before the date of this
Agreement but not previously submitted, as long as you
submit the expenses by June 30, 1998), subject to limits
to be mutually agreed in advance, upon proper and timely
substantiation.
Amended Services Agreement with Jonathan J. Ledecky Page 3 of 12
<PAGE>
Spinco You will receive options in the Spincos in consideration for
Compensation your services as an employee of each Spinco.
Option Your Spinco options will cover 7.5% of the
outstanding common stock of each Spinco
determined as of the Distribution Date
(excluding the stock under the Spinco's
initial public offering), 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).
Term Each Spinco option will expire ten years from
the Closing Date.
Price Each Spinco option will have a per share
exercise price equal to the offering price in
the initial public offerings for each
Spinco or, if no initial public offering
commences on the Closing Date, at the fair
market value of the Spinco's common stock,
as determined under the Spinco's option
plan, for the date of the grant.
Schedule Each Spinco option will be fully vested when
granted, but may not be exercised until the
first anniversary of the Closing Date.
Your Spinco options with respect to a
particular Spinco will become exercisable
before that first anniversary if and to the
extent the relevant Spinco accelerates the
options for substantially all management
optionholders.
All unexercised portions of Spinco options
with respect to a particular Spinco will
expire if, as finally determined by a court,
you violate the No Competition provision as it
applies to the respective Spinco.
If a court finds that you violated the No
Competition provision with respect to a
particular Spinco, you agree that your
unexercised options from that Spinco are
retroactively forfeited as of the date of the
violation and that, if you have exercised the
options from that Spinco since the violation
began, you will promptly pay that Spinco any
Option Gain, net of any taxes actually paid
on the options.
All unexpired options will vest and be
exercisable at your death.
Termination The Company can terminate your employment under this
Agreement only for "cause." "Cause" means your (i) conviction
of or guilty or nolo contendere plea to a felony demonstrably
and materially injurious to the Company's business, and
resulting in a sentence of imprisonment, or (ii), as finally
determined by a court, violation of the No Competition
provision as it applies to the Company, provided that the
Company will give you 10 days to resolve the violation before
attempting to invoke this termination provision. For a
termination under (ii), you agree to repay any
Amended Services Agreement with Jonathan J. Ledecky Page 4 of 12
<PAGE>
salary you received from the Company between the date of the
violation and the date of the court's determination.
Severance If your employment ends because you resign or are properly
terminated for cause, you will not receive severance or
termination pay, your salary will end, and your Company
options will cease vesting. Except to the extent the law or
the terms of an applicable plan requires otherwise, neither
you nor your beneficiary or estate will have any rights or
claims under this Agreement or otherwise to receive severance
or any other compensation or to participate in any other
plan, arrangement, or benefit, after your termination of
employment, other than with respect to your options.
No Competition The Company hereby releases you, effective for acts or
omissions after the Closing Date, from any obligation under
your 1997 Agreement to notify the Company regarding corporate
opportunities.
Consistent with certain of your prior obligations under the
1997 Agreement, you will not, until after the end of the
Restricted Period, for any reason whatsoever, directly or
indirectly, for yourself or on behalf of or in conjunction
with any other person, persons, company, partnership,
corporation, or business of whatever nature:
Competition (i) engage, as an officer, director,
shareholder, owner, partner, joint venturer,
or in a managerial capacity, whether as an
employee, independent contractor, consultant,
or advisor, or as a sales representative, in
any business (other than an Excluded Business,
as defined below) selling any products or
services in direct competition with the
Company within 100 miles of where the Company
or where any of the Company's subsidiaries or
affiliates regularly maintains any of its or
their offices with employees (the
"Territory"), where "products or services" are
determined for this clause with respect to
products or services offered on or before
January 13, 1998 by the Company and/or any of
the Spincos and where the geographic
limitation is determined with reference to the
applicable entity and its subsidiaries (e.g.,
competition with respect to a Spinco is
determined by reference to the location where
that Spinco has an office with employees and
not to the locations of others);
Employees (ii) call upon any person who is, at that
time, within the Territory, an employee of the
Company (including the respective subsidiaries
and/or affiliates thereof) in a managerial
capacity for the purpose
Amended Services Agreement with Jonathan J. Ledecky Page 5 of 12
<PAGE>
or with the intent of enticing such employee
away from or out of the Company's employ
(including the respective subsidiaries and/or
affiliates thereof) other than a member of
your immediate family; or
Customers (iii) call upon any person or entity that is,
at that time, or that has been, within one
year prior to that time, a customer of the
Company (including the respective subsidiaries
and/or affiliates thereof) within the
Territory for the purpose of soliciting or
selling products or services in direct
competition with the Company (including the
respective subsidiaries and/or affiliates
thereof) within the Territory other than on
behalf of an Excluded Business.
For purposes of this Agreement, the
"Restricted Period" ends, for the Company and
its subsidiaries and affiliates after the
Closing Date, on the second anniversary of the
Closing Date, and ends, for each Spinco and
its subsidiaries and affiliates after the
Closing Date, on the later of the second
anniversary of the Closing Date and the date
one year after you leave employment with the
Spinco and its subsidiaries and affiliates.
For purposes of this Agreement, the "Excluded
Businesses" are the following
(i) any electrical contracting
business that, at the time of its
creation or acquisition and at all
later times, derives more than 50% of
its revenues from electrical
contracting and maintenance services,
without regard to whether it would
otherwise violate the No Competition
clause because it is also engaged in a
business directly competitive with
Aztec Technology Partners, Inc. or any
of its subsidiaries (together,
"Aztec"), provided that this exclusion
does not permit the business to engage
in any of the lines of business
described under "Consulting and
Engineering Services," "Systems and
Network Design and Implementation
Services" and "Software Development
and Implementation Services" in the
Aztec Form S-1 filed on June 3, 1998
(the "Aztec Specified Businesses")
other than as provided under (ii) or (vi)
in the Excluded Businesses;
Amended Services Agreement with Jonathan J. Ledecky Page 6 of 12
<PAGE>
(ii) any business whose revenue from
activities that compete with Aztec and
its subsidiaries, at the time of the
business's creation or acquisition and
at all later times, is less than $15
million per year, provided that this
exclusion does not permit the business
to engage in the Aztec Specified
Businesses other than (i) as provided
under (vi) in the Excluded Businesses
or (ii) through the pending CCC
acquisitions of National Network
Systems in Denver, Colorado and of
Chambers Electronics Communications in
Phoenix, Arizona;
(iii) any business engaged, and only to
the extent it is so engaged, in computer
monitoring for facilities management;
(iv) any business engaged, and only to
the extent that it is so engaged, in the
business of selling, supplying, or
distributing janitorial or sanitary
products or services;
(v) any business engaged, and only to
the extent it is so engaged, in the
managing or servicing of office
equipment (other than computers);
(vi) any business engaged, and only to
the extent it is so engaged, in providing
internet access services and
activities supportive of such services;
(vii) UniCapital Corporation's
business as described in its prospectus
as of the date of this Agreement; and
(viii) U.S. Marketing Services Inc.'s
("USM") shelf-stocking and merchandising,
and point of purchase display creation
and incentive marketing businesses,
as described in its registration
statement filed on the date of this
Agreement, so long as you are solely
an investor in USM and not an officer,
director, or employee of or consultant
to, USM; provided however, that your
service as a director will not violate
the foregoing requirement as long as
you cease to be a director no later
than the 90th day after the effective
date of USM's initial public offering;
Amended Services Agreement with Jonathan J. Ledecky Page 7 of 12
<PAGE>
provided, that in each case you are engaged in
such business only in a policy making role and
not in the entity's business in a manner that
would involve you in direct personal
competition with the Company (and its
subsidiaries) or the applicable Spinco (and
its subsidiaries), provided further that
this proviso does not prevent your
activities in furtherance of acquisitions
of Excluded Businesses, and provided further
that you will comply with your fiduciary
duties as a director of each of the Spincos
in connection with the Excluded Businesses.
To the extent permitted by your obligations to the relevant
Excluded Business, as an employee and/or director of the
Company and each Spinco (or their subsidiaries), you will
inform the relevant entity of any opportunities for it
associated with any of the Excluded Businesses.
In addition to (and not in lieu of) the restriction contained
in the Employees clause above, you agree that, during the
period that the restrictions contained in this No Competition
provision remain in effect, and so long as you are employed
by, or otherwise affiliated with, CCC, you will not, directly
or indirectly, offer employment with CCC to, or otherwise
allow CCC to employ, any person who
is employed by the Company or a subsidiary of the
Company at the time; or
was so employed by the Company or a subsidiary of the
Company within one year prior to such time; or
provides (or within the prior year provided) substantial
service to the Company or a subsidiary of the Company as
part of an entity that is or was a vendor or other
outside service provider to the Company or any
subsidiary; provided, however, that this provision
regarding vendors and outside service providers will not
apply after the Closing Date. In addition, the Company
specifically agrees that you may hire Jackie Scott and
Amy Blodgett, notwithstanding anything to the contrary
in the 1997 Agreement.
Notwithstanding the above, the foregoing covenant shall
not be deemed to prohibit you from acquiring capital stock
in CCC or any Excluded Business or serving as an officer,
director or employee or consultant to CCC, or acquiring as
an investment not more than 4.9% of the capital stock of a
competing business, whose stock is traded on a national
securities exchange or over-the-counter, provided that
such actions do not otherwise breach your obligations
hereunder; and provided further that actions of CCC after
you have ceased to be a director, officer, and employee of
CCC will not constitute a breach of this covenant despite
your continued stock ownership, so long as you are not
then directly assisting any competitive actions.
Amended Services Agreement with Jonathan J. Ledecky Page 8 of 12
<PAGE>
Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant,
and because of the immediate and irreparable damage that
could be caused to the Company for which it would have no
other adequate remedy, you agree that the Company may enforce
the No Competition provisions by injunctions and restraining
orders.
You and the Company agree that you will not be in
violation of the No Competition provisions by virtue of
your investment in or other relationship to the Company,
any of the Spincos, or their respective subsidiaries, even
if one of those entities engages in direct competition
with another. You and the Company agree that CCC's
acquisition or retention of Wilson Electric Company, Inc.
("Wilson") and Wilson's engaging in any lines of business
in place as of the Closing Date do not violate the No
Competition provision.
You and the Company agree that the No Competition provisions
impose a reasonable restraint on you in light of the
Company's activities and business (including the Company's
subsidiaries and/or affiliates) on the date of the execution
of this Agreement.
The Company agrees to consider reasonably and within two
weeks of receipt any requests you make for a waiver from the
No Competition provisions for a particular acquisition.
You and the Company further agree that, if you enter into a
business or pursue other activities not in competition with
the Company (including the Company's subsidiaries), or
similar activities or business in locations the operation of
which, under such circumstances, does not violate the
Competition clause of this No Competition provision, and in
any event such new business, activities, or location is not
in violation of this No Competition provision or of your
obligations under this No Competition provision, if any, you
will not be chargeable with a violation of this provision if
the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar, or a competitive (i)
business, (ii) course of activities, or (iii) location, as
applicable.
The covenants in this No Competition provision are severable
and separate, and the unenforceability of any specific
covenant does not affect the provisions of any other
covenant. Moreover, if any court of competent jurisdiction
shall determine that the scope, time, or territorial
restrictions set forth are unreasonable, then it is the
intention of the parties that such restrictions be enforced
to the fullest extent which the court deems reasonable, and
the Agreement shall thereby be reformed.
All of the covenants in this No Competition provision shall
be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim
or cause of action by you against the Company, whether
predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of
such covenants. It is specifically agreed that the Restricted
Period, during which your
Amended Services Agreement with Jonathan J. Ledecky Page 9 of 12
<PAGE>
agreements and covenants made in this provision shall be
effective, is computed by excluding from such computation any
time during which you are in violation of any provision of
the No Competition provision.
Notwithstanding any of the foregoing, if any applicable law
reduces the time period during which you are prohibited from
engaging in any competitive activity described in this
provision, you agree that the period for prohibition shall be
the maximum time permitted by law.
You specifically agree that the Company and the Spincos have
provided you with sufficient consideration for the
enforcement of the No Competition obligations for the
Restricted Period and for the assignment of this provision to
the Spincos.
After the Distributions, you agree that the Company will
assign to each Spinco the ability to enforce the
noncompetition provisions as to its own business.
Other The Company acknowledges that you are also employed by CCC
Employment and the Spincos, and agrees that such dual employment does
not breach this Agreement, unless and to the extent that you
thereby violate the No Competition provisions.
Return of All records, designs, patents, business plans, financial
Company statements, manuals, memoranda, lists and other property
Property delivered to or compiled by you by or on behalf of the
Company (including the respective subsidiaries thereof) or
their representatives, vendors, or customers that pertain to
the business of the Company (including the respective
subsidiaries thereof) shall be and remain the property of the
Company, and be subject at all times to its discretion and
control. Likewise, you will make reasonably available at the
Company's request during business hours all correspondence,
reports, records, acquisition materials, charts, advertising
materials and other similar data pertaining to the business,
activities, or future plans of the Company that you have
collected or obtained.
Trade You agree that you will not, during or after the term of this
Secrets Agreement with the Company, disclose the specific terms of
the Company's (including the respective subsidiaries thereof)
relationships or agreements with its or their respective
significant vendors or customers or any other significant and
material trade secret of the Company (including the
respective subsidiaries thereof) whether in existence or
proposed, to any person, firm, partnership, corporation or
business for any reason or
Amended Services Agreement with Jonathan J. Ledecky Page 10 of 12
<PAGE>
purpose whatsoever. For CCC or any other businesses with
which you are affiliated or in which you are a stockholder,
you may reach agreement on comparable terms with significant
vendors to the Company, so long as you do not provide copies
of or otherwise disclose the specific terms of the Company's
relationships or agreements.
Indemnification If you are made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by the Company against you), by reason of the fact
that you are or were performing services under this Agreement
or the 1997 Agreement then the Company must indemnify you
against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, as actually and
reasonably incurred by you in connection therewith to the
fullest extent provided by Delaware law and in accordance
with the Company's Bylaws. Further, while you are expected at
all times to use your best efforts to faithfully discharge
your duties under this Agreement, the Company will not hold
you liable to itself or its subsidiaries or affiliates for
errors or omissions made in good faith where you have not
exhibited gross, willful, or wanton negligence or misconduct
or performed criminal or fraudulent acts that materially
damage the business of the Company; provided, however, that
this sentence shall not apply to acts or omissions between
the effective date of the 1997 Agreement and the Closing
Date.
No Prior You hereby represent and warrant to the Company that your
Agreements execution of this Agreement, your services to the Company,
and the performance of your agreements hereunder will not
violate or be a breach of any agreement with a former or
current employer, client, or any other person or entity.
Further, you agree to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses
of investigation, by any such third party that such third
party may now have or may hereafter come to have against the
Company based upon or arising out of any non-competition
agreement, invention, or secrecy agreement between you and
such third party that was in existence as of the date of this
Agreement.
Complete This Agreement is not a promise of future employment. You
Agreements have no oral representations, understandings, or agreements
with the Company or any of its officers, directors, or
representatives covering the same subject matter as this
Agreement. This written Agreement is the final, complete, and
exclusive statement and expression of the agreement between
the Company and you with respect to all the terms of this
Agreement, and it
Amended Services Agreement with Jonathan J. Ledecky Page 11 of 12
<PAGE>
cannot be varied, contradicted, or supplemented by evidence
of any prior or contemporaneous oral or written agreements.
This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the
Company and you, and no term of this Agreement may be waived
except by writing signed by the party waiving the benefit of
such term.
Notice Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, D.C. 20007
Attention: General Counsel
To Employee: Jonathan J. Ledecky
1400 34th St., N.W.
Washington, D.C. 20007
Notice shall be deemed given and effective three days after
the deposit in the U.S. mail of a writing addressed as above
and sent first class mail, certified, return receipt
requested, or when actually received. Either party may change
the address for notice by notifying the other party of such
change in accordance with this Notice provision.
Severability If any portion of this Agreement is held invalid or
inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and
possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. This severability
provision shall be in addition to, and not in place of, the
comparable provisions in the No Competition provision.
Governing Law This Agreement shall in all respects be construed according
to the laws of the State of Delaware, other than those
relating to conflicts of laws. Any decision as to breaches of
this Agreement or any provision herein shall be made pursuant
to a final, nonappealable decision of a court.
Binding Effect This Agreement binds and benefits the Company and each of the
and Assignment Spincos, each of their respective successors or assigns, and
your heirs and the personal representatives of your estate.
Without the Company's prior written consent, you may not
assign or delegate this Agreement or any or
Amended Services Agreement with Jonathan J. Ledecky Page 12 of 12
<PAGE>
all rights, duties, obligations, or interests under it. You
specifically agree that the Company may assign its rights
under No Competition, in whole or in part, to each Spinco
with respect to such Spinco's business.
Superseding Contingent upon the Closing and effective only in that event,
Effect this Agreement supersedes any prior oral or written
employment or severance agreements between you and the
Company (including specifically your 1997 Agreement
(including but not limited to its Change of Control
provisions) but specifically excluding your options to
purchase Company stock). Contingent upon the Closing and
effective only in that event, the 1997 Agreement will
terminate as of the Closing Date. Except as set forth above,
this Agreement supersedes all prior or contemporaneous
negotiations, commitments, agreements, and writings with
respect to the subject matter of this Agreement. All such
other negotiations, commitments, agreements, and writings
will have no further force or effect; and the parties to any
such other negotiation, commitment, agreement, or writing
will have no further rights or obligations thereunder.
Negotiated You agree that you have consulted with counsel of your own
Agreement selection and have negotiated the terms of this Agreement
with the Company. You and the Company agree that this
Agreement should not be construed against either party as the
"drafter."
U.S. OFFICE PRODUCTS COMPANY
Date: By: /s/ Thomas Morgan
-------------------- -----------------------------------
Thomas Morgan
President and Chief Executive Officer
I agree to and accept these terms:
Date: /s/ Jonathan J. Ledecky
-------------------- -----------------------------------
Jonathan J. Ledecky
Amended Services Agreement with Jonathan J. Ledecky Page 13 of 12
<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
16, 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
