<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1998
REGISTRATION NO. 333-46537
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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 52-2080520
(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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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 6, 1998
INFORMATION STATEMENT/PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
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[LOGO] SCHOOL SPECIALTY, INC.
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DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
SCHOOL SPECIALTY, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of School Specialty, Inc. ("School Specialty").
School Specialty is a Delaware corporation formed by U.S. Office Products that
will own substantially all the assets of, and will be responsible for
substantially all the liabilities associated with, U.S. Office Products'
Educational Supplies and Products Division. Pursuant to this distribution (the
"School Specialty Distribution"), all of the issued and outstanding shares of
the common stock, $.001 par value per share, of School Specialty (the "School
Specialty Common Stock") will be distributed to holders of record as of the
close of business on , 1998 (the "Record Date") of the common stock, par
value $.001 per share, of U.S. Office Products ("U.S. Office Products Common
Stock"). The Company currently estimates that each such holder will receive one
share of School Specialty Common Stock for every shares of U.S. Office
Products Common Stock held on the Record Date (the "Distribution Ratio").
Fractional shares will be aggregated into whole shares of School Specialty
Common Stock and sold on the open market by the Distribution Agent (as defined
herein). The proceeds of such sales will be distributed to holders who otherwise
would be entitled to receive fractional shares. See "The School Specialty
Distribution-- General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of School Specialty Common Stock they receive in
the Distribution. There is no current public trading market for School Specialty
Common Stock. School Specialty has applied for quotation of the shares of School
Specialty Common Stock on the Nasdaq National Market under the symbol ABCZ.
The School Specialty Distribution is an element of a comprehensive
restructuring plan (the "Strategic Restructuring Plan") approved by the Board of
Directors of U.S. Office Products. 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 Clayton, Dubilier
& Rice, 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. In addition to this Information
Statement/Prospectus, U.S. Office Products is distributing a Tender Offer
Statement regarding the Tender Offer and a Proxy Statement regarding stockholder
approval of the issuance of securities in the Equity Investment. See "Additional
Information."
All holders of U.S. Office Products Common Stock, including the executive
officers and directors of the Company, have the right to participate in the
Tender Offer. The Company has been advised that all of the executive officers
and directors who hold shares (or options to purchase shares) of U.S. Office
Products Common Stock, except for Donald Ray Pate, Jr., intend to tender shares
and options in the Tender Offer. See "Management of School Specialty."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 9.
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 9.
--------------------------
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 , 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 the 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 1, 1998 and U.S. Office Products
Proxy Statement filed on May 1, 1998.
School Specialty intends to furnish its stockholders annual reports
containing financial statements audited by its independent auditor. School
Specialty does not intend to furnish its stockholders quarterly reports.
Questions concerning the School Specialty Distribution should be directed to
Mark D. Director, Chief Administrative Officer, Secretary and General Counsel of
U.S. Office Products, or Donald H. Platt, Senior Vice President, Chief Financial
Officer and Treasurer of U.S. Office Products, at 1025 Thomas Jefferson Street,
N.W., Washington, D.C. 20007, telephone (202) 339-6700. After the School
Specialty Distribution, holders of School Specialty Common Stock having
inquiries related to their investment in School Specialty should contact Daniel
P. Spalding, Chief Executive Officer, at 1000 North Bluemound Drive, P.O. Box
1579, Appleton, Wisconsin 54914, telephone (920) 734-2756.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998, the expiration of the twenty-fifth calendar day
following the School Specialty Distribution, all dealers effecting transactions
in registered securities, whether or not participating in this distribution, may
be required to deliver an Information Statement/Prospectus.
------------------------
Childcraft Education Corp.-Registered Trademark- is a trademark of
Childcraft Education Corp. School Specialty-Registered Trademark- and Education
Access-Registered Trademark- are trademarks of School Specialty. Gresswell is a
common law trademark of School Specialty.
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TABLE OF CONTENTS
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SUMMARY.................................................................................................... 1
RISK FACTORS............................................................................................... 9
THE SCHOOL SPECIALTY DISTRIBUTION.......................................................................... 17
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS.................................................................... 29
DIVIDEND POLICY............................................................................................ 31
CAPITALIZATION............................................................................................. 32
SELECTED FINANCIAL DATA.................................................................................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SCHOOL SPECIALTY... 36
INDUSTRY OVERVIEW.......................................................................................... 44
BUSINESS................................................................................................... 45
MANAGEMENT OF SCHOOL SPECIALTY............................................................................. 52
CERTAIN TRANSACTIONS....................................................................................... 60
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY................................................................. 61
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK.............................................................. 63
EXPERTS.................................................................................................... 67
LEGAL MATTERS.............................................................................................. 67
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
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<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 COMPANY
COMMON STOCK (INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN
FULL) BY THE COMPANY (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") 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 $379.5 million and pro forma operating income aggregated
$24.7 million, which represented compound annual increases of 45% and 75%,
respectively, over sales 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.
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, according to
the National School Supply & Equipment Association ("NSSEA"). 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.
<PAGE>
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 shareholders 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
2
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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 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 revenues by adding sales representatives
in geographic markets in which the Company does not have a significant presence.
In addition, the Company believes that it can further increase revenues by cross
merchandising its specialty product lines to its general supplies customers.
RECENT DEVELOPMENTS
On March 20, 1998, the Company acquired the catalog business of Education
Access, a catalog reseller of technology solutions for the K-12 education
market. This new product line will offer curriculum software, productivity
software, peripherals, networking products and other related products through
catalogs mailed twice a year.
BACKGROUND OF THE SCHOOL SPECIALTY DISTRIBUTION
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THE DISTRIBUTION.................. Shares of common stock, par value $.001 per share, of
School Specialty (the "Company Common Stock" or the
"School Specialty Common Stock") will, subject to
certain conditions, be distributed to the stockholders
of record of U.S. Office Products (the "School Specialty
Distribution" or the "Distribution") as of ,
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 the plan, as so modified,
the "Strategic Restructuring Plan") are:
- Pursuant to a self-tender offer, U.S. Office Products
will purchase 37,037,037 shares of its common stock
$.001 par value ("U.S. Office Products Common Stock"),
(including shares that may be issued on exercise of
vested and unvested options for U.S. Office Products
Common Stock) at $27.00 per share (or in the case of
stock options, at $27.00 minus the exercise price of
the options) (the "Tender Offer").
- After acceptance of the shares in the Tender Offer,
U.S. Office Products will distribute to U.S. Office
Products stockholders the shares of four separate
companies: Aztec Technology Partners, Inc., Workflow
Management, Inc., School Specialty, Inc., and Navigant
International, Inc. (collectively the "Spin-Off
Companies"). The distributions of the shares of the
Spin-Off Companies are referred to in this Information
Statement/Prospectus as the "Distributions." The
Spin-Off Companies will hold U.S. Office Products'
current technology solutions, print management,
educational supplies, and corporate travel services
businesses, respectively.
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- Following the Record Date, an affiliate ("CD&R") of
Clayton, Dubilier & Rice, Inc., a private investment
firm, will acquire for $270.0 million, shares of U.S.
Office Products Common Stock representing 24.9% of the
outstanding equity of U.S. Office Products (after
giving effect to the Tender Offer and issuance of
shares to CD&R) and warrants to purchase additional
U.S. Office Products Common Stock (the "Equity
Investment"). CD&R will not acquire any interests in
the Spin-Off Companies.
U.S. Office Products will retain its North American
Office Products Group (which includes the office supply,
office furniture, and office coffee and beverage
services businesses), Mail Boxes, Etc., its New Zealand
and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan,
U.S. Office Products plans to undertake the following
transactions (the "Financing Transactions"):
- Pursuant to a tender offer, U.S. Office Products will
purchase any or all of its 5 1/2% convertible
subordinated notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and
accrued interest of such notes (the "2003 Note
Tender").
- Pursuant to an exchange offer, U.S. Office Products
will exchange any or all of its 5 1/2% convertible
subordinated notes due 2001 (the "2001 Notes") for
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 reduces the
conversion price on the 2001 Notes from $19.00 to
$16.17 while the 2001 Note Offer is open.
- Pursuant to a commitment letter from a group of
lenders, U.S. Office Products plans to enter into a
new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a
private placement.
REASONS FOR THE DISTRIBUTIONS..... The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
- adopt strategies and pursue objectives that are
appropriate to its respective industry;
- 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
- implement more focused incentive compensation packages
that respond to specific industry and market
conditions and enhance employee retention objectives.
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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.......... Based on the number of shares of U.S. Office Products
Common Stock outstanding on , 1998, less
37,037,037 shares (including shares that may be issued
on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be repurchased in the
Tender Offer, approximately shares of School
Specialty Common Stock will be distributed to
stockholders of U.S. Office Products in the School
Specialty Distribution. The number of shares to be
distributed could be greater if additional shares of
U.S. Office Products Common Stock are issued prior to
the Record Date pursuant to outstanding convertible debt
securities or stock options of U.S. Office Products.
DISTRIBUTION RATIO................ Each U.S. Office Products stockholder will receive one
share of School Specialty Common Stock for each
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....................... , 1998.
DISTRIBUTION DATE................. Certificates representing shares of School Specialty
Common Stock will be mailed to U.S. Office Products
stockholders on or about , 1998 (the
"Distribution Date").
DISTRIBUTION AGENT................
TAX CONSEQUENCES.................. Wilmer, Cutler & Pickering expects to deliver an opinion
at the time of the Distributions stating that, subject
to the matters discussed therein, for U.S. federal
income tax purposes the receipt of School Specialty
Common Stock by U.S. Office Products stockholders will
be tax-free to U.S. Office Products and the U.S. Office
Products stockholders (except with respect to cash
received in lieu of fractional shares). See "The School
Specialty Distribution--U.S. Federal Income Tax
Consequences of the School Specialty Distribution."
THE SPIN-OFFS FROM U.S. OFFICE
PRODUCTS........................ School Specialty, U.S. Office Products and the other
Spin-Off Companies will enter into an agreement (the
"Distribution Agreement") in connection with the
Distribution pursuant to which, among other things, (i)
equity interests in the domestic U.S. Office Products
subsidiaries that engage in the business of the
distribution of school supplies will be transferred to
School Specialty, (ii) liabilities will be allocated
among School Specialty, U.S. Office Products and the
other Spin-Off Companies, and (iii) School Specialty,
U.S. Office Products and the other Spin-Off Companies
will indemnify one another for liabilities allocated to
them under the Distribution Agreement and a share of
certain other liabilities.
School Specialty, U.S. Office Products and the Other
Spin-Off Companies will also enter into an agreement
(the "Tax Allocation Agreement") (i) allocating to each
Spin-Off
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Company responsibility for its share of U.S. Office
Products' consolidated tax liability for the years that
it was included in U.S. Office Products' consolidated
federal income tax returns, (ii) sharing certain state,
local and foreign taxes, and (iii) providing for (a)
indemnification by School Specialty for certain taxes if
they are assessed against U.S. Office Products as a
result of the Distribution and (b) joint and several
indemnification by School Specialty and the other
Spin-Off Companies for such taxes resulting from certain
acts taken by School Specialty or any of the other
Spin-Off Companies. The liability to U.S. Office
Products for taxes resulting from such acts will be
allocated among the Spin-Off Companies pursuant to a
separate agreement (the "Tax Indemnification
Agreement"). As a consequence, School Specialty will be
primarily liable for taxes resulting from acts taken by
School Specialty and liable (subject to indemnification
by the other Spin-Off Companies) for any taxes resulting
from acts taken by the other Spin-Off Companies.
School Specialty, U.S. Office Products and the other
Spin-Off Companies will also enter into an agreement
(the "Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "The Spin-Offs from U.S.
Office Products."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 9, 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.
6
<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 per share:
Basic............. $ 0.03 $ (0.06) $ (0.06) $ 0.09 $ 0.04
Diluted........... $ 0.03 $ (0.06) $ (0.06) $ 0.09 $ 0.04
Weighted
average shares
outstanding(5):
Basic............. 45,562 59,059 77,501 90,026 85,978
Diluted........... 45,704 60,024 79,100 91,761 87,824
<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 $321,010 $379,526
Cost of revenues...... 176,501 198,698 244,396 203,705 228,512 269,203
----------- ----------- --------------- ----------- ----------- -----------
Gross profit.......... 71,379 80,951 106,364 88,539 92,498 110,323
Selling, general and
administrative
expenses............ 50,999 61,065 85,430 66,926 66,951 85,455
Non-recurring
acquisition costs... 1,792 1,792
Restructuring costs... 194 194 194
----------- ----------- --------------- ----------- ----------- -----------
Operating income
(loss).............. 20,380 19,692 18,948 19,821 25,547 24,674
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) 520 536
----------- ----------- --------------- ----------- ----------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 15,948 14,312 11,806 14,460 19,492 16,838
Provision for (benefit
from) income
taxes(4)............ 7,113 952 92 6,651 8,966 2,407
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss)..... $ 8,835 $ 13,350 $ 11,714 $ 7,809 $ 10,526 $ 14,431
----------- ----------- --------------- ----------- ----------- -----------
----------- ----------- --------------- ----------- ----------- -----------
Net income per share:
Basic............. $ 0.08 $ 0.13 $ 0.11 $ 0.07 $ 0.10 $ 0.13
Diluted........... $ 0.08 $ 0.13 $ 0.11 $ 0.07 $ 0.10 $ 0.13
Weighted
average shares
outstanding(5):
Basic............. 114,758 111,611 109,895 109,895 109,895 109,895
Diluted........... 117,185 113,781 109,895 109,895 109,895 109,895
</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>
7
<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 School Specialty
Distribution and the purchase acquisitions completed by the Company from May
1, 1996 through May 1, 1998 as if all such transactions had been made 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 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 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. The difference
between the effective pro forma tax rate of 46% and the statutory rate of
35% for the nine months ended January 25, 1997 and January 24, 1998 relates
primarily to state 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 and the twelve months ended January 24, 1998
relates primarily to state taxes and nondeductible goodwill, offset by the
reversal of the valuation allowance.
(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(h) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma net income per share and
pro forma weighted average shares outstanding, as adjusted to give effect to
the sale of shares to Messrs. Spalding, Vander Zanden and Pate, the Offering
and the refinancing of $83.3 million of debt owed to U.S. Office Products,
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..................................................................................... -- --
Diluted................................................................................... -- --
Pro forma weighted average shares outstanding:
Basic..................................................................................... -- --
Diluted................................................................................... -- --
<CAPTION>
TWELVE MONTHS ENDED
JANUARY 24, JANUARY 24,
1998 1998
----------- --------------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic..................................................................................... -- --
Diluted................................................................................... -- --
Pro forma weighted average shares outstanding:
Basic..................................................................................... -- --
Diluted................................................................................... -- --
</TABLE>
(6) The pro forma balance sheet data give effect to the School Specialty
Distribution and the purchase acquisition of Education Access completed by
the Company subsequent to January 24, 1998 as if such transaction had been
made 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.
8
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
POTENTIAL VOLATILITY OF STOCK PRICE; RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE
As a result of the School Specialty Distribution, stockholders of U.S.
Office Products will acquire shares of School Specialty Common Stock that are
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.
A "when-issued" trading market in School Specialty Common Stock may develop
immediately. Such trading could increase the volatility of, and adversely affect
the market price of, the School Specialty Common Stock.
In addition, upon completion of the Offering and the School Specialty
Distribution, School Specialty will have outstanding (i) shares of School
Specialty Common Stock issued in the Offering, and (ii) immediately exercisable
options to acquire shares of School Specialty Common Stock following the
Offering. 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".
The officers and directors of School Specialty who together hold shares of
School Specialty Common Stock have agreed not to sell or otherwise dispose of
any School Specialty Common Stock without the prior written consent of the
Underwriters for a period of 180 days from the date of this Information
Statement/Prospectus (the "Lock-Up Agreements"). The Company intends to register
the shares of School Specialty Common Stock reserved for issuance pursuant to
its stock option plan as soon as practicable after the closing of the Offering.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into a
tax allocation agreement with School Specialty and the other Spin-Off Companies
(the "Tax Allocation Agreement") which will provide that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any losses
associated with taxes related to the Distributions ("Distribution Taxes") if an
action or omission (an "Adverse Tax Act") of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty will also enter into a tax
indemnification agreement with the other Spin-Off Companies (the "Tax
Indemnification Agreement") under which the Spin-Off Company that is responsible
for the Adverse Tax Act will indemnify the other Spin-Off Companies for any
liability to indemnify U.S. Office Products under the Tax Allocation Agreement.
As a consequence, School Specialty will be liable for any Distribution Taxes
resulting from any Adverse Tax Act by School Specialty and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been
9
<PAGE>
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 any Distribution Taxes
with respect not only to the School Specialty 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 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 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--Business Strategy--Acquisition 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.
10
<PAGE>
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
U.S. Office Products and the Company will represent to Wilmer, Cutler &
Pickering, for purposes of its Tax Opinion, that the Company Common Stock that
will be issued in the Equity Offering, together with all Company capital stock
that could be issued pursuant to the exercise of options and other agreements
that may be exercised within one year of the School Specialty Distribution,
represents in the aggregate less than 20 percent of the Company capital stock
that would be outstanding after the Equity Offering and the exercise of all such
options and other agreements. U.S. Office Products and the Company will also
represent to Wilmer, Cutler & Pickering that there are no written or oral
agreements or understandings, in effect prior to the School Specialty
Distribution, under which the Company may be required to issue Company Common
Stock after the School Specialty Distribution, other than agreements covering
the stock referenced in the previous sentence and agreements covering other
stock options granted as compensation for services. The Company has accordingly
not been able, prior to the School Specialty Distribution, to enter into any
acquisition or other agreement or understanding requiring issuance of additional
Company Common Stock.
In addition, 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.
These limitations could adversely affect the pace of the Company's
acquisitions and its ability to issue Company Common Stock for other purposes,
including equity offerings.
The Company has entered into a Tax Allocation Agreement and a Tax
Indemnification Agreement pursuant to which the Company will be liable to U.S.
Office Products and the other Spin-Off Companies if its actions or omissions
materially contribute to a final determination that the School Specialty
Distribution is taxable. See "--Potential Liability for Taxes Related to the
Distributions" and "The Spin-Offs From U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement."
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
11
<PAGE>
volatile, or potential acquisition candidates are otherwise unwilling to accept
School Specialty Common Stock as part of the consideration for the sale of their
businesses, School Specialty may be required to use more of its cash resources
or more borrowed funds in order to initiate and maintain its acquisition
program. Such limitations also may cause School Specialty to rely more heavily
on cash or borrowed funds to support its acquisition program. If School
Specialty does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through debt or equity offerings.
The use of equity offerings in connection with the School Specialty Distribution
will also be subject to certain limitations on the number of shares that School
Specialty can issue without jeopardizing the tax-free treatment of the School
Specialty Distribution. See "--Possible Limitations on Issuances of Common
Stock" and "--Tax Matters." Prior to the School Specialty Distribution, School
Specialty was not responsible for obtaining external sources of funding. The
Company intends to enter into credit facilities with one or more lenders to
obtain financing to be used in connection with future acquisitions. There can be
no assurance that School Specialty, as a stand-alone company, will be able to
obtain such financing if and when it is needed or that any such financing will
be available on terms it deems acceptable.
ADDITIONAL DILUTION
School Specialty will have 150 million authorized shares of School Specialty
Common Stock, a portion of which could be available (subject to the rules and
regulations of federal and state securities laws, limitations under U.S. federal
income tax laws and rules, and rules of the Nasdaq Stock Market), to finance
acquisitions without obtaining stockholder approval for such issuances. Existing
stockholders may suffer dilution if School Specialty uses School Specialty
Common Stock as consideration for future acquisitions. Moreover, the issuance of
additional shares of School Specialty Common Stock may have a negative impact on
earnings per share and may negatively impact the market price of School
Specialty Common Stock.
SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
School Specialty's business is subject to seasonal influences, with sales
and profitability substantially higher from May to October due to increased
school orders during these months. As a result of this seasonality,
historically, School Specialty has earned more than 100% of its annual net
income in the first six months of its fiscal year and has historically operated
at a loss in its third fiscal quarter. Also, quarterly results may be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs. Therefore, operating results for any quarter are
not necessarily indicative of the results that may be achieved for any
subsequent fiscal quarter or full fiscal year. Fluctuations caused by variations
in quarterly results may adversely affect the market price of the School
Specialty Common 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
12
<PAGE>
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 customs 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 three 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 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 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.
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DEPENDENCE ON KEY SUPPLIERS AND SERVICE PROVIDERS
School Specialty is dependent on (i) a limited number of suppliers for
certain of its product lines, particularly its franchise furniture lines and
(ii) a limited number of service providers, such as delivery service from United
Parcel Service. Any interruption of supply from current vendors or any material
increased costs, particularly in the peak season of June through September,
could cause significant delays in the shipment of such products and could have a
material adverse effect on School Specialty's business, financial condition, and
results of operations. Increases in freight costs charged to School Specialty or
inability to ship products, whether real or perceived, could have a material
adverse effect on School Specialty's business, financial condition, and results
of operations. In addition, as part of its business strategy, School Specialty
strives to reduce its number of suppliers and minimize duplicative lines, which
may have the effect of increasing its dependence on remaining vendors. The
United Parcel Service strike during August 1997 had an adverse effect on School
Specialty due to the perceived inability of School Specialty to ship products.
COMPETITION
The market for school supplies is highly competitive and fragmented. School
Specialty estimates that over 3,400 companies distribute educational materials
to grade pre-K-12 schools as a primary focus of their business. In addition,
School Specialty competes with alternate channel distributors such as office
product contract stationers and superstores, which may continue to broaden their
product lines in school supplies. Some of these competitors have greater
financial resources and buying power than School Specialty. School Specialty
believes that the educational supplies market will consolidate over the next
several years, which may make School Specialty's general and specialty supply
businesses more competitive. In addition, there may be increasing competition
for acquisition candidates and there can be no assurance that acquisitions will
continue to be available to School Specialty on favorable terms, if at all. See
"Business-- Competition."
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
School Specialty currently operates as a wholly-owned subsidiary of U.S.
Office Products. On or before the Distribution Date, School Specialty, the other
Spin-Off Companies and U.S. Office Products will enter into the Distribution
Agreement, the Tax Allocation Agreement and the Employee Benefits Agreement, and
the Spin-Off Companies will enter into a Tax Indemnification Agreement. See "The
Spin-Offs from U.S. Office Products." These agreements are expected to provide,
among other things, for U.S. Office Products and School Specialty to indemnify
each other from tax and other liabilities relating to their respective
businesses prior to and following the School Specialty Distribution.
Certain indemnification obligations of School Specialty and the other
Spin-Off Companies to U.S. Office Products are joint and several. Therefore, if
one of the other Spin-Off Companies fails to indemnify U.S. Office Products when
such a loss occurs, School Specialty may be required to reimburse U.S. Office
Products for all or a portion of the losses that otherwise would have been
allocated to such other Spin-Off Company. In addition, the agreements will
allocate certain liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically related to the specific
businesses to be conducted by the Spin-Off Companies and post-Distribution U.S.
Office Products, among U.S. Office Products and each of the Spin-Off Companies.
Adverse developments or material disputes with U.S. Office Products following
the School Specialty Distribution could have a material adverse effect on School
Specialty.
The terms of the agreements that will govern the relationship among School
Specialty, U.S. Office Products, and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the management of
School Specialty and the other Spin-Off Companies prior to the Distributions and
while School Specialty and the other Spin-Off Companies are wholly-owned
subsidiaries of U.S. Office
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Products. The terms of these agreements, including the allocation of general
corporate and securities liabilities among U.S. Office Products, School
Specialty, and the other Spin-Off Companies may not be the same as they would be
if the agreements were the result of arm's length negotiations. In addition, the
agreements must contain certain terms specified in U.S. Office Products'
agreement with CD&R relating to the Equity Investment and must otherwise be
reasonably acceptable to CD&R. CD&R will not be a stockholder in any of the
Spin-Off Companies and its interests may be adverse to those of the Spin-Off
Companies. See "The Spin-Offs from U.S. Office Products." Accordingly, there can
be no assurance that the terms and conditions of the agreements will not be more
or less favorable to School Specialty than those that might have been obtained
from unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, will receive options for shares of each of the
Spin-Off Companies exercisable for up to 7.5% of the common stock of each
Spin-Off Company. See "Management of School Specialty--Director Compensation and
Other Arrangements". As a result, Mr. Ledecky has interests in the Distributions
that differ in certain respects from, and may conflict with, the interests of
other stockholders of U.S. Office Products and School Specialty.
TAX MATTERS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes, the Distributions (including the School Specialty Distribution) will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e). U.S. Office Products will not complete the School
Specialty Distribution unless it receives the Tax Opinion. The Tax Opinion will
be based on the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Spin-Off Companies and CD&R,
and certain other information, data, documentation and other materials as
Wilmer, Cutler & Pickering has deemed necessary. See "The School Specialty
Distribution--U.S. Federal Income Tax Consequences of the School Specialty
Distribution."
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling has not been, and
will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the School Specialty Distribution. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Tax
Opinion.
If the School Specialty Distribution fails to qualify under Section 355 as a
tax-free spin-off, each holder of U.S. Office Products Common Stock on the
Record Date will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the Distribution Date) of the
Company Common Stock distributed to such holder of U.S. Office Products Common
Stock including fractional shares. In addition, U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
Company Common Stock (on the Distribution Date) and U.S. Office Products'
adjusted tax basis in the Company Common Stock (on the Distribution Date). If
U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
If the School Specialty Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements for a tax-free spin-off, U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Company Common Stock (on the Distribution Date) and U.S. Office
Products' adjusted tax basis in the Company Common Stock (on the Distribution
Date). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial. However, no gain or loss
will be recognized by holders of U.S. Office Products Common Stock (except with
respect to cash received in lieu of fractional shares).
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MATERIAL AMOUNT OF GOODWILL
Approximately $97.5 million, or 47.7%, of the School Specialty's pro forma
total assets as of January 24, 1998 represents intangibles assets, the
significant majority of which is goodwill. Goodwill represents the excess of
cost over the fair market value of net assets acquired in business combinations
accounted for under the purchase method. School Specialty generally amortizes
goodwill on a straight line method over a period of 40 years with the amount
amortized in a particular period constituting a non-cash expense that reduces
School Specialty's net income. Amortization of goodwill resulting from certain
past acquisitions, and additional goodwill recorded in certain acquisitions may
not be deductible for tax purposes. In addition, School Specialty will be
required to periodically evaluate the recoverability of goodwill by reviewing
the anticipated undiscounted future cash flows from the operations of the
acquired companies and comparing such cash flows to the carrying value of the
associated goodwill. If goodwill becomes impaired, School Specialty would be
required to write down the carrying value of the goodwill and incur a related
charge to its income. A reduction in net income resulting from the amortization
or write down of goodwill could have a material and adverse impact upon the
market price of School Specialty Common Stock.
ABSENCE OF PUBLIC MARKET
Prior to the School Specialty Distribution and the Offering there will be no
public market for the Company Common Stock. The initial public offering price of
the Company Common Stock in the Offering will be determined through negotiations
among the Company and the underwriters of the Offering and may not be indicative
of the market price for the Company Common Stock after the Offering and the
School Specialty Distribution. The trading price of the Company Common Stock
also could be subject to wide fluctuations in response to variations in the
Company's quarterly operating results, changes in earnings estimates by
analysts, conditions in the Company's businesses, general market or economic
conditions or other factors. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many companies, often unrelated to
the operating performance of the specific companies. Such market fluctuations
could have a material adverse effect on the market price of the Company Common
Stock. See "-- Potential Volatility of Stock Price, Risks Associated With Shares
Eligible for Immediate Sale."
NO DIVIDENDS
School Specialty does not expect to pay cash dividends on School Specialty
Common Stock in the foreseeable future. In addition, School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements. See "Dividend Policy".
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THE SCHOOL SPECIALTY DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
the close of business on , 1998 (the "Record Date"), will receive one
share of School Specialty Common Stock for each 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 as the
Distribution Agent. No certificates or scrip representing fractional shares of
School Specialty Common Stock will be issued. Following the announcement of the
proration results of the Tender Offer, fractional share interests will be
aggregated and sold by the Distribution Agent at such time or times as it shall
determine in open market transactions effected through broker-dealers selected
by it. The cash proceeds will be distributed to those stockholders entitled to a
fractional interest with the distribution of payment for the tendered shares or
as soon thereafter as practicable. Certificates representing shares of School
Specialty Common Stock will be distributed on or about , 1998 (the
"Distribution Date").
School Specialty is a newly formed subsidiary of U.S. Office Products that
will, as of the Distribution Date, hold substantially all of the businesses and
assets of, and will be responsible for substantially all of the liabilities
associated with, U.S. Office Products Educational Supplies and Products
Division. See "The Spin-Offs from U.S. Office Products--Distribution Agreement."
School Specialty will include the businesses of the following wholly-owned
subsidiaries of U.S. Office Products: School Specialty, Inc., a Wisconsin
corporation and predecessor to School Specialty, The Re-Print Corporation,
American Academic Suppliers, Inc., Childcraft Education Corp., Sax Arts &
Crafts, Inc. and Don Gresswell, Ltd. Immediately prior to the School Specialty
Distribution, U.S. Office Products will hold all the issued and outstanding
shares of School Specialty Common Stock. Based on the number of shares of U.S.
Office Products Common Stock outstanding on , 1998, less 37,037,037 shares
(including shares that may be issued on exercise of vested and unvested options
for U.S. Office Products Common Stock) to be repurchased in the Tender Offer and
on a Distribution Ratio of one share of Company Common Stock distributed for
every shares of U.S. Office Products Common Stock, approximately
shares of School Specialty Common Stock will be distributed to
stockholders of U.S. Office Products in the School Specialty Distribution. The
number of shares to be distributed could be greater if additional shares of U.S.
Office Products Common Stock are issued prior to the School Specialty
Distribution pursuant to outstanding convertible debt securities or stock
options of U.S. Office Products.
THE STRATEGIC RESTRUCTURING PLAN
The School Specialty Distribution is part of the Strategic Restructuring
Plan. The principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products will purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares
that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) at $27.00 per share (or in the case of stock
options, at $27.00 minus the exercise price of the options) and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office 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.
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Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group, (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
plans to undertake the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products will purchase any
or all of its 2003 Notes for a purchase price of 94.5% of the principal
amount and accrued interest.
- Pursuant to the 2001 Note Offer, U.S. Office Products will exchange any or
all of its 2001 Notes for U.S. Office Products Common Stock at an exchange
rate of 61.483 shares per $1,000 principal amount, which effectively
reduces the conversion price on the 2001 Notes from $19.00 to $16.71 while
the offer is open.
- Pursuant to a commitment letter from a group of lenders, U.S. Office
Products plans to enter into a new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least $400.0 million in
Senior Subordinated Notes in a private placement.
REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products has approved the Strategic
Restructuring Plan, including the Distributions. The U.S. Office Products Board
of Directors determined that separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would have advantages for the Spin-Off Companies
and U.S. Office Products. The Distributions will allow U.S. Office Products and
the Spin-Off Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries and geographic territories. After the
Distributions, U.S. Office Products will be focused on a more narrow group of
businesses that involve primarily the distribution of office products and
business services. School Specialty and each of the other Spin-Off Companies
will be focused primarily on their individual businesses.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the school supplies business using
U.S. Office Products Common Stock. Sellers were thus required to accept stock in
a business that included office products, corporate travel services, technology
solutions and print management businesses, as well as other businesses.
Following the School Specialty Distribution, School Specialty will be able to
offer stock in its own business, which will be substantially the same as the
businesses School Specialty expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
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
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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 the Tender Offer). U.S. Office Products' Board of
Directors recognized that U.S. Office Products was making a transition from an
acquisition-oriented company to a business more focused on growth through
improvement and expansion of existing operations. U.S. Office Products' Board of
Directors concluded that the investment by CD&R in U.S. Office Products, and
support of the management of U.S. Office Products by Clayton Dubilier & Rice,
Inc. ("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 will offer
to repurchase 37,037,037 shares (including shares that may be issued on exercise
of vested and unvested stock options of U.S. Office Products Common Stock) at a
price of $27.00 per share (or, in the case of stock options, at $27.00 minus the
exercise price of the options). Acceptance of and payment for shares of U.S.
Office Products Common Stock under the Tender Offer will be subject to a number
of conditions. These conditions include: (i) a minimum of 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 being validly tendered and not
withdrawn; (ii) U.S. Office Products having obtained financing sufficient to
fund the Tender Offer; (iii) all conditions to the completion of the Equity
Investment having been satisfied or waived, except for consummation of the
Tender Offer and the Distributions; and (iv) registration statements relating to
the Distributions having become effective and (v) all other conditions to the
completion of the Distributions, including U.S. Office Products having received
an opinion of Wilmer, Cutler & Pickering regarding the tax treatment of the
Distributions, having been satisfied.
U.S. Office Products expects to finance the aggregate tender price through a
combination of a new senior credit facility for $1.225 billion (the "USOP Credit
Facility"), the net proceeds of the Equity Investment and issuance of $400.0
million of senior subordinated debt securities in a private placement. U.S.
Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $441.0 million. Approximately $362.0 million
was outstanding under U.S. Office Products' existing bank credit facility as of
March 20, 1998. U.S. Office Products has entered into a commitment for the USOP
Credit Facility.
The Record Date for the Distributions will occur after acceptance of shares
under the Tender Offer. Accordingly, U.S. Office Products stockholders who
tender 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 are accepted in the Tender Offer. Because the Tender Offer is 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), only a portion of
the shares tendered by any U.S. Office Products stockholder is likely to be
accepted. U.S. Office Products stockholders who tender their shares are
therefore likely to receive the Distributions with respect to a portion of their
shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special
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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 warrants described in clause (c) above are exercisable from
and after the second anniversary of the Closing Date until such 12th
anniversary. The aggregate exercise price of the warrants described in clause
(c) is $405.0 million.
Regardless of the number of shares of U.S. Office Products Common Stock
outstanding on the date of the Equity Investment, CD&R has contracted to
purchase a 24.9% equity interest in U.S. Office Products, including the shares
issued to CD&R (the "Initial CD&R Acquisition"). CD&R's percentage ownership of
U.S. Office Products will not increase or decrease depending on the actual
number of shares of U.S. Office Products Common Stock outstanding on the closing
date of the Initial CD&R Acquisition. The Special Warrants will be issued to
allow CD&R to maintain its 24.9% ownership interest if (i) any 2001 Notes that
remain outstanding after the 2001 Note exchange 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 contracts for acquisitions completed by U.S. Office Products. The Common
Stock Warrants will be exercisable at any time after the second anniversary of
the Initial CD&R Acquisition until the 12th anniversary of that date.
Assuming (i) exercise of all currently exercisable outstanding options, and
(ii) no 2003 Notes were repurchased under the 2003 Note Tender and all such 2003
Notes were converted in accordance with their existing terms, in each case,
without any adjustment for the restructuring transaction, and (a) exercise of
the Special Warrants in full, and (b) exercise of the Common Stock Warrants in
full, CD&R could own approximately 34.7% of outstanding U.S. Office Products
Common Stock on a fully-diluted basis. U.S. Office Products expects to make
adjustments to the number and exercise price of outstanding options, and the
conversion price of the 2001 Notes and 2003 Notes remaining after the 2001 Note
Offer and the 2003 Note Tender, on account of the restructuring transactions,
and these adjustments will result in a greater number of shares that may be
issued upon exercise of the options and conversion of such notes. Although the
amount of these adjustments will not be known until after the completion of the
Strategic Restructuring Plan, the effect of these adjustments will be to reduce
CD&R's fully diluted ownership interest in U.S. Office Products from the amounts
set forth above. If no currently exercisable outstanding options are exercised,
exercise of the Special Warrants and Common Stock Warrants could give CD&R
approximately 39.9% of outstanding U.S. Office Products Common Stock after
implementation of the Strategic Restructuring Plan (assuming all of the 2001
Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender).
Because the Record Date for the Distributions will be immediately before the
closing of the Equity Investment, CD&R will not receive any shares of the
Spin-Off Companies in the Distributions.
Prior to the closing of the Initial CD&R Acquisition, the Board of Directors
of U.S. Office Products will consist of nine persons, including the chief
executive officer of U.S. Office Products, three designees of CD&R, three
designees the U.S. Office Products' Board and two persons who are satisfactory
to both CD&R and the U.S. Office Products' Board. After the closing of the
Initial CD&R Acquisition, the existing members of the U.S. Office Products Board
will have the right to nominate six directors, which will include the chief
executive officer. CD&R will have the right to nominate three directors. So long
as CD&R has the right to nominate two or more directors, one of CD&R's nominees
will serve as Chairman
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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, 75% 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 or sale,
lease or disposition of all or substantially all of U.S. Office Products assets
or other business combination involving U.S. Office Products, unless the
consideration for such sale is all cash or is freely tradeable common stock of a
public company with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to stockholder rights plans; (v) any
dissolution or partial liquidation of U.S. Office Products; or (vi) any
modification to U.S. Office Products' organization documents or by-laws that is
inconsistent with CD&R's rights under the Investment Agreement or any other
agreements between U.S. Office Products and CD&R. The effect of this provision
is so long as CD&R can nominate three directors, at least one of them must vote
in favor of any of the above actions for it to be approved.
The following Table summarizes the right of CD&R to nominate directors of
U.S. Office Products and shows when the 75% super-majority voting requirement
will apply:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
PORTION OF SHARES OF U.S. CD&R IS ENTITLED TO RIGHT TO 75% BOARD
OFFICE PRODUCTS COMMON NOMINATE (OUT OF DESIGNATE APPROVAL
STOCK RETAINED BY CD&R(1)(2) NINE)(3)(4) CHAIRMAN REQUIREMENT(2)
- ---------------------------------------------------------- --------------------------- ------------- -----------------
<S> <C> <C> <C>
66 2/3% to 100%........................................... Three Yes Yes
33 1/2% to 66 2/3%........................................ Two Yes Yes
Less than 33 2/3% (but CD&R holds at least 5% of U.S.
Office Products voting stock............................. One No No
Less than 5% of then outstanding U.S. Office Products
voting stock............................................. None No No
</TABLE>
- ------------------------------
(1) Includes shares acquired by CD&R in the Initial CD&R Acquisition and Shares
CD&R can acquire by exercising the Special Warrants.
(2) All of CD&R's corporate governance rights will expire on the earlier of the
fifth anniversary of the closing of the Initial CD&R Acquisition or if CD&R
ever acquires more than 50% of the voting power represented by U.S. Office
Products' then outstanding voting securities.
(3) CD&R can approve one additional nominee if the Chief Executive Officer of
U.S. Office Products is not a member of the Board or is not a Board nominee.
(4) The size of the Board can be increased up to a total of 12 members, in which
case the number of directors that CD&R has the right to nominate will
increase proportionately.
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 after giving effect to the
distributions; and (xi) U.S. Office Products' debt immediately following
completion of the transactions
21
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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 receive a termination
fee of $25.0 million plus reasonable fees and expenses. If the Equity Investment
is completed, CD&R, Inc. will receive a transaction fee of $15.0 million and
reimbursement for expenses it incurred in connection with the transaction. For
additional information concerning the Equity Investment, investors should refer
to U.S. Office Products' proxy statement for its special meeting to be held to
consider issuance of shares in the Equity Investment. See "Additional
Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will step down
as Chairman of the Board of U.S. Office Products upon consummation of the
Distributions. In connection with the adoption of the Strategic Restructuring
Plan, U.S. Office Products' Board of Directors 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"). Pursuant to this agreement, which is contingent on the
Distributions occurring, Mr. Ledecky has agreed to extend his existing
non-competition agreement with U.S. Office Products until the fourth anniversary
of the Distribution Date. 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 following the Distribution, the Ledecky Services
Agreement provides that he will receive options to purchase up to 7.5% of the
outstanding common stock of each Spin-Off Company as of the Distribution Date
without regard to the Offering. For additional information on the terms of the
Ledecky Services Agreement and the options to be granted by School Specialty to
Mr. Ledecky, see "Management of School Specialty-- Director Compensation and
Other Arrangements."
School Specialty has filed a Registration Statement with the Commission for
the issuance of shares of School Specialty Common Stock in the Offering that is
expected to close prior to or concurrent with the School Specialty Distribution.
As a result of certain U.S. federal income tax limitations under Section 355 of
the Code on the number of shares that School Specialty can issue in connection
with the School Specialty Distribution without jeopardizing the tax-free
treatment of the School Specialty Distribution, the amount of School Specialty
capital stock issued in such a public offering, when aggregated with any other
School Specialty capital stock that will be issued in such a public offering has
not been determined and may be limited by the factors discussed in "Risk
Factors--Tax Matters," "--Limitation on Equity Offerings and the Use of Company
Common Stock in Acquisitions" and sat--U.S. Federal Income Tax Consequences of
the School Specialty Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions on the material U.S. federal income tax
consequences of the School Specialty Distribution to U. S. Office Products and
holders of U.S. Office Products Common Stock on the Record Date. The Tax Opinion
will be based on the Code, and regulations, rulings, and judicial decisions as
of the date thereof, all of which may be repealed, revoked, or modified so as to
result in U.S. federal income tax consequences different from those described
below. Such changes could be applied retroactively in a manner that could
adversely affect a holder of U.S. Office Products Common Stock. In addition, the
authorities on which the Tax Opinion will be based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the School Specialty Distribution and of the holding, and
disposition of the School Specialty Common Stock may differ from the treatment
described below.
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The Tax Opinion will apply only to holders of U.S. Office Products Common
Stock who are U. S. persons and who hold U.S. Office Products Common Stock as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. A U.S. person is the beneficial owner of U.S. Office
Products Common Stock that is (i) for U.S. federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust with respect to
the administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. The Tax Opinion will not address tax
considerations applicable to a holder of U.S. Office Products Common Stock's
particular circumstances or to a holder that may be subject to special tax rules
(such as holders subject to the alternative minimum tax) or other special
situations, such as those of dealers in securities or currencies, financial
institutions, insurance companies, persons holding U.S. Office Products Common
Stock as part of a hedging or conversion transaction or a straddle, persons
whose "functional currency" is not the U.S. dollar, and certain U.S.
expatriates.
The Tax Opinion will not address all aspects of U.S. federal income taxation
that may be relevant to holders of U.S. Office Products Common Stock in light of
their particular circumstances, nor will it address any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction. Holders of
U.S. Office Products Common Stock should consult their tax advisors about the
particular U.S. federal income tax consequences to them of the School Specialty
Distribution, or the holding and disposition of the School Specialty Common
Stock, as well as any tax consequences arising under the laws of any state,
local, or foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. Subject to the foregoing, the Tax Opinion will state Wilmer, Cutler &
Pickering's opinion that for U.S. federal income tax purposes the Distributions
(including the School Specialty Distribution) will qualify as tax-free spin-offs
under Section 355 of the Code, and will not be taxable under Section 355(e) of
the Code. U.S. Office Products will not complete the School Specialty
Distribution unless it receives the Tax Opinion. The Tax Opinion will be based
on the accuracy as of the time of the Distributions of factual representations
made by U.S. Office Products, School Specialty, the Spin-Off Companies and CD&R
and certain other information, data, documentation and other materials that
Wilmer, Cutler & Pickering has deemed necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the School Specialty
Distribution.
Assuming the School Specialty Distribution qualifies as a tax-free spin-off
under Section 355 and is not taxable under to Section 355(e) of the Code:
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of School Specialty
Common Stock in the School Specialty Distribution. Holders of U.S. Office
Products Common Stock will recognize gain or loss on the receipt of cash in
lieu of fractional shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the School Specialty Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the School Specialty Distribution will be
allocated among the U.S. Office Products Common Stock and the Spin-Off
Companies Common Stock (including any fractional shares) received with
respect to such U.S. Office Products Common Stock in proportion to their
relative fair
23
<PAGE>
market values on the Distribution Date of School Specialty. Such allocation
must be calculated separately for each block of U.S. Office Products Common
Stock (shares purchased at the same time and at the same cost) with respect
to which the Spin-Off Companies' common stock is received.
4. The holding period of the School Specialty Common Stock (including
any fractional shares) received in the School Specialty Distribution will
include the holding period of the U.S. Office Products Common Stock with
respect to which it was distributed.
Treasury regulations governing Section 355 require that each holder of U.S.
Office Products Common Stock who receives shares of School Specialty Common
Stock pursuant to the School Specialty Distribution attach a statement to the
U.S. federal income tax return that will be filed by such stockholder for the
taxable year in which the stockholder receives School Specialty Common Stock in
the School Specialty Distribution. The regulations require that the statement
show the applicability of Section 355 to the School Specialty Distribution. U.S.
Office Products will provide each U.S. Office Products stockholder of record on
the record date with information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION As noted
above, the Tax Opinion is not binding on the IRS or the courts. Holders of U.S.
Office Products Common Stock should be aware that the requirements of Section
355 pertaining to business purpose, active trade or business, and absence of a
device of distribution of earnings and profits, as well as the requirements of
Section 355(e) pertaining to a plan or series of related transactions to acquire
50% or more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the School Specialty Distribution. Accordingly, the IRS
and/or a court reach a conclusion that differs from the conclusions in the Tax
Opinion.
BUSINESS PURPOSE. In order for the School Specialty Distribution to qualify
as a tax-free spin-off under Section 355, it must be motivated, in whole or
substantial part, by one or more corporate business purposes. U.S. Office
Products will represent that the School Specialty Distribution was motivated, in
whole or substantial part, to allow U.S. Office Products and the Company to
adopt strategies and pursue objectives that are more appropriate to their
respective industries and stages of growth; to allow the Company to pursue an
independent acquisition program with a more focused use of resources and, where
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. Based on these representations and certain other information, data,
documentation and other materials, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of the Distributions that the School Specialty
Distribution satisfies the business purpose requirement of Section 355 of the
Code. However, although similar rationales have been accepted by the IRS in
other circumstances as sufficient to meet the business purpose requirement of
Code Section 355, there can be no assurances that the IRS will not assert that
the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the School Specialty Distribution to
qualify as a tax-free spin-off under Section 355, both the Company and U.S.
Office Products must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the School Specialty
Distribution, taking into account only businesses that have been acquired in
transactions in which no gain or loss was recognized. Whether current and
historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of U.S.
Office Products and the Company, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of
24
<PAGE>
the Distributions that the School Specialty Distribution will satisfy the active
trade or business requirement. However, because of the inherently subjective
nature of important elements of the active trade or business requirement, and
because the IRS may challenge the representations upon which Wilmer, Cutler &
Pickering relies, there can be no assurance that the IRS will not assert that
the active trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. The School
Specialty Distribution will not qualify as a tax-free spin-off under Section 355
if the School Specialty Distribution was used principally as a device for the
distribution of the earnings and profits of U.S. Office Products or the Company.
Treasury regulations provide that this test is applied based on all the facts
and circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and the Company, Wilmer, Cutler &
Pickering expects to deliver an opinion at the time of the Distributions that
the School Specialty Distribution is not a transaction used principally as a
device for the distribution of earnings and profits of either U.S. Office
Products or the Company. However, because of the inherently subjective nature of
the device test (including the subjectivity involved in assigning weight to
various factors), and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will assert that the School Specialty Distribution is a transaction used
principally as a device for the distribution of earnings and profits of U.S.
Office Products or the Company.
If the School Specialty Distribution fails to qualify as a tax-free spin-off
under Section 355:
1. U.S. Office Products will recognize gain equal to the difference
between the fair market value of the School Specialty Common Stock on the
Distribution Date and U.S. Office Products adjusted tax basis in the School
Specialty Common Stock on the Distribution Date. If U.S. Office Products
were to recognize gain on the School Specialty Distribution, such gain would
likely be substantial.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the School Specialty Common
Stock distributed to such stockholder, including fractional shares. 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.
25
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Whether or not the School Specialty Distribution is taxable, cash received
by a holder of U.S. Office Products Common Stock in lieu of a fractional share
of School Specialty Common Stock will be treated as received in exchange for
such fractional share and the stockholder will recognize gain or loss for U.S.
federal income tax purposes measured by the difference between the amount of
cash received and the stockholder's tax basis in the fractional share. Such gain
or loss will be capital gain or loss to the stockholder.
EFFECT OF POST-DISTRIBUTION TRANSACTION. Section 355(e) which was added in
1997, generally provides that a company that distributes shares of a subsidiary
in a spin-off that is otherwise tax-free will incur U.S. federal income tax
liability if 50% or more, by vote or value, of the capital stock of either the
company making the distribution or the subsidiary is acquired by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether this 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary occurring two years before or after the spin-off is
pursuant to a plan that includes the spin-off. However, the presumption may be
rebutted by establishing that the spin-off and the acquisition are not part of a
plan or series of related transactions. Based on the representations of U.S.
Office Products, the Company and CD&R, and the assumption that the School
Specialty Distribution is not part of a plan that is outside the knowledge of
U.S. Office Products and the Company pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of U.S. Office Products or the Company, Wilmer, Cutler & Pickering's expects to
deliver an opinion at the time of the Distributions that the School Specialty
Distribution will not be Section 355(e). However, there can be no assurance that
the IRS will not assert that the School Specialty Distribution is taxable under
Section 355(e).
If the School Specialty Distribution is taxable under Section 355(e) of the
Code, U.S. Office Products will recognize gain, equal to the difference between
the fair market value of the School Specialty Common Stock on the Distribution
Date and U.S. Office Products' adjusted tax basis in the School Specialty Common
Stock on the Distribution Date. If U.S. Office Products were to recognize gain
on the School Specialty Distribution, such gain would likely be substantial.
However, no gain or loss will be recognized by holders of U.S. Office Products
Common Stock (except with respect to cash received in lieu of fractional
shares). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
School Specialty and the other Spin-Off Companies will jointly and severally
indemnify U.S. Office Products for any Distribution Taxes assessed against U.S.
Office Products if an Adverse Tax Act of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty will also enter into the Tax
Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, School Specialty will be liable for any
Distribution Taxes resulting from any adverse Tax Act by School Specialty and
liable (subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. Additionally, U.S. Office Products and each of the Spin-Off Companies
will be liable for its pro rata portion of any Distribution Taxes, based on the
value of each company's common stock after the Distributions, if it is
determined that there has not been Adverse Tax Act by either U.S. Office
Products or any of the other Spin-Off Companies. As a result, the Company could
become liable for a pro rata portion of any Distribution Taxes with respect not
only to the School Specialty Distribution, but also to any of the other
Distributions. See "The Spin-Offs from U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement" for a detailed discussion of the
Tax Allocation Agreement and Tax Indemnification Agreement.
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THE FOREGOING DESCRIPTION OF WILMER, CUTLER & PICKERING'S OPINION OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS
COMMON STOCK DOES NOT PURPORT TO COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES
THAT MIGHT APPLY TO EVERY HOLDER OF U.S. OFFICE PRODUCTS COMMON STOCK. ALL
HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION TO THEM.
EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY SCHOOL SPECIALTY
EMPLOYEES
School Specialty expects that all or substantially all vested and unvested
options to acquire U.S. Office Products Common Stock that are held by School
Specialty employees on the Distribution Date will be replaced with options to
acquire shares of School Specialty Common Stock. School Specialty anticipates
that the replacement options will be issued under a stock option plan to be
adopted on or prior to the Distribution Date. As of the Distribution Date,
approximately options to acquire U.S. Office Products Common Stock will be
held by employees of School Specialty. The number 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 options exercisable for shares of Company Common Stock into which
the U.S. Office Products options will convert is not yet determinable. The
option exercise price 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 option 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. The
exercise price and number of options will not be adjusted as a result of the
Tender Offer, but instead are adjusted solely for the Distributions. The
intrinsic value of the adjusted options will be no greater than the intrinsic
value of the options immediately before the Distributions, and the ratio of
exercise price to market price will not be less than the ratio immediately
before the Distributions.
Management anticipates that the replacement options will be issued under a
stock option plan to be adopted on or prior to the Distribution Date. It is
anticipated that all other terms of the School Specialty stock options will be
the same as the terms of the U.S. Office Products options they replace. As a
result of this, 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 Distribution.
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
27
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directors of School Specialty as well as principal stockholders of School
Specialty. Persons who are affiliates of School Specialty will be permitted to
sell their shares of School Specialty Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions provided
for private transactions or Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that the direct legal, financial advisory,
investment banking, financing, accounting, printing, mailing and other expenses
(including the fees of U.S. Office Products' and the Spin-Off Companies'
transfer agents) of the Strategic Restructuring Plan (including CD&R's fees and
expenses), including the Distributions, will total approximately $75.0 million.
Upon request, U.S. Office Products will pay the reasonable expenses of brokerage
firms, custodians, nominees and fiduciaries who are record holders of U.S.
Office Products Common Stock for forwarding this Information Statement/
Prospectus to the beneficial owners of such shares. The foregoing expenses will
be allocated among U.S. Office Products and the Spin-Off Companies pursuant to a
formula to be determined. See "The Spin-Offs from U.S. Office
Products--Distribution Agreement."
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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, on or before the Distribution
Date, U.S. Office Products, School Specialty and the Other Spin-Off Companies
will enter into the Distribution Agreement, the Tax Allocation Agreement, and
the Employee Benefits Agreement and the Spin-Off Companies will enter into the
Tax Indemnification Agreement. The terms of the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
Benefits Agreement have not yet been finally determined. Those terms will be
agreed to while School Specialty is a wholly-owned subsidiary of U.S. Office
Products. In addition, the Investment Agreement specifies certain terms of this
Agreement 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.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement, and Employee Benefits Agreement have not been
finally determined, School Specialty currently expects that the terms will
include those described below. There can be no assurance that the terms of the
Distribution Agreement, Tax Allocation Agreement, Tax Indemnification Agreement
and Employee Benefits Agreement will not be less favorable to the stockholders
of School Specialty than the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement is expected
to provide for the transfer from U.S. Office Products to School Specialty of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of School Specialty as well as the
transfer, in certain instances, of other assets related to the business of
School Specialty. It is also expected to provide that the recovery on any claims
under applicable acquisition agreements that U.S. Office Products may have
against the persons who sold businesses to U.S. Office Products that will become
part of School Specialty in connection with the Distributions (the "School
Specialty Acquisition Indemnity Claims") will be shared between U.S. Office
Products and School Specialty. In addition, to the extent that the School
Specialty Acquisition Indemnity Claims are secured by the pledge of stock of
U.S. Office Products and School Specialty that is owned by persons who sold
businesses to U.S. Office Products that will become part of School Specialty
(and no previous claims have been made against such shares), 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.
DEBT. The Distribution Agreement is expected to provide that School
Specialty will have, at the time of the School Specialty Distribution, $80.0
million of debt plus the amount of any additional debt incurred after the date
of the Investment Agreement by U.S. Office Products or School Specialty in
connection with the acquisition of entities that will become subsidiaries of
School Specialty in connection with the Distributions. The amount of debt that
will be allocated pursuant to this provision will be $83.3 million, which is
expected to be refinanced with a third party lender at or about the time of the
Offering.
LIABILITIES. The Distribution Agreement is expected to allocate and provide
for the assumption of financial responsibility for certain liabilities (other
than taxes and employee benefit matters which will be governed by separate
agreements) among U.S. Office Products, School Specialty and the Other Spin-Off
Companies. School Specialty will be responsible for (i) any liabilities arising
out of or in connection with the businesses conducted by School Specialty and/or
its subsidiaries, (ii) its liabilities under the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
29
<PAGE>
Benefits Agreement and related agreements, (iii) its liabilities for the debt
described above, (iv) securities liabilities relating to the Prospectus in
respect of the Offering and certain sections of this Information
Statement/Prospectus, as well as other securities 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) any liabilities of U.S. Office Products relating to earn-out or bonus
payments owed by U.S. Office Products in respect of School Specialty or its
subsidiaries, (vi) the Company's costs and expenses related to the Offering and
the Company's 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 the Strategic
Restructuring Plan. In addition, the Distribution Agreement will provide for
sharing of certain liabilities among the parties. Each of U.S. Office Products,
School Specialty and the other Spin-Off Companies will bear its pro rata share
of certain other liabilities (the "Shared Liabilities") including: (i) any
liabilities of U.S. Office Products under the securities laws arising from
events prior to the Distributions (other than claims relating solely to a
specific Spin-Off Company or relating specifically to the continuing businesses
of U.S. Office Products), and (ii) 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 Company's pro rata share of such Shared Liabilities will be
approximately percent. Shared Liabilities will also include a portion of the
indemnity obligations of the Other Spin-Off Companies should one or more of
those companies default on their indemnity obligations under the Distribution
Agreement. However, in no event will the Company's share of the Shared
Liabilities exceed $ .
The Distribution Agreement is expected to 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 is expected to have other
customary provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. School Specialty will also
enter into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible for the Adverse Tax Act
will indemnify the other Spin-Off Companies for any liability to U.S. Office
Products under the Tax Allocation Agreement. As a consequence, School Specialty
will be liable for any Distribution Taxes resulting from any Adverse Tax Act by
School Specialty and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
each of U.S. Office Products and the Spin-Off Companies will be liable for its
pro
30
<PAGE>
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 any Distribution Taxes with respect not only to
the School Specialty Distribution but also any of the other Distributions.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with School Specialty and the other
Spin-Off Companies to provide for an orderly transition of benefits coverage
between U.S. Office Products and the Spin-off Companies. Pursuant to this
agreement, the respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distribution subsidiaries will retain or assume
responsibility for their current and previous employees. The proposed Employee
Benefits Agreement reflects U.S. Office Products' expectation that each of the
Spin-Off Companies will establish 401(k) plans for their respective employees
effective as of, or shortly after, the Distribution Date and that U.S. Office
Products will transfer 401(k) accounts to those plans as soon as practicable.
The proposed 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.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of School Specialty at
January 24, 1998 (i) on an actual basis, and (ii) on a pro forma basis to
reflect the refinancing of U.S. Office Products' debt allocated to School
Specialty, the School Specialty Distribution and the purchase acquisition
completed subsequent to January 24, 1998 and (iii) on a pro forma as adjusted
basis to give effect to the Offering and the issuance of Common Stock to Messrs.
Spalding, Vander Zanden and Pate and the application of a portion of the
proceeds therefrom to the payment of a portion of U.S. Office Products' debt
allocated to the Company (assuming an inital public offering price of $ per
share and no exercise of the Underwriter's overallotment option, but without
deducting the estimated underwriting discount and 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
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................................................ $ 272 $ 272 $
Short-term payable to U.S. Office Products................................. 16,873
---------- ----------- -------------
Total short-term debt................................................ $ 17,145 $ 272
---------- ----------- -------------
---------- ----------- -------------
Long-term debt............................................................. $ 385 $ 82,978
Long-term payable to U.S. Office Products.................................. 62,470
Stockholder's equity:
Divisional equity........................................................ 93,313 93,313
Preferred stock (1,000,000 shares authorized; no shares outstanding).....
Common stock, $0.001 par value (150,000,000 shares authorized;
shares outstanding pro forma; shares outstanding pro forma, as
adjusted)(1)...........................................................
Additional paid-in capital...............................................
Retained earnings........................................................ 5,179 5,179
---------- ----------- -------------
Total stockholder's equity........................................... 98,492 98,492
---------- ----------- -------------
Total capitalization................................................. $ 161,347 $ 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 "--Employee Stock Option Plan".
(2) The net proceeds of the Offering are estimated to be $ ($ if the
underwriters' over-allotment option is exercised in full). Those net
proceeds will be used for working capital, repayment of a portion of the
debt allocated to the Company by U.S. Office Products and general
corporation purposes, including future acquisitions.
32
<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 the "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
School Specialty" that 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 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 of normal recurring accruals, necessary for a fair
presentation of the results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the School
Specialty Distribution and the acquisitions completed by the Company after May
1, 1996 through May 1, 1998 as if all such acquisitions had been consummated by
May 1, 1996. The unaudited pro forma combined financial data discussed herein
does 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.
33
<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 per share(4):..............
Basic $ (0.09) $ 0.00 $ 0.03 $ (0.06) $ (0.06) $ 0.09
Diluted $ (0.09) $ 0.00 $ 0.03 $ (0.06) $ (0.06) $ 0.09
Weighted average shares
outstanding(4):.....................
Basic 44,260 44,260 45,562 59,059 77,501 90,026
Diluted 44,260 44,260 45,704 60,024 79,100 91,761
<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 per share(4):..............
Basic $ 0.04 $ 0.08 $ 0.11 $ 0.07
Diluted $ 0.04 $ 0.08 $ 0.11 $ 0.07
Weighted average shares
outstanding(4):.....................
Basic 85,978 114,758 109,895 109,895
Diluted 87,824 117,185 109,895 109,895
<CAPTION>
JANUARY 24, 1998
----------------
STATEMENT OF INCOME DATA:
Revenues.............................. $321,010
Cost of revenues...................... 228,512
--------
Gross profit.......................... 92,498
Selling, general and administrative
expenses............................ 66,951
Non-recurring acquisition costs.......
Restructuring costs...................
--------
Operating income (loss)............... 25,547
Interest expense...................... 5,535
Interest income.......................
Other (income) expense................ 520
--------
Income (loss) before provision for
(benefit from) income taxes......... 19,492
Provision for (benefit from) income
taxes(3)............................ 8,966
--------
Net income (loss)..................... $ 10,526
--------
--------
Net income per share(4):..............
Basic $ 0.10
Diluted $ 0.10
Weighted average shares
outstanding(4):.....................
Basic 109,895
Diluted 109,895
</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>
34
<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. The pro forma
financial data reflect acquisitions completed by School Specialty through
May 1, 1998.
(2) The pro forma financial data give effect to the refinancing of U.S. Office
Products' debt allocated to School Specialty and the purchase acquisitions
completed by School Specialty from May 1, 1996 to May 1, 1998 as if all such
transactions had been made 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 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. The difference
between the effective pro forma tax rate of 46% and the statutory rate of
35% for the nine months ended January 25, 1997 and January 24, 1998 relates
primarily to state 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 the valuation allowance.
(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 (h) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma net income per share and
pro forma weighted average shares outstanding, as adjusted to give effect to
the sale of shares to Messrs. Spalding, Vander Zanden and Pate, the Offering
and the refinancing of $ of debt owed to U.S. Office Products, would
have been:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------------
ENDED APRIL 26, JANUARY 25, JANUARY 24,
1997 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net income per share, as adjusted:
Basic...............................................................
Diluted.............................................................
Pro forma weighted average shares outstanding:
Basic...............................................................
Diluted.............................................................
<CAPTION>
TWELVE MONTHS
ENDED
---------------
JANUARY 24,
1998
---------------
<S> <C>
Pro forma net income per share, as adjusted:
Basic...............................................................
Diluted.............................................................
Pro forma weighted average shares outstanding:
Basic...............................................................
Diluted.............................................................
</TABLE>
(5) The pro forma balance sheet data give effect to the refinancing of U.S.
Office Products' debt allocated to School Specialty and the purchase
acquisition of Education Access completed by School Specialty subsequent to
January 24, 1998 as if such transactions had been made 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.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 14 of which had occurred since
May 1996, 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 that the effective income tax rate of 46% 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
if a restructuring charge will be incurred and, if incurred, the timing or
overall magnitude of such a charge. In addition, the Company anticipates
recording certain material one-time non-recurring costs primarily consisting of
write-down of deferred catalog costs, employee severance and asset impairment
costs in the fourth quarter of fiscal 1998.
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
36
<PAGE>
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 School Specialty Distribution and the
companies acquired 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 24.3
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 2.1 2.2 1.7
Other (income)........... (0.1) (0.1) (0.1) 0.1
------ ------ ------ ------ ------ ------
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 71.2
------ ------
Gross profit........... 30.3 28.8
Selling, general and
administrative
expenses............... 22.9 20.8
Non-recurring acquisition
costs.................. 0.6
Restructuring costs......
------ ------
Operating income....... 6.8 8.0
Interest expense, net.... 1.9 1.7
Other (income)........... (0.1) .2
------ ------
Income (Loss) before
provision for income
taxes.................. 5.0 6.1
Provision for (benefit
from) income taxes..... 2.3 2.8
------ ------
Net income (Loss)........ 2.7% 3.3%
------ ------
------ ------
</TABLE>
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 Fiscal 1997 Purchased Companies for the entire nine month
period. Revenues also increased due to sales to new accounts,
37
<PAGE>
increased sales to existing customers and higher pricing on certain products in
response to increased product costs.
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.
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-interest 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".
Interest expense, net of interest income, increased 22.1%, from $3.3 million
for the nine months ended January 25, 1997 to $4.1 million for the nine months
ended January 24, 1998.
Provision for income taxes increased from tax expense of $3.8 million for
the nine months ended January 25, 1997 to tax expense of $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.
38
<PAGE>
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 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 $173,000 in 1995 to a tax benefit
of $2.4 million in fiscal 1997, reflecting effective income tax rates of -5.4%
and -42.2%, respectively. The provision for income taxes in 1995 is a result of
the Company recording a full valuation allowance on the deferred tax asset
resulting from the net operating loss carry forwards created during 1995. The
benefit from income taxes in Fiscal 1997 of $2.4 million arose from the reversal
of a $5.3 million deferred tax asset valuation allowance in the fourth quarter.
The valuation allowance had been established by one of the Pooled Companies
prior to acquisition and consisted primarily of a reserve against the tax
benefit of net operating loss carryforwards. The Company believes that the
effective income tax rate of 46% used in the pro forma interim financial
statements is more representative of future effective income tax rates.
39
<PAGE>
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 22.9% 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, reflecting effective income tax rates of 14.0% and -5.4%, respectively.
The low effective income tax rate 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.
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 9.8%, from $292.2 million for the nine months
ended January 25, 1997, to $321.0 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. 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 4.5%, from $88.5 million, or 30.3% of revenues, for
the nine months ended January 25, 1997 to $92.5 million, or 28.8% 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 the discontinuation of higher margin
retail operations at some of the six companies acquired during fiscal 1997 in
business combinations accounted for under the purchase method ("the Fiscal 1997
Purchased Companies").
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 were $66.9 million, or
22.9% of revenues, for the
40
<PAGE>
nine months ended January 25, 1997 and $67.0 million, or 20.9% 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 28.9% from $6.7 million for the nine
months ended January 25, 1997 to $9.0 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
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 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 those
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
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.
41
<PAGE>
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.
School Specialty intends to use a portion of the net proceeds of this
Offering to repay a portion of the $83.3 million of U.S. Office Products debt
assumed by School Specialty. The remainder of the net proceeds of this Offering
will be retained by School Specialty for general corporate purposes, including
working capital, and for acquisitions.
The Company expects that the Distribution Agreement with U.S. Office
Products will result in an allocation of $83.3 million of debt by U.S. Office
Products resulting in a capital contribution of $69.8 million by U.S. Office
Products at January 24, 1998. The Company has received a committment letter for
a secured $250.0 million revolving credit facility from NationsBank, N.A. as
administrative agent. NationsBank Montgomery Securities LLC, one of the
Underwriters and an affiliate of NationsBank, N.A., is the Arranger and
Syndication Agent. The credit facility terminates five years from the
Distribution Date. The committment letter provides that 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, the
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 is
governed by certain financial covenants. The closing of the credit facility is
conditioned on, among other things, the consummation of the Distribution. The
Company expects that at or about the time of the Offering the credit facility
will be used to repay the debt allocated by U.S. Office Products and to fund
working capital and capital expenditure needs. The Company expects that a
portion of the credit facility will also be available to fund the cash portion
of future acquisitions, subject to the maintenance of required covenants.
On March 6, 1998, School Specialty filed a Registration Statement with the
SEC for the issuance of School Specialty Common Stock in an underwritten public
offering that is expected to close prior to or concurrent with the School
Distribution, the amount of which has not been determined. 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
42
<PAGE>
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.
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".
<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>
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.
43
<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. According to data collected by the NSSEA, sales of educational
supplies and equipment (which is defined by NSSEA 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 NSSEA study states 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.
44
<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, 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
45
<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 shareholders 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.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 7.0% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase sales by adding sales representatives in
geographic markets in which the Company does not have a significant presence. In
addition, the Company believes that it can further increase sales by cross
merchandising its specialty supplies to its general supplies customers. Lastly,
the Company intends to increase international sales in English-speaking
countries.
PRODUCT LINES
SCHOOL SPECIALTY. The School Specialty Catalog offers a comprehensive
selection of classroom supplies, instructional materials, educational games, art
supplies, school forms (such as reports, planners and academic calendars),
physical education equipment, audio-visual equipment, school furniture, and
indoor and outdoor equipment and is targeted to administrative decision makers.
School Specialty believes it is the largest school furniture resale source in
the United States. School Specialty has been granted exclusive franchises for
certain furniture lines in specific territories and School Specialty enjoys
significant purchasing power in open furniture lines.
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.
46
<PAGE>
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 are to the K-12 education market in the
United States.
School Specialty employs merchandising managers who continually review and
update the product lines for each operating division. The merchandising managers
convene customer focus groups and advisory panels to ascertain whether current
offerings are well-received and to anticipate future demand. The merchandising
managers also travel to product fairs and conventions seeking out new product
lines. This annual review process results in an organic reshaping and expansion
of the educational materials being offered by School Specialty.
OPERATIONS
SALES AND MARKETING
School Specialty believes it has developed a substantially different sales
and marketing model from that of traditional school supply and school
furnishings distribution companies in the United States. School Specialty's
strategy is to use its position of owning two distribution platforms with which
it can approach the school market. School Specialty's 290 sales representatives
focus on "top down" selling (through districts, school purchasing authorities
and schools), while School Specialty's Re-Print Division uses the "bottom up"
approach through its direct mail catalog selling directly to teachers. To
further strengthen its position in the market, School Specialty also owns
premier specialty education brands (Childcraft, Sax Arts & Crafts, and
Gresswell) that have the potential to enrich the general product offering
through cross-merchandising.
School Specialty has a broad customer base and no single customer accounted
for more than 2% of sales during fiscal 1997. Schools typically purchase school
supplies and furniture based on an established relationship with relatively few
suppliers. School Specialty establishes and maintains its relationship with its
customers by assigning accounts within a specific geographic territory to a
local area sales representative. Additionally, each account is assigned its
designated inside customer service representative.
School Specialty's customer service representatives call on existing
customers frequently to ascertain and fulfill their school supply needs. The
representatives maintain contact with customers throughout the order cycle and
assist in processing orders.
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.
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<PAGE>
School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft, Gresswell, and Sax Arts &
Crafts lines. The catalog distribution calendar is generally the same across all
product lines. A major catalog containing all product offerings is distributed
toward the end of the calendar year so that it is available for school buyers at
the beginning of the year. During the year, various catalog supplements are
distributed to coincide with the peak school buying season in June through
September and following the return of students to school in the fall.
The approximate number of catalogs distributed for School Specialty,
Re-Print, Childcraft, Gresswell and Sax Arts & Crafts for each of the past three
calendar years and projected catalog distribution for 1998 is set out below. The
figures set forth below include all books of over 32 pages sent out (or, with
respect to 1998, expected to be sent out) during the calendar year but do not
include catalogs that were distributed by discontinued operations.
<TABLE>
<CAPTION>
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
School Specialty Catalog............................... 115,000 296,750 450,750 600,000
Re-Print............................................... 998,000 1,175,000 2,275,000 3,400,000
Childcraft............................................. 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell.............................................. 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts...................................... 750,000 823,000 1,043,500 1,064,000
--------- --------- --------- ---------
Total.............................................. 3,546,000 3,782,750 5,259,250 6,942,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes an extra catalog published against a competitive launch.
Pricing for School Specialty's general and specialty product offerings
varies by product and channel of distribution. The Company generally offers a
negotiated discount from catalog prices for supplies and responds to quote and
bid requests for furniture and equipment. In addition, local sales
representatives work with the Company's corporate sales force and school supply
buyers to achieve an acceptable pricing structure based upon the mix of products
being procured.
School Specialty distributes products through its distribution centers as
well as placing customer orders directly with School Specialty's suppliers.
Furniture is generally shipped directly from the manufacturer to the user,
bypassing School Specialty's distribution centers.
PURCHASING AND INVENTORY MANAGEMENT
School Specialty manages its inventory by continually reviewing daily
inventory levels compared to a running 90-day inventory for the previous year,
adjusted for incoming orders. School Specialty constantly refines the focus of
inventory products through its automated inventory management system to pursue
the optimum level of scope and depth of product offered. Every item in each of
the various distribution regions is forecasted on a daily basis to account for
the anticipated demand curve, current order activity, and available stock as
well as the expected lead time from the supplier. The forecast allows inventory
purchases to respond quickly to the high seasonal demand while keeping
off-season inventory to a minimum. The information systems for all of School
Specialty's distribution centers are interconnected to allow transfer of
inventory between facilities to fill regional demand. In addition, all orders
can be redirected to the distribution center which is the primary stocking
location for a product. School Specialty's inventory management results in
inventory turnover that management believes is higher than industry 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
48
<PAGE>
leverage this purchasing power to acquired companies in the future to improve
the operating margins for both general supply and specialty businesses. The
Company also believes its purchasing power for general supplies should result in
improved margins for its specialty businesses.
Market surveys by Krebs and Company have shown that the primary determinants
of customer satisfaction in the educational supply industry are the completeness
and accuracy of shipments received and the timeliness of delivery. School
Specialty continues to invest in sophisticated computer systems to automate the
order taking, inventory allocation and management, and order shipment processes.
As a result, School Specialty has been able to provide superior order
fulfillment to its customers. In addition, School Specialty has developed OMS,
which allows schools to customize their orders and enter them electronically
with School Specialty and provides historical usage reports to schools useful
for their budgeting process. During the academic year, School Specialty seeks to
fill orders within twenty-four hours of receipt of the order at a 95.0% fill
rate and a 99.5% order accuracy rate. During the summer months, School Specialty
shifts to a production environment and schedules shipments to coincide with the
start of the school year. During the summer months, School Specialty's
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. In the
aggregate, School Specialty's order fill rate for June, July and August 1997
exceeded 97.0%. The Company defines "fill rate" as the percentage of line items
in a customer's order that are initially shipped to the customer in response to
the order by the requested ship date.
During the peak shipping season between June 1 and September 30, each of
School Specialty's distribution centers contracts with local common carriers to
deliver its product to schools and school warehouses. Re-Print and Sax Arts &
Craft rely on carriers such as Roadway Package Service, United Parcel Service
and the U.S. Postal Service for distribution to customers.
INFORMATION SYSTEMS
The Company believes that through the utilization of technology in areas
such as (i) purchasing and inventory management, (ii) customer order fulfillment
and (iii) database management, School Specialty is able to turn inventory more
quickly than competitors, offer customers more convenient and cost effective
product ordering methods and conduct more precisely targeted sales and marketing
campaigns. School Specialty uses two principal information systems, one for its
general distribution and another for its specialty market distribution. In
general school supply distribution, School Specialty utilizes a specialized
distribution software package used primarily by office products and paper
distributors. The software offers a fully integrated process from sales order
entry through customer invoicing, and inventory requirements planning through
accounts payable. School Specialty's system provides information through daily
automatic posting to the general ledger and integrated inventory control. School
Specialty has made numerous enhancements to this process that allow greater
flexibility in addressing seasonal requirements of the industry and meeting
specific customer needs.
The specialty divisions are moving towards a common mail order system
provided by Smith-Gardner & Associates. The Mail-order and Catalog System
("MACS") meets the unique needs of the direct marketing approach with extensive
list management and tracking of multiple marketing efforts. The system provides
complete and integrated order processing, inventory control, warehouse
management, and financial applications.
Although School Specialty has two principal information systems, these
systems integrate general ledger, purchasing and inventory management functions.
The software and hardware allow for continued incremental growth as well as the
opportunity to integrate new client-server and other technologies into 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.
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<PAGE>
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.
51
<PAGE>
MANAGEMENT OF SCHOOL SPECIALTY
EXECUTIVE OFFICERS AND DIRECTORS
Following the School Specialty Distribution, it is anticipated that the
directors and executive officers of School Specialty will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Daniel P. Spalding........................ 43 Chairman of the Board and Chief Executive
Officer
David J. Vander Zanden.................... 43 President, Chief Operating Officer, and
Director*
Donald J. Noskowiak....................... 40 Executive Vice President and Chief
Financial Officer
Douglas Moskonas.......................... 53 Executive Vice President for School
Specialty Divisions
Melvin D. Hilbrown........................ 49 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..................... 51 Executive Vice President for Childcraft
Michael J. Killoren....................... 41 Vice President for School Specialty
Divisions
Lillian R. Kellogg........................ 45 President for Education Access Division
Jonathan J. Ledecky....................... 40 Director*
Leo C. McKenna............................ 64 Director*
Rochelle Lamm Wallach..................... 48 Director*
</TABLE>
- ------------------------
* Messrs. Vander Zanden, Ledecky and McKenna and Ms. Wallach will join the Board
of Directors of School Specialty immediately prior to the issuance of the shares
offered in the Offering.
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. Mr. Spalding has served as President of
the Educational Supplies and Products Division of U.S. Office Products since
1996. Prior to that time, he served as President, Chief Executive Officer, and a
director of Old School since 1988. Prior to 1988, Mr. Spalding was an officer of
JanSport, a manufacturer of sports apparel and backpacking equipment. Mr.
Spalding was a co-founder of JanSport, and served as President and Chief
Executive Officer from 1977 to 1984. Mr. Spalding has been a director of the
National School Supply and Equipment Association since 1992 and completed his
term as the association's Chairman in November 1997. Mr. Spalding is Michael J.
Killoren's cousin.
DAVID J. VANDER ZANDEN became the Chief Operating Officer of School
Specialty in March 1998. Prior to that time, he served as President of Ariens
Company since 1992, a manufacturer of outdoor lawn and garden equipment.
DONALD J. NOSKOWIAK has served as Chief Financial Officer of School
Specialty since 1997. In February 1998, Mr. Noskowiak became an Executive Vice
President of School Specialty. He was Vice President, Treasurer and Principal
Financial Officer of Old School since 1994. From 1992 through 1994 he was the
Corporate Controller of Old School.
DOUGLAS MOSKONAS joined Old School in 1993 as Vice President of Sales for
the Valley Division. Since that time he has served as General Manager for the
Valley Division from 1994 through 1996 and was appointed President of School
Specialty Distribution in 1997. Prior to joining School Specialty, Mr. Moskonas
served as Vice President of Sales for Emmons-Napp Office Products from 1979
through 1993. As of the School Specialty Distribution, Mr. Moskonas is expected
to be elected an Executive Vice President of School Specialty for School
Specialty Divisions.
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<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 Education Corp. in 1997 and serves as President of Childcraft
Education Corp. Mr. Suchodolski has been President of Childcraft Education Corp.
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.
JONATHAN J. LEDECKY will serve as a Director and an employee of School
Specialty as of the Distribution Date. 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 the Non-Executive Chairman of the Board 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 an overseer and Chairman of the
Finance Committee for the Catholic Student Center at Dartmouth College.
53
<PAGE>
ROCHELLE LAMM WALLACH was formerly 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
effective date of the Distribution.
COMMITTEES OF THE BOARD
The School Specialty Board will create an Audit Committee effective
immediately prior to the issuance of shares in the Offering. The Audit Committee
is charged with reviewing School Specialty's annual audit and meeting with
School Specialty's independent accountants to review School Specialty's internal
controls and financial management practices.
The School Specialty Board will create a Compensation Committee effective
immediately prior to the issuance of shares in the Offering. The Compensation
Committee is charged with determining the compensation of executive officers of
School Specialty and administering any stock option plan School Specialty may
adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by School Specialty for services rendered during the year ended 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 SALARY BONUS OPTIONS(#) COMPENSATION
- ------------------------------------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Daniel P. Spalding......................... $ 212,104 $ 34,200 150,000 --
Chairman of the Board, CEO and Director
David J. Vander Zanden..................... 225,000 -- -- --
President, Chief Operating Officer and
Director
Ronald E. Suchodolski...................... 157,646 $ 62,633 20,000 --
President, Childcraft
Richard H. Nagel........................... 130,660 29,500 20,000 --
President, Sax Arts & Crafts
Douglas Moskonas........................... 139,525 -- 20,000 --
President, School Specialty Division
</TABLE>
- ------------------------
(1) Mr. Vander Zanden joined School Specialty in March 1998.
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire School Specialty Common Stock in connection
with the School Specialty Distribution. See "--Replacement of Outstanding U.S.
Office Products' Options." Upon consummation of the School Specialty
Distribution, the number of options granted to officers, directors
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<PAGE>
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 0.0% $ 15.17 4/28/07 $1,431,049 $3,626,561
David J. Vander Zanden................ -- 0.0% -- -- -- --
Ronald E. Suchodolski................. 20,000 0.0% 18.00 12/12/07 226,400 573,600
Richard H. Nagel...................... 20,000 0.0% 18.00 12/12/07 226,400 573,600
Douglas Moskonas...................... 20,000 0.0% 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 option exercise price 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 option will be adjusted by applying the following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products' Common Stock
Pre-School Specialty
Distribution
Initial Public Offering Price of
School Specialty Common Stock in
the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of
U.S. Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will not be
adjusted as a result of the Tender Offer, but instead are adjusted solely
for the Distributions. 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.
(3) Total options granted refers to options to acquire U.S. Office Products
Common Stock given to all employees of the Educational Supplies and Products
Division of U.S. Office Products during fiscal 1998.
(4) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998 AND FISCAL YEAR
END 1998 OPTION VALUES.
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. All options were granted
by U.S. Office Products as options to acquire U.S. Office Products Common Stock
and are expected to be replaced with options to acquire shares of School
Specialty Common Stock in connection with the Distribution. See "--Replacement
of Outstanding U.S. Office Products Options." Upon consummation of the School
Specialty Distribution, the number of stock 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.
55
<PAGE>
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
David J. Vander Zanden............... -- -- -- -- -- --
Ronald E. Suchodolski................ -- -- -- 20,000 -- --
Richard H. Nagel..................... -- -- -- 20,000 -- --
Douglas Moskonas..................... -- -- -- 20,000 -- --
</TABLE>
- ------------------------
(1) The option exercise price 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 option 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-Workflow 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. For
all optionees who will be employees of the Company, the "Initial Public
Offering Price of the Common Stock in the Offering" will be (i) the initial
public offering price of the Company Common Stock multiplied by (ii)
(the "Reverse Stock Split"). The exercise price and number
of options will not be adjusted as a result of the Tender Offer, but
instead are adjusted solely for the Distributions and the Reverse Stock
Split. The intrinsic value of the adjusted options will be no greater than
the intrinsic value of the options before the Distributions and the Reverse
Stock Split, and the ratio of exercise price to market price will be not
less than the ratio before the Distributions and the Reverse Stock Split.
(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
School Specialty expects that all or substantially all vested and unvested
options to acquire the U.S. Office Products' common stock that are held by
School Specialty employees on the Distribution Date will be replaced with
options to acquire shares of Company Common Stock. As of the Distribution Date,
approximately 492,833 options to acquire U.S. Office Products' Common Stock were
held by employees of School Specialty. The number of 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 options exercisable for shares of Company Common Stock
into which the U.S. Office Products options will convert is not yet
determinable. In respect of U.S. Office Products' options, the option exercise
price will be adjusted by applying the following formula:
56
<PAGE>
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 option will be adjusted by applying the following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products'
Common Stock Pre-School Specialty
Distribution
Initial Public Offering Price of
School Specialty Common Stock in the
Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products' common stock for the lesser of (a) ten business days preceding
the Distributions, or (b) the business days falling between the expiration of
the Tender Offer and the completion of the Distributions. The exercise price and
number of options will not be adjusted as a result of the Tender Offer, but
instead are adjusted solely for the Distributions. 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.
EMPLOYEE STOCK OPTION PLAN
School Specialty expects to adopt an employee stock option plan at
approximately the time of the School Specialty Distribution. The terms of the
plan and the initial amount of options have not yet been approved but School
Specialty currently expects that options for 7.5% of the issued and outstanding
capital stock of School Specialty will be granted to senior management
concurrent with the School Specialty Distribution. Option prices will not exceed
the market price of School Specialty Common Stock on the respective dates of
grant.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
School Specialty expects to grant non-employee directors options to
purchase School Specialty Common Stock for each year of service. Non-employee
directors will be paid $ for each meeting attended and will also be
reimbursed for all out-of-pocket expenses related to their service as directors.
Jonathan J. Ledecky entered into a services agreement, as amended (the
"Ledecky Services Agreement") with U.S. Office Products on January 13, 1998, to
become 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 it is expected to be amended, are summarized here.
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. 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, (ii) his
engaging, despite notice, in conduct demonstrably and materially injurious to
U.S. Office Products, or (iii) his violation of the noncompetition agreement 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 stock options and will have 90
days to exercise any vested options.
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.
Under the employment agreement, Mr. Ledecky will report to the Board of
Directors and senior management of the Company. In such
57
<PAGE>
capacity, Mr. Ledecky will provide high-level acquisition negotiation services
and strategic business advice. The Company can require Mr. Ledecky's performance
of such services, consistent with his other contractual obligations to
Consolidation Capital Corporation, U.S. Office Products and the other Spin-Off
Companies. As an employee, Mr. Ledecky will also be subject to the generally
applicable personnel policies of the Company and will be eligible for such
benefit plans in accordance with their terms. The Company will pay Mr. Ledecky
an annual salary of $48,000, for up to two years. The Company may terminate Mr.
Ledecky's employment with or without "cause," where cause is defined as in the
Ledecky Services Agreement, as modified to refer to the Company. If without
cause, the termination would entitle Mr. Ledecky to severance equal to his
salary for the lesser of 12 months or the remainder of the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the School
Specialty Distribution has been completed. 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 any U.S. Office
Products Company conducts business. (For this purpose, "products or services"
are those that U.S. Office Products offered on January 13, 1998.) 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 is permitted to (and 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 his
employment agreement with the Company.
Mr. Ledecky will receive a stock option for School Specialty Common Stock
from School Specialty as of the date of the School Specialty Distribution. The
option is intended to compensate Mr. Ledecky for his services to School
Specialty as an employee. [That option will be granted under the Company's
[stock option plan.]]The options will cover up to 7.5% of the outstanding School
Specialty Common Stock determined as of the Distribution Date. The option will
have a per share exercise price equal to the initial public offering price of
the School Specialty Common Stock.
It is expected that Mr. Ledecky's options, will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the School
Specialty Distributiion. Mr. Ledecky's option from School Specialty will be
exercisable immediately if Mr. Ledecky dies before the options expire or if
School Specialty accelerates the exercise schedule of options for substantially
all management option holders (in this latter case, Mr. Ledecky's option will
become exercisable on the same accelerated schedule as the other management
holders). All unexercised portions of the options 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.
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 (President and Chief Operating
Officer), that will take effect upon the Distribution Date.
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
58
<PAGE>
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 $180,000 and
participates in an incentive bonus plan which provides for an annual bonus up to
100% of base salary upon the attainment of profit and revenue objectives.
Following the termination of his employment for any reason, Mr. Spalding has
agreed not to compete with School Specialty for a period equal to the longer of
two years or, in the case of early termination, the years remaining on his
contract. If Mr. Spalding is terminated without cause, as defined in the
contract, he is entitled to his entire base salary for the years remaining on
the contract. In addition, Mr. Spalding may terminate his contract for good
cause (e.g., a material adverse change in his position or responsibilities or
any material breach on the part of School Specialty) or within five days of a
change in control of School Specialty. The contract defines a change of control
to mean: (i) the acquisition of beneficial ownership of 50% or more of voting
securities of School Specialty by any person other than U.S. Office Products;
(ii) a loss of majority status by the combination of members of U.S. Office
Products' Board at the time of its initial public offering and any Board members
installed by a two-thirds vote of the then-present initial Directors or any
Directors subsequently installed by them; (iii) any reorganization of 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.
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.
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 $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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The School Specialty Board will create a Compensation Committee immediately
following the Offering. The Compensation Committee will be charged with
determining the compensation of all executive officers. Until the Compensation
Committee of the School Specialty Board is created, decisions regarding
compensation of the executive officers will be made by the School Specialty
Board. No member of the School Specialty Board has ever been an officer of
School Specialty or any of its subsidiaries, except that Mr. Spalding is the
Chief Executive Officer of School Specialty. In addition, Mr. Ledecky was the
Chief Executive Officer of U.S. Office Products until November 5, 1997 and will
be the Chairman of U.S. Office Products until the Distribution Date.
59
<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 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 Company believes that these transactions are
as favorable as could be negotiated with third parties.
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.
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.
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".
60
<PAGE>
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY
The following table sets forth the number and percentage of outstanding
shares of U.S. Office Products Common Stock beneficially owned as of April 1,
1998 and as adjusted to reflect the School Specialty Distribution and the
Offering (assuming no exercise of the underwriters' over-allotment option, no
shares are tendered in the Tender Offer, application of the Distribution Ratio
and no options are excercisable) by, (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 of U.S. Office Products Common
Stock 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>
PERCENT OF PERCENT OF
NUMBER OF SHARES OF NUMBER OF SHARES OF SHARES OF
SHARES OF U.S. OFFICE PRODUCTS SCHOOL SPECIALTY SCHOOL SPECILATY
U.S. OFFICE COMMON STOCK COMMON STOCK, COMMON STOCK
PRODUCTS PRIOR TO THE AS AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK OFFERING ADJUSTED(1) OFFERING
- -------------------------------------- ------------------ --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Daniel P. Spalding (6)................ 200,299(2) *
David T. Vander Zanden................ 0 0
Ronald Suchodolski(6)................. 0 0%
Jonathan J. Ledecky(6)................ 2,428,125(3) 1.7%
Richard H. Nagel(6)................... 0 0%
Douglas Moskonas(6)................... 7,500(4) *
Leo C. McKenna........................ 13,088 *
All current executive officers
and directors as a group
(12 persons)(6)..................... 3,756,128 3.4%
5% STOCKHOLDERS
FMR Corp.(5).......................... 15,754,406 11.2%
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services 8,262,886 5.9%
Company(5)..........................
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) The "Number of Shares of School Specialty Common Stock, as Adjusted"
reflects the results of the Tender Offer and the application of the
Distribution Ratio. It assumes no options are exercisable within 60 days.
(2) Includes 37,500 shares which may be acquired upon exercise of options
exercisable within 60 days following the School Specialty Distribution.
(3) Does not include Mr. Ledecky's options described under "Management of School
Specialty--Director Compensation and Other Arrangements," none of which are
exercisable within the next twelve months.
(4) Includes 7,500 shares which may be acquired upon exercise of options
exercisable within 60 days following the School Specialty Distribution.
61
<PAGE>
(5) Based upon a Schedule 13G filed for U.S Office Products with the Securities
and Exchange
Commission.
(6) 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 option 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-Workflow Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
exercise price and number of options will not be adjusted as a result of the
Tender Offer, but instead are adjusted solely for the Distributions. 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.
62
<PAGE>
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK
GENERAL
Set forth below is a summary of the terms of School Specialty's Capital
Stock. At the time of the Distribution and the Offering, School Specialty's
authorized capital stock will consist of 150,000,000 shares of School Specialty
Common Stock, par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). At the time of the
Distribution and the Offering, School Specialty is expected to have outstanding
approximately 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.
63
<PAGE>
OTHER CHARTER AND BY LAWS PROVISIONS
School Specialty's Board of Directors is considering the adoption of certain
takeover defense measures, including but not limited to a shareholder rights
plan and a staggered board. The School Specialty Board expects to complete such
consideration prior to the Offering.
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.
PROVISIONS OF SCHOOL SPECIALTY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AFFECTING CHANGE OF CONTROL
The Board of Directors of School Specialty is contemplating adoption of
certain provisions of the Certificate of Incorporation or Bylaws that may, if
adopted, 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.
64
<PAGE>
CLASSIFIED BOARD
School Specialty's Certificate of Incorporation may include 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 may 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 stockholder can be called only
by the Chairman of School Specialty 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 may 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 control context if the requisite notice provision cannot be
satisfied.
AMENDMENT OF BYLAWS
The Certificate of Incorporation may require a vote of at least 66% 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
School Specialty may 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.
65
<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.
66
<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 Prospectus, have been so included in
reliance on the January 13, 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, 1996 included in this 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, 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 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 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.
67
<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-33
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited).......... F-34
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-35
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-36
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-37
Notes to the Consolidated Financial Statements........................................................... F-38
SAX ARTS & CRAFTS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-43
Balance Sheets as of December 16, 1995, and December 25, 1996 and June 29, 1997 (unaudited).............. F-44
Statement 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-45
Statement 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-46
Statement 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-47
Notes to Financial Statements............................................................................ F-48
</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
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............................. 45,562 59,059 77,501 90,026 85,978 114,758
Diluted........................... 45,704 60,024 79,100 91,761 87,824 117,185
Net income per share:
Basic............................. $ 0.03 ($ 0.06) ($ 0.06) $ 0.09 $ 0.04 $ 0.08
Diluted........................... $ 0.03 ($ 0.06) ($ 0.06) $ 0.09 $ 0.04 $ 0.08
</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 April 25, 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.
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. With the exception of interest
expense, 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.
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
F-10
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-11
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-12
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-13
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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
</TABLE>
F-14
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
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 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:
F-15
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
<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>
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.
F-16
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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 at 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
---------
Unaudited data:
Balance at April 26, 1997......................................................... 33,226
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....................................................... $ 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 balance with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.
F-19
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
The Company's financial statements include allocations of interest expense
from 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.
At the date of Distribution, U.S. Office Products has agreed to allocate
$80.0 million in debt to the Company plus expenditures for acquisitions
completed after January 12, 1998. The Company has completed one such acquisition
subsequent to January 12, 1998 had total expenditures of $3.3 million
(unaudited). The allocation will include debt outstanding with third parties and
intercompany debt payable to U.S. Office Products. The debt payable to U.S.
Office Products will be payable upon the completion of the Distribution.
The Company has received a committment letter for a secured $250.0 million
revolving credit facility from NationsBank, N.A. as administrative agent.
NationsBank Montgomery Securities LLC, one of the Underwriters and an affiliate
of NationsBank, N.A., is the Arranger and Syndication Agent. The credit facility
terminates five years from the Distribution Date. The committment letter
provides that 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, the 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 is governed by certain financial covenants. The
closing of the credit facility is conditioned on, among other things, the
consummation of the Distribution. The Company expects that at or about the time
of the Offering the credit facility will be used to repay the debt allocated by
U.S. Office Products and to fund working capital and capital expenditure needs.
The Company expects that a portion of the credit facility will also be available
to fund the cash portion of future acquisitions, subject to the maintenance of
required covenants.
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 income taxes.................. $ 218 $ 173 $ 139 $ (2,412)
------ ------------ ------------- -------------
------ ------------ ------------- -------------
</TABLE>
F-20
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--INCOME TAXES (CONTINUED)
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 liabilities:
Property and equipment..................................................................... (126) (289)
Intangible assets.......................................................................... 622 258
--------- ---------
Total long-term deferred tax asset (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, a 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.
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)
No 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>
F-21
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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-22
<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
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility are expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
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-23
<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 oon the grant date under the
methodology prescribed by the 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 up to 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 price of the first trade on the day the Company's common stock is
first publicly traded.
F-24
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED)
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 results of operations for the nine months ended January 24, 1998
include the results of the acquired companies from their respective dates of
acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisitions described above 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, adjustments in executive compensation of $124 for the fiscal year ended
April 26, 1997 and the nine months ended January 25, 1997 and the inclusion of a
federal income tax provision on all earnings:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------------
ENDED JANUARY 25, JANUARY 24,
APRIL 26, 1997 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues.................................................... $ 350,760 292,244 321,010
Net income.................................................. 11,714 7,809 10,526
</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.
F-25
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
School Specialty, Inc. (the "Company"), formerly the Educational Supplies and
Products Division of U.S. Office Products Company ("U.S. Office Products"),
through the distribution of shares of the Company to U.S. Office Products
shareholders (the "Distribution) and acquisitions completed through March 5,
1998.
The pro forma combined balance sheet gives effect to the Distribution and to
all acquisitions completed through May 1, 1998, as if such transactions 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 Distribution; (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 acquisitions; 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 Distribution 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 Distribution; (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 the two companies acquired by the Company during the fiscal
year ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
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
F-26
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
average outstanding intercompany balance with U.S. Office Products at U.S.
Office Products' weighted average interest rate during such period.
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.......... $ $ $ $ $ $
Accounts receivable, net........... 41,530 41,530
Inventory.......................... 32,946 100 33,046
Prepaid and other current assets... 8,997 8,997
------------- ------- ----------- --------- ----------- -----------
Total current assets........... 83,473 100 83,573
Property and equipment, net.......... 20,489 350 20,839
Intangible assets, net............... 94,651 2,800(a) 97,451
Other assets......................... 2,594 2,594
------------- ------- ----------- --------- ----------- -----------
Total assets................... $ 201,207 $ 450 $ 2,800 $ 204,457
------------- ------- ----------- --------- ----------- -----------
------------- ------- ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt.................... $ 272 $ $ $ 272 $ $
Short-term Payable to U.S. Office
Products......................... 16,873 (16,873)(b)
Accounts payable................... 11,951 11,951
Accrued compensation............... 5,502 5,502
Other accrued liabilities.......... 5,262 5,262
------------- ------- ----------- --------- ----------- -----------
Total current liabilities...... 39,860 (16,873) 22,987
Long-term debt....................... 385 82,593(b) 82,978
Long-term Payable to U.S. Office
Products........................... 62,470 3,250(a)
(65,720)(b)
------------- ------- ----------- --------- ----------- -----------
Total liabilities.............. 102,715 3,250 105,965
Stockholder's equity:
Divisional equity.................. 93,313 93,313
Retained earnings.................. 5,179 5,179
Equity in Purchased Company........ 450 (450)(a)
------------- ------- ----------- --------- ----------- -----------
Total stockholder's equity..... 98,492 450 (450) 98,492
------------- ------- ----------- --------- ----------- -----------
Total liabilities and
stockholder's equity......... $ 201,207 $ 450 $ 2,800 $ 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 $ 7,764 $ 36,423 $ 28,943 $ $ 321,010
Cost of revenues..................... 176,501 4,494 26,203 21,314 228,512
------------- --------- ----------- ----------- ----------- --------- -----------
Gross profit..................... 71,379 3,270 10,220 7,629 92,498
Selling, general and administrative
expenses........................... 49,588 1,779 6,968 6,425 224(d) 64,984
Amortization expense................. 1,411 556(e) 1,967
------------- --------- ----------- ----------- ----------- --------- -----------
Operating income................. 20,380 1,491 3,252 1,204 (780) 25,547
Other (income) expense:
Interest expense................... 4,100 100 441 38 856(f) 5,535
Interest income.................... (109) (4) 113(f)
Other.............................. 441 (2) 24 57 520
------------- --------- ----------- ----------- ----------- --------- -----------
Income before provision for income
taxes.............................. 15,948 1,393 2,787 1,113 (1,749) 19,492
Provision for income taxes........... 7,113 539 892 141 281(g) 8,966
------------- --------- ----------- ----------- ----------- --------- -----------
Net income........................... $ 8,835 $ 854 $ 1,895 $ 972 $ (2,030) $ 10,526
------------- --------- ----------- ----------- ----------- --------- -----------
------------- --------- ----------- ----------- ----------- --------- -----------
Weighted average shares:
Basic.............................. 114,758 109,895(h)
Diluted............................ 117,185 109,895(h)
Net income per share:
Basic.............................. $ 0.08 $ 0.10
Diluted............................ $ 0.08 $ 0.10
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues.............................
Cost of revenues.....................
-----------
Gross profit.....................
Selling, general and administrative
expenses...........................
Amortization expense.................
-----------
Operating income.................
Other (income) expense:
Interest expense...................
Interest income....................
Other..............................
-----------
Income before provision for income
taxes..............................
Provision for income taxes...........
-----------
Net income...........................
-----------
-----------
Weighted average shares:
Basic..............................
Diluted............................
Net income per share:
Basic..............................
Diluted............................
</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)(c) 64,997
830(d)
Amortization expense........ 396 1,533(e) 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(f) 5,535
Interest income............. (101) (37) 138(f)
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(g) 6,651
------------- --------- ----------- ------------- ------------- ------------- ---------
Net income.................. $ 3,606 $ 2,557 $ 1,897 $ 3,792 $ (137) $ (3,906) $ 7,809
------------- --------- ----------- ------------- ------------- ------------- ---------
------------- --------- ----------- ------------- ------------- ------------- ---------
Weighted average shares:
Basic................... 85,978 109,895(h)
Diluted................. 87,824 109,895(h)
Net income per share:
Basic................... $ 0.04 $ 0.07
Diluted................. $ 0.04 $ 0.07
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS COMBINED
----------- -----------
<S> <C> <C>
Revenues.................... $ $
Cost of revenues............
----------- -----------
Gross profit................
Selling, general and
administrative expenses...
Amortization expense........
Non-recurring acquisition
costs.....................
----------- -----------
Operating income............
Other (income) expense:
Interest expense............
Interest income.............
Other.......................
----------- -----------
Income before provision for
income taxes..............
Provision for income
taxes.....................
----------- -----------
Net income..................
----------- -----------
----------- -----------
Weighted average shares:
Basic...................
Diluted.................
Net income per share:
Basic...................
Diluted.................
</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)(c) 82,956
1,016(d)
Amortization expense........... 566 1,908(e) 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(f) 7,300
Interest income.............. (45) 45(f)
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(g) 92
-------------- --------- ----------- ------------- ------------- ------------- -----------
Net (Loss) income.............. $ 8,132 $ 2,672 $ 1,969 $ 3,369 $ (137) $ (4,291) $ 11,714
-------------- --------- ----------- ------------- ------------- ------------- -----------
-------------- --------- ----------- ------------- ------------- ------------- -----------
Weighted average shares
outstanding:
Basic...................... 90,026 109,895(h)
Diluted.................... 91,761 109,895(h)
Net income per share:
Basic...................... $ 0.09 $ 0.11
Diluted.................... $ 0.09 $ 0.11
-----------
-----------
<CAPTION>
PRO
FORMA PRO
OFFERING FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues....................... $ $
Cost of revenues...............
------------- -----------
Gross profit...............
Selling, general and
administrative expenses......
Amortization expense...........
Non-recurring acquisition
costs........................
Restructuring costs............
------------- -----------
Operating income...........
Other (income) expense:
Interest expense.............
Interest income..............
Other........................
------------- -----------
Income (Loss) before provision
for income taxes.............
Provision for income taxes.....
------------- -----------
Net (Loss) income..............
------------- -----------
------------- -----------
Weighted average shares
outstanding:
Basic......................
Diluted....................
Net income per share:
Basic......................
Diluted....................
</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) Represents the refinancing of the payable to U.S. Office Products with the
proceeds received from borrowings with a third party.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) 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.
(d) Adjustment to reflect additional corporate overhead during the period prior
to the formation of the School Division by U.S. Office Products as if the
division had been formed at May 1, 1996.
(e) 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.
(f) 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.
(g) 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.
(h) The weighted average shares outstanding used to calculate pro forma earnings
per share is based upon 109,895 shares of common stock outstanding for the
periods. This is based upon the most current number of shares of common
stock of U.S. Office Products outstanding of 133,042, plus 5,000 shares
expected to be tendered by U.S. Office Products option holders, plus 8,890
shares related to the conversion of U.S. Office Products debt, less 37,037
shares expected to be repurchased by U.S. Office Products in the Tender
Offer, and assumes a distribution ratio of one share of School Specialty
Common Stock for each share of U.S. Office Products Common Stock. The actual
distribution ratio will be determined prior to effectiveness of the
Distribution, and is expected to be less than one share of School Specialty
Common Stock for every one share of U.S. Office Products Common Stock.
F-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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 provided by (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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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.......................................................... $ *
Legal Fees and Expenses..................................................... $ *
Accounting Fees and Expenses................................................ $ *
Printing Fees and Expenses.................................................. $ *
Miscellaneous............................................................... $ *
---------
Total................................................................... $ *
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of School Specialty's Certificate of Incorporation provides
that School Specialty shall indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of School Specialty's Certificate of Incorporation states that
directors of School Specialty will not be liable to School Specialty or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to School Specialty or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, which makes directors liable for unlawful dividends or unlawful stock
repurchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
Article IV of School Specialty's Bylaws provides that School Specialty shall
indemnify its officers and directors (and those serving at the request of School
Specialty as an officer or director of another corporation, partnership, joint
venture, trust or other enterprise), and may indemnify its employees and
II-1
<PAGE>
agents (and those serving at the request of School Specialty as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred, if such officer,
director, employee or agent acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of School Specialty, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In a derivative action, indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such officer, director, employee or agent in the defense or
settlement of such action or suit, and no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to School Specialty unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Unless the Board of Directors of School Specialty otherwise determines in a
specific case, expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by School Specialty in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the officer or director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by School Specialty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No.1 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 May 4, 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. 1 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 May 4, 1998
- ------------------------------ (Principal Executive
Daniel P. Spalding Officer); Director
/s/ DONALD J. NOSKOWIAK Chief Financial Officer May 4, 1998
- ------------------------------ (Principal Financial and
Donald J. Noskowiak Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1*** Amended and Restated Certificate of Incorporation
3.2*** Bylaws
4.1*** Form of certificate representing shares of Common Stock
5*** Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8*** Tax opinion of Wilmer, Cutler & Pickering
10.1*** Form of Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Consulting, Inc., Navigant International, Inc., and School Specialty, Inc.
10.2*** Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.3*** Tax Indemnification Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc., and School Specialty, Inc.
10.4*** Employee Benefits Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc., and School Specialty, Inc.
10.5* Employment Agreement dated April 29, 1996, between Daniel P. Spalding and School Specialty, Inc.
10.6* Employment Agreement dated July 26, 1996, between Donald Ray Pate, Jr. and The Re-Print Corp.
10.7* Employment Agreement dated June 27, 1997, between Richard H. Nagel and Sax Arts & Crafts, Inc.
10.8*** Agreement dated as of January 13, 1998 between U.S. Office Products and Jonathan J. Ledecky.
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 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between School Specialty,
Inc., a Wisconsin corporation (the "Company") and wholly-owned subsidiary of
U.S. Office Products Company, a Delaware corporation ("USOP") and Daniel P.
Spalding ("Employee") is hereby entered into and effective as of the 29 day of
April, 1996. This Agreement hereby supersedes any other employment agreements or
understandings; written or oral, between the Company, USOP and Employee.
RECITALS
The following statements are true and correct:
On this day the Company, USOP and certain other parties consummated a
transaction contemplated by the Agreement and Plan of Reorganization dated as of
April 29, 1996 by and among the Company, USOP and such other parties.
As of the date of this Agreement, the Company is engaged primarily in the
school products supply business.
Employee is employed hereunder by the Company in a confidential relationship
wherein Employee, in the course of his employment with the Company, has and will
continue to become familiar with and aware of information as to the Company's
and USOP's customers, specific manner of doing business, including the
processes, techniques and trade secrets utilized by the Company and USOP, and
future plans with respect thereto, all of which has been and will be established
and maintained at great expense to the Company and USOP; this information is a
trade secret and constitutes the valuable good will of the Company and USOP.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
AGREEMENTS
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as President. As such, Employee
shall have responsibilities, duties and authority reasonably accorded to and
expected of President. Employee will report directly to the Board of Directors
of the Company (the "Board"). Employee hereby accepts this employment upon the
terms and conditions herein contained and agrees to devote his time, attention
and efforts to promote and further the business of the Company.
(b) Employee shall faithfully adhere to, execute and fulfill all policies
established by the Company.
(c) Employee shall not, during the Term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes with Employee's duties and
responsibilities hereunder. However, the foregoing limitations shall not be
construed as prohibiting Employee from (i) making personal investments in such
form or manner as will neither require his services in the operation or affairs
of the companies or enterprises in which such investments are made nor violate
the terms of paragraph 3 hereof or (ii) acting as director of charitable or
educational organizations or companies which do not compete with the Company so
long as such activities do not interfere with Employee's performance of his
obligations to the Company.
2. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be $180,000 per year, payable on a regular basis in accordance
with the Company's standard payroll procedures but not less than monthly. On at
least an annual basis, the Board will review Employee's
<PAGE>
performance and may make increases to such base salary if, in its discretion,
any such increase is warranted.
(b) INCENTIVE BONUS PLAN. The Company will develop a written Incentive
Bonus Plan (which may be USOP's Incentive Bonus Plan, provided that it contains
the same terms and provisions for Employee as for USOP employees of similar
standing) setting forth the criteria under which Employee and other officers and
key employees will be eligible to receive year-end bonus awards. The Incentive
Bonus Plan will provide for Employee to earn up to 100% of his base salary in
bonus compensation, payable out of a bonus pool determined by the Board of
Directors of USOP or a compensation committee thereof. Bonuses under the
Incentive Bonus Plan will be determined by measuring Employee's performance, the
Company's performance and USOP's performance based on the following criteria,
weighted as indicated, and measured against target performance levels
established by the Board of Directors of USOP or such compensation committee:
USOP's profit--25%, (ii) the profit of the Company--50%, and (iii) revenue
growth of the Company due to acquisitions--25%.
(c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall
be entitled to receive additional benefits and compensation from the Company in
such form and to such extent as specified below:
(1) Payment of all premiums (or such portion thereof as is provided by the
Company's or USOP's plans) for coverage for Employee and his dependent
family members under health, hospitalization, disability, dental, life
and other insurance plans that the Company or USOP may have in effect
from time to time, benefits provided to Employee under this clause (1)
to be at least equal to such benefits provided to USOP executives.
(2) Reimbursement for all business travel and other out-of-pocket expenses
reasonably incurred by Employee in the performance of his services
pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by Employee upon
submission of any request for reimbursement, and in a format and manner
consistent with the Company's expense reporting policy.
(3) The Company shall provide Employee with other executive perquisites as
may be available to or deemed appropriate for Employee by the Board and
participation in all other Company-wide and USOP-wide employee benefits
as available from time to time.
3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of his employment by or with the
Company, and for a period equal to the longer of (i) two (2) years or (ii) the
period during which Employee is entitled to receive and is receiving any payment
pursuant to paragraph 5(d) hereof, immediately following the termination of his
employment under this Agreement, for any reason whatsoever, directly or
indirectly, for himself or on behalf of or in conjunction with any other person,
persons, company, partnership, corporation or business of whatever nature:
(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 selling any products or services in direct competition with the
Company or USOP, within 100 miles of the Company or USOP or where any of the
Company's or USOP's subsidiaries conducts business, including any territory
serviced by the Company or USOP or any of such subsidiaries (the
"Territory");
(ii) call upon any person who is, at that time, within the Territory, an
employee of the Company or USOP (including the respective subsidiaries
thereof) in a managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company or USOP
(including the respective subsidiaries thereof).
2
<PAGE>
(iii) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a customer of the Company or
USOP (including the respective subsidiaries thereof) within the Territory
for the purpose of soliciting or selling products or services in direct
competition with the Company or USOP within the Territory;
(iv) call upon any prospective acquisition candidate, on Employee's own
behalf or on behalf of any competitor, which candidate was either called
upon by the Company or USOP (including the respective subsidiaries thereof),
or for which the Company or USOP made an acquisition analysis, for the
purpose of acquiring such entity.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit Employee from 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.
(b) Because of the difficulty of measuring economic losses to the Company
and USOP 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 and USOP
for which they would have no other adequate remedy, Employee agrees that the
foregoing covenant may be enforced by USOP or the Company in the event of breach
by him, by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company or USOP (including USOP's other subsidiaries) on the
date of the execution of this Agreement and the current plans of USOP (including
USOP's other subsidiaries); but it is also the intent of the Company and
Employee that such covenants be construed and enforced in accordance with the
changing activities, business and locations of the Company and USOP (including
USOP's other subsidiaries) throughout the term of this covenant.
It is further agreed by the parties hereto that, in the event that Employee
shall cease to be employed hereunder, and shall enter into a business or pursue
other activities not in competition with the Company or USOP (including USOP's
other subsidiaries), or similar activities or business in locations the
operation of which, under such circumstances, does not violate clause (i) of
this paragraph 3, and in any event such new business, activities or location are
not in violation of this paragraph 3 or of Employee's obligations under this
paragraph 3, if any, Employee shall not be chargeable with a violation of this
paragraph 3 if the Company or USOP (including USOP's other subsidiaries) shall
thereafter enter the same, similar or a competitive (i) business, (ii) course of
activities or (iii) location, as applicable.
(d) The covenants in this paragraph 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. Moreover, in the event 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.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
USOP, whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by USOP or the Company of such covenants, PROVIDED,
however, that upon the failure of the Company to make any payments required
under this Agreement, the Employee may, upon thirty days prior written notice to
the Company, waive his right to receive any additional compensation pursuant to
this Agreement and engage in any activity prohibited by the covenants of this
paragraph 3. It is specifically agreed that the period of two (2) years stated
at the beginning of this paragraph 3, during which the agreements and covenants
of Employee made in this paragraph 3 shall be effective, shall be computed by
excluding from such computation any time during which Employee is in violation
of any provision of this paragraph 3.
3
<PAGE>
(f) Notwithstanding any of the foregoing, if any applicable law shall reduce
the time period during which Employee shall be prohibited from engaging any any
competitive activity described in paragraph 3(a) hereof, the period of time for
which Employee shall be prohibited pursuant to paragraph 3(a) hereof shall be
the maximum time permitted by law. However, in the event that the time period
specified by paragraph 3(a) shall be so reduced, then, notwithstanding the
provisions of paragraph 5(d) hereof, Employee shall be entitled to receive from
the Company his base salary at the rate then in effect solely for the longer of
(i) the time period during which the provisions of paragraph 3(a) shall be
enforceable under the provisions of such applicable law, or (ii) the time period
during which Employee is not engaging in any competitive activity, but in no
event longer than the term provided in paragraph 5(d).
4. PLACE OF PERFORMANCE.
(a) Employee understands that he may be requested by the Board or USOP to
relocate from his present residence to another geographic location in order to
more efficiently carry out his duties and responsibilities under this Agreement
or as part of a promotion or other increase in duties and responsibilities. In
such event, if Employee agrees to relocate, the Company will pay all relocation
costs to move Employee, his immediate family and their personal property and
effects. Such costs may include, by way of example, but are not limited to,
pre-move visits to search for a new residence, investigate schools or for other
purposes; temporary lodging and living costs prior to moving into a new
permanent residence; duplicate home carrying costs; all closing costs on the
sale of Employee's present residence and on the purchase of a comparable
residence in the new location; and added income taxes that Employee may incur if
any relocation costs are not deductible for tax purposes. The general intent of
the foregoing is that Employee shall no personally bear any out-of-pocket cost
as a result of the relocation, with an understanding that Employee will use his
best efforts to incur only those costs which are reasonable and necessary to
effect a smooth, efficient and orderly relocation with minimal disruption to the
business affairs of the Company and the personal life of Employee and his
family.
(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "cause" for
termination of this Agreement under the terms of paragraph 5(c) and, in the
event that Employee is terminated for such refusal, Employee shall be entitled
to receive all payments under this Agreement as if he were terminated by the
Company without cause.
5. TERM; TERMINATION; RIGHTS ON TERMINATION. The term of this Agreement
shall begin on the date hereof and continue for four years (the "Initial Term"),
and, unless terminated as herein provided, shall be extended at the end of each
year beginning at the end of the second year of the Initial Term hereof for a
period of one year on the same terms and conditions contained herein, such that
the term (the "Term") of this Agreement shall extend for a period of three years
from the date of such extension. This Agreement and Employee's employment may be
terminated in any one of the following ways:
(a) DEATH. The death of Employee shall immediately terminate the Agreement
with no severance compensation due to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from his full-time duties
hereunder for four (4) consecutive months, then thirty (30) days after written
notice to the Employee (which notice may occur before or after the end of such
four (4) month period, but which shall not be effective earlier than the last
day of such four (4) month period), the Company may terminate Employee's
employment hereunder provided Employee is unable to resume his full-time duties
at the conclusion of such notice period. Also, Employee may terminate his
employment hereunder if his health should become impaired to an extent that
makes the continued performance of his duties hereunder hazardous to his
physical or mental health or his life, provided that Employee shall have
furnished the Company with a written statement from a qualified doctor to such
effect and provided, further, that, at the Company's request made within thirty
(30) days of the date of such written statement, Employee shall submit to an
examination by a doctor selected by the Company who is reasonably acceptable to
Employee or Employee's doctor and such doctor shall have concurred in the
conclusion of
4
<PAGE>
Employee's doctor. Subject to paragraph 3(f) hereof and the last paragraph of
this paragraph 5, in the event this Agreement is terminated as a result of
Employee's disability, Employee shall receive from the Company the base salary
at the rate then in effect for whatever time period is remaining under the Term
of this Agreement, payable over such time period.
(c) GOOD CAUSE. The Company may terminate the Agreement ten (10) days
after written notice to Employee for good cause, which shall be: (1) Employee's
willful, material and irreparable breach of this Agreement which continues after
receipt of ten (10) days prior written notice from the Company to Employee; (2)
Employee's gross negligence in the performance or intentional nonperformance
(continuing for ten (10) days after receipt of written notice of need to cure)
of any of Employee's material duties and responsibilities hereunder; (3)
Employee's willful dishonesty, fraud or misconduct with respect to the business
or affairs of the Company or USOP which materially and adversely affects the
operations or reputation of the Company or USOP; (4) Employee's conviction of a
felony or other crime involving moral turpitude; or (5) alcohol abuse or illegal
drug abuse by Employee. In the event of a termination for good cause, as
enumerated above, Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment, the
Company may, without cause, terminate this Agreement and Employee's employment,
effective thirty (30) days after written notice is provided to the Employee.
Should Employee be terminated by the Company without cause, subject to paragraph
3(f) hereof and the last paragraph of this paragraph 5, Employee shall receive
from the Company the base salary at the rate then in effect for whatever time
period is remaining under the Term of this Agreement, payable over such time
period. If Employee resigns or otherwise terminates his employment for any
reason other than Good Reason as defined in paragraph 5(f), Employee shall
receive no severance compensation.
(e) CHANGE IN CONTROL OF THE COMPANY OR USOP. Refer to paragraph 17 below.
(f) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate
his employment hereunder for "Good Reason." As used herein, "Good Reason" shall
mean the continuance of any of the following after 10 days' prior written notice
by Employee to the Company and to USOP, specifying the basis for such Employee's
having Good Reason to terminate this Agreement.
(i) a material adverse change in Employee's status, title, position or
responsibilities;
(ii) the assignment to Employee of any duties materially and adversely
inconsistent with the Employee's position as specified in paragraph 1 hereof
(or such other position to which he may be promoted), including status,
offices, responsibilities or persons to whom the Employee reports as
contemplated under paragraph 1 of this Agreement, or any other action by the
Company which results in a material and adverse change in such position,
status, offices, titles or responsibilities;
(iii) Employee's removal from, or failure to be reappointed or reelected
to, Employee's position under this Agreement, except as contemplated by
paragraphs 5(a), (b), (c) and (e); or
(iv) any other material breach of this Agreement by the Company,
including the failure to pay Employee on a timely basis the amounts to which
he is entitled under this Agreement.
In the event of any termination by the Employee for Good Reason, as determined
by a court of competent jurisdiction or pursuant to the provisions of paragraph
15 below, the Company shall pay all amounts and damages to which Employee may be
entitled as a result of such breach, including interest thereon and all
reasonable legal fees and expenses and other costs incurred by Employee to
enforce his rights hereunder.
(g) PAYMENT THROUGH TERMINATION. Upon termination of this Agreement for
any reason provided above, Employee shall be entitled to receive all
compensation earned and all benefits and reimbursements (including payments for
accrued vacation and sick leave) due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Employee only to the extent and in the manner expressly provided
above. All other rights and obligations of USOP, the
5
<PAGE>
Company and Employee under this Agreement shall cease as of the effective date
of termination, except that the Company's obligations under paragraph 9 herein
and Employee's obligations under paragraphs 3, 6, 7, 8 and 10 herein shall
survive such termination in accordance with their terms.
In the event of any termination of Employee's employment under this Agreement,
the Employee shall have no obligation to seek other employment; PROVIDED,
however, that in the event that Employee secures employment during the period
that any payment is continuing pursuant to the provisions of this paragraph 5,
the amounts to be paid hereunder shall be reduced by the amount of Employee's
earnings from such other employment.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company, USOP or
their representatives, vendors or customers which pertain to the business of the
Company or USOP shall be and remain the property of the Company or USOP, as the
case may be, and be subject at all times to their discretion and control.
Likewise, all correspondence, reports, records, charts, advertising materials
and other similar data pertaining to the business, activities or future plans of
the Company or USOP which is collected by Employee shall be delivered promptly
to the Company without request by it upon termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to USOP and the Company
any and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Employee, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are directly related to the business
or activities of the Company or USOP and which Employee conceives as a result of
his employment by the Company. Employee hereby assigns and agrees to assign all
his interests therein to the Company or its nominee. Whenever requested to do so
by the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
8. TRADE SECRETS. Employee agrees that he will not, during or after the
term of this Agreement with the Company, disclose the specific terms of the
Company's or USOP's relationships or agreements with their respective
significant vendors or customers or any other significant and material trade
secret of the Company or USOP, whether in existence or proposed, to any person,
firm, partnership, corporation or business for any reason or purpose whatsoever.
9. INDEMNIFICATION. In the event Employee is 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
or USOP against the Employee), by reason of the fact that he is or was
performing services under this Agreement or as an officer or director of the
Company (and whether or not the basis of such action is the Employee's action in
such official capacity), then the Company shall indemnify Employee against all
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith and such indemnification shall continue as to the Employee even if he
has ceased to be an employee, officer or director of the Company and shall inure
to the benefit of his heirs and estate. The Company shall advance to Employee
all reasonable costs and expenses directly related to the defense of such
action, suit or proceeding within twenty days after written request therefore by
the Employee to the Company, PROVIDED that such request shall include an
undertaking by the Employee to repay such advances if it shall ultimately be
determined that Employee is or was not entitled to be indemnified by the Company
against such costs and expenses. In the event that both Employee and the Company
are made a party to the same third-party action, complaint, suit or proceeding,
the Company or USOP agrees to engage competent legal representation, and
Employee agrees to use the same representation, provided that if counsel
selected by USOP shall have a conflict of interest that prevents such counsel
from representing Employee, Employee may engage separate counsel and the Company
or USOP shall pay all attorneys' fees of such separate counsel. Further,
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while Employee is expected at all times to use his best efforts to faithfully
discharge his duties under this Agreement, Employee cannot be held liable to the
Company or USOP for errors or omissions made in good faith where Employee has
not exhibited gross, willful or wanton negligence or misconduct or performed
criminal or fraudulent acts which materially damage the business of the Company.
The provisions of this Section 9 are in addition to, and not in derogation of,
the indemnification provisions of the Company's By-Laws.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employee, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses or 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 Employee and such third party
which was in existence as of the date of this Agreement.
11. ASSIGNMENT: BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Employee agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. This
Agreement may not be assigned or transferred by the Company or USOP without the
prior written consent of Employee. Subject to the preceding two (2) sentences,
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective heirs, legal representatives,
successors and assigns.
12. COMPLETE AGREEMENT. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with the Company or any of its officers, directors or representatives covering
the same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and Employee and of 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 Employee, and no term of this Agreement may be waived except by writing
signed by the party waiving the benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
<TABLE>
<CAPTION>
To the Company: School Specialty, Inc.
1000 N. Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
Attention: Vice President
<S> <C>
to USOP: U.S. Office Products Company
1440 New York Avenue, N.W.
Suite 310
Washington, D.C. 20005
Attn: Mark D. Director
To Employee: Mr. Daniel P. Spalding
c/o School Specialty, Inc.
1000 N. Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
</TABLE>
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Notice shall be deemed given and effective three (3) 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 paragraph 13.
14. SEVERABILITY: HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. The arbitrators shall have the authority to order back-pay,
severance compensation, vesting of options (or cash compensation in lieu of
vesting of options), reimbursement of costs, including those incurred to enforce
this Agreement, and interest thereon in the event the arbitrators determine that
Employee was terminated without disability or good cause, as defined in
paragraphs 5(b) and 5(c), respectively, or that the Company has otherwise
materially breached this Agreement. A decision by a majority of the arbitration
panel shall be final and binding. Judgment may be entered on the arbitrators'
award in any court having jurisdiction. The direct expense of any arbitration
proceeding shall be borne by the Company. The arbitration proceeding shall be
held in the city where the Company is located.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Wisconsin.
17. CHANGE IN CONTROL.
(a) Unless he elects to terminate this Agreement pursuant to (c) below,
Employee understands and acknowledges that the Company may be merged or
consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder.
In the event of a Change in Control, Employee may, at his sole discretion,
elect to terminate this Agreement by providing written notice to the Company not
later than five (5) business days after the closing of the transaction giving
rise to the Change in Control. In such case, the applicable provisions of
paragraph 5(d) will apply as though the Company had terminated the Agreement
without cause; however, under such circumstances, Employee shall be entitled to
continue to receive his base salary at the rate then in effect for whatever time
period is remaining under the Term of this Agreement or for two (2) years,
whichever amount is greater, payable over the term of such payment and the
non-competition provisions of paragraph 3 shall all apply for a period equal to
the duration of such payment.
(b) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than USOP or an employee benefit plan of USOP,
acquires directly or indirectly the Beneficial Ownership (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as amended) of any
voting security of the Company and immediately after such acquisition such
Person is, directly or indirectly, the Beneficial Owner of voting securities
representing 50% or more of the total voting power of all of the
then-outstanding voting securities of the Company;
(ii) the individuals (A) who, as of the closing date of USOP's initial
public offering, constitute the Board of Directors of USOP (the "Original
Directors") or (B) who thereafter are elected to the Board of Directors of
USOP and whose election, or nomination for election, to the Board of
Directors of USOP was approved by a vote of at least two-thirds ( 2/3) of
the Original Directors then still in office (such directors becoming
"Additional Original Directors" immediately following their
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<PAGE>
election) or (C) who are elected to the Board of Directors of USOP and whose
election, or nomination for election, to the Board of Directors of USOP was
approved by a vote of at least two-thirds ( 2/3) of the Original Directors
and Additional Original Directors then still in office (such directors also
becoming "Additional Original Directors" immediately following their
election) (such individuals being the "Continuing Directors"), cease for any
reason to constitute a majority of the members of the Board of Directors of
USOP;
(iii) the shareholders of USOP shall approve a merger, consolidation,
recapitalization, or reorganization of USOP, a reverse stock split of
outstanding voting securities, or consummation of any such transaction if
shareholder approval is not sought or obtained, other than any such
transaction which would result in at least 75% of the total voting power
represented by the voting securities of the surviving entity outstanding
immediately after such transaction being Beneficially Owned by at least 75%
of the holders of outstanding voting securities of USOP immediately prior to
the transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in the
transaction; or
(iv) the shareholders of USOP shall approve a plan of complete
liquidation of USOP or an agreement for the sale or disposition by USOP of
all or a substantial portion of USOP's assets (i.e., 50% or more of the
total assets of USOP).
(c) Employee must be notified in writing by the Company at any time that the
Company or any member of its Board anticipates that a Change in Control may take
place.
(d) Employee shall be reimbursed by the Company or its successor for any
excise taxes that Employee incurs under Section 4999 of the Internal Revenue
Code of 1986, as a result of any Change in Control. Such amount will be due and
payable by the Company or its successor within ten (10) days after Employee
delivers a written request for reimbursement accompanied by a copy of his tax
return(s) showing the excise tax actually incurred by Employee.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may be
by telefax) by the parties. It shall not be necessary in making proof of this
Agreement or any counterpart hereof to produce and account for any of the other
counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SCHOOL SPECIALTY, INC.
By: /s/ LEO C. MCKENNA
-------------------------------------------------------------------------
Title: Secretary
EMPLOYEE:
/s/ DANIEL P. SPALDING
-------------------------------------------------------------------------
Daniel P. Spalding
9
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 26th day of July, 1996 is by and
between The Re-Print Corporation, an Alabama corporation (the "Company") and a
wholly-owned subsidiary of U.S. Office Products Company ("USOP"), a Delaware
corporation, and Donald Ray Pate, Jr. ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of his skills and services, and Employee desires to continue employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM. The Company hereby employs Employee to perform the
duties described herein, and Employee hereby accepts employment with the
Company, for a term beginning on the date hereof and continuing for a period of
four years. The term of this Agreement shall be extended automatically beyond
the initial four-year period for additional, successive one-year terms, up to a
total of two additional one-year terms, unless the Company notifies the Employee
no less than 60 days prior to the end of the initial period or of any renewal
period, as applicable, that it does not intend to extend the term for an
additional period at the end of the then-effective term. The initial period,
together with all renewal periods, if any, shall be referred to in this
Agreement as the "Term." In addition to termination in the event of a decision
of non-renewal by the Company (in which event Employee shall not be entitled to
any severance compensation), this Agreement may be terminated prior to the end
of the Term in the manner provided for in Section 6 below.
2. POSITION AND DUTIES. The Company hereby employs Employee as President.
As such, Employee shall have responsibilities, duties and authority reasonably
accorded to and expected of the President of the Company. Employee will report
directly to the Board of Directors of the Company (the "Board"). Employee hereby
accepts this employment upon the terms and conditions herein contained and
agrees to devote all of his professional time, attention, and efforts to promote
and further the business of the Company. Employee shall faithfully adhere to,
execute, and fulfill all policies established by the Company.
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be $125,000 per year, payable on a regular basis in accordance
with the Company's standard payroll procedures, but not less than monthly. On at
least an annual basis, the Board will review Employee's performance and may make
increases to such base salary if, in its sole discretion, any such increase is
warranted.
(b) INCENTIVE BONUS. The Company will develop a written Incentive Bonus
Plan (which may be USOP's Incentive Bonus Plan, provided that it contains the
same terms and provisions for Employee as for USOP employees of similar
standing) setting forth the criteria under which Employee and other officers and
key employees will be eligible to receive year-end bonus awards. The Incentive
Bonus Plan will provide for Employee to earn up to 100% of his base salary in
bonus compensation, payable out of a bonus pool determined by the Board of
Directors of USOP or a compensation committee thereof.
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<PAGE>
Bonuses under the Incentive Bonus Plan will be determined by measuring
Employee's performance, the Company's performance and USOP's performance based
on the following criteria, weighted as indicated, and measured against target
performance levels established by the Board of Directors of USOP or such
compensation committee: USOP's profit--25%, (ii) the profit of the Company--50%,
and (iii) revenue growth of the Company due to acquisitions--25%.
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the Term,
Employee shall be entitled to receive all perquisites and benefits as are
customarily provided by the Company to its employees, subject to such changes,
additions, or deletions as the Company may make generally from time to time, as
well as such other perquisites or benefits as may be specified from time to time
by the Board.
4. EXPENSE REIMBURSEMENT. The Company shall reimburse Employee for (or, at
the Company's option, pay) all business travel and other out-of-pocket expenses
reasonably incurred by Employee in the performance of his services hereunder
during the Term. All reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request for reimbursement,
and in a format and manner consistent with the Company's expense reporting
policy, as well as applicable federal and state tax record keeping requirements.
5. PLACE OF PERFORMANCE. Employee understands that he may be requested by
the Company to relocate from his present residence to another geographic
location in the continental United States or Hawaii in order to more efficiently
carry out his duties and responsibilities under this Agreement or as part of a
promotion or a change in duties and responsibilities. In such event, if Employee
agrees to relocate, the Company will provide Employee with a relocation
allowance, in an amount determined by the Company, to assist Employee in
covering the costs of moving himself, his immediate family, and their personal
property and effects. The total amount and type of costs to be covered shall be
determined by the Company, in light of prevailing Company policy at the time.
6. TERMINATION: RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the following ways, prior to the expiration of the
Term;
(a) DEATH. The death of Employee shall immediately terminate the Term, and
no severance compensation shall be owed to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been unable to perform the material
duties of his position on a full-time basis for a period of four consecutive
months, or for a total of four months in any six-month period, then 30 days
after written notice to the Employee (which notice may be given before or after
the end of the aforementioned periods, but which shall not be effective earlier
than the last day of the applicable period), the Company may terminate
Employee's employment hereunder if Employee is unable to resume his full-time
duties at the conclusion of such notice period. Subject to Section 6(f) below,
if Employee's employment is terminated as a result of Employee's disability, the
Company shall continue to pay Employee his base salary at the then-current rate
for the lesser of (i) three months from the effective date of termination, or
(ii) whatever time period is remaining under the then-current period of the Term
(without regard to renewals thereof). Such payments shall be made in accordance
with the Company's regular payroll cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE." The Company may terminate the
Term 10 days after written notice to Employee "for cause," which shall be: (i)
Employee's material breach of this Agreement, which breach is not cured within
10 days of receipt by Employee of written notice from the Company specifying the
breach; (ii) Employee's gross negligence in the performance of his duties
hereunder, intentional nonperformance or mis-performance of such duties, or
refusal to abide by or comply with the directives of the Board, his superior
officers, or the Company's policies and procedures, which actions continue for a
period of at least 10 days after receipt by Employee of written notice of the
need to cure or cease; (iii) Employee's willful dishonesty, fraud, or misconduct
with respect to the
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business or affairs of the Company or USOP, and that in the reasonable judgment
of the Company or USOP materially and adversely affects the operations or
reputation of the Company or USOP; (iv) Employee's conviction of a felony or
other crime involving moral turpitude; or (v) Employee's abuse of alcohol or
drugs (legal or illegal) that, in the Company's reasonable judgment, materially
impairs Employee's ability to perform his duties hereunder. In the event of a
termination "for cause," as enumerated above, Employee shall have no right to
any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment, the
Company may, without cause, terminate the Term and Employee's employment,
effective 30 days after written notice is provided to the Employee. Should
Employee be terminated by the Company without cause, subject to Section 6(f)
below, Employee shall receive from the Company the base salary at the rate then
in effect for the longer of (i) three months from the date of termination, or
(ii) whatever time period is remaining under the then-current period of the Term
(without regard to renewals thereof). Such payments shall be made in accordance
with the Company's regular payroll cycle. If Employee resigns or otherwise
terminates his employment for any reason or for no reason, Employee shall
receive no severance compensation.
(e) PAYMENT THROUGH TERMINATION. Upon termination of Employee's employment
for any reason provided above, Employee shall be entitled to receive all
compensation earned and all benefits and reimbursements (including payments for
accrued vacation and sick leave, in each case in accordance with applicable
policies of the Company) due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Employee only to the extent and in the manner expressly provided
above in this Section 6. With respect to incentive bonus compensation, Employee
shall be entitled to receive any bonus declared but not paid prior to
termination. In addition, in the event of a termination by the Company under
Section 6(b) or 6(d), Employee shall be entitled to receive incentive bonus
compensation through the end of the Company's fiscal year in which termination
occurs, calculated as if Employee had remained employed by the Company through
the end of such fiscal year, and paid in such amounts, at such times, and in
such forms as are determined pursuant to Section 3(b) above and Exhibit A
attached hereto. Except as specified in the preceding two sentences, Employee
shall not be entitled to receive any incentive bonus compensation after the
effective date of termination of his employment. All other rights and
obligations of USOP, the Company, and Employee under this Agreement shall cease
as of the effective date of termination, except that the Company's obligations
under Section 11 below and Employee's obligations under Sections 7, 8, 9 and 10
below shall survive such termination in accordance with their terms.
(f) RIGHT TO OFFSET. In the event of any termination of Employee's
employment under this Agreement, the Employee shall have no obligation to seek
other employment; PROVIDED, that in the event that Employee secures employment
or any consulting or other similar arrangement during the period that any
payment is continuing pursuant to the provisions of this Section 6, the Company
shall have the right to reduce the amounts to be paid hereunder by the amount of
the Employee's earnings from such other employment.
7. RESTRICTION ON COMPETITION.
(a) During the Term, and thereafter, if Employee continues to be employed by
the Company and/or any other entity owned by or affiliated with the Company or
USOP on an "at will" basis, for the duration of such period, and thereafter for
a period equal to the longer of (x) two years, or (y) the period during which
Employee is receiving any severance pay from the Company, Employee shall not,
directly or indirectly, for himself or on behalf of or in conjunction with any
other person, company, partnership, corporation business, group, or other entity
(each, a "Person"):
(i) engage, as an officer, director, shareholder, owner, partner, joint
venturer, or on a managerial capacity, whether as an employee, independent
contractor, consultant, advisor, or sales representative, in any business
selling any products or services in direct competition with the Company or
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USOP, within 100 miles of any location where the Company or USOP conducts
business (the "Territory"):
(ii) call upon any Person who is, at that time, within the Territory, an
employee of the Company or USOP for the purpose or with the intent of
enticing such employee away from or out of the employ of the Company or
USOP;
(iii) call upon any Person who or that is, at that time, or has been,
within one year prior to that time, a customer of the Company or USOP within
the Territory for the purpose of soliciting or selling products or services
in direct competition with the Company or USOP within the Territory;
(iv) on Employee's own behalf or on behalf of any competitor, call upon
any Person who or that, during Employee's employment by the Company or USOP
was either called upon by the Company or USOP as a prospective acquisition
candidate or was the subject of an acquisition analysis conducted by the
Company or USOP; or
(v) engage as an officer, director, shareholder, owner, partner, joint
venturer, or in any managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative in any
business involved in direct marketing of business-to-business mail order of
school supplies and furniture and engineering products.
(b) The foregoing covenants shall not be deemed to prohibit Employee from
acquiring as an investment not more than one percent of the capital stock of a
competing business, whose stock is traded on a national securities exchange or
through the automated quotation system of a registered securities association.
(c) It is further agreed that, in the event that Employee shall cease to be
employed by the Company or USOP and enters into a business or pursues other
activities that, at such time, are not in competition with the Company or USOP,
Employee shall not be chargeable with a violation of this Section 7 if the
Company or USOP subsequently enters the same (or a similar) competitive business
or activity or commences competitive operations within 100 miles of Employee's
new business or activities. In addition, if Employee has no actual knowledge
that his actions violate the terms of this Section 7, Employee shall not be
deemed to have breached the restrictive covenants contained herein if, promptly
after being notified by the Company or USOP of such breach, Employee ceases the
prohibited actions.
(d) For purposes of this Section 7, reference to "USOP" shall mean U.S.
Office Products Company, together with its subsidiaries and affiliates.
(e) The covenants in this Section 7 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of any
other covenant. If any provision of this Section 7 relating to the time period
or geographic area of the restrictive covenants shall be declared by a court of
competent jurisdiction to exceed the maximum time period or geographic area, as
applicable, that such court deems reasonable and enforceable, said time period
or geographic area shall be deemed to be, and thereafter shall become, the
maximum time period or largest geographic area that such court deems reasonable
and enforceable and this Agreement shall automatically be considered to have
been amended and revised to reflect such determination.
(f) All of the covenants in this Section 7 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company or
USOP, whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by USOP or the Company of such covenants; PROVIDED,
that upon the failure of the Company to make any payments required under this
Agreement, the Employee may, upon 30 days' prior written notice to the Company,
waive his right to receive any additional compensation pursuant to this
Agreement and engage in any activity prohibited by the covenants of this Section
7. It is specifically agreed that the period of two years stated at the
beginning of this Section 7, during which the
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agreements and covenants of Employee made in this Section 7 shall be effective,
shall be computed by excluding from such computation any time during which
Employee is in violation of any provision of this Section 7.
(g) If the time period specified by this Section 7 shall be reduced by law
or court decision, then, notwithstanding the provisions of Section 6 above,
Employee shall be entitled to receive from the Company his base salary at the
rate then in effect solely for the longer of (i) the time period during which
the provisions of this Section 7 shall be enforceable under the provisions of
such applicable law, or (ii) the time period during which Employee is not
engaging in any competitive activity, but in no event longer than the applicable
period provided in Section 6 above. If Employee is subject to a restriction on
competitive activity as a party to that certain Agreement and Plan of
Reorganization, dated as of July 26, 1996, by and among USOP, the Company,
Re-Print Acquisition Corp. and the shareholders of the Company party thereto
(the "Merger Agreement"), then Employee shall abide by, and in all cases be
subject to, the restrictive covenants (whether in this Section 7 or in the
Merger Agreement) that, in the aggregate, impose restrictions on Employee for
the longest duration and the broadest geographic scope (taking into account the
effect of any applicable court decisions limiting the scope or duration of such
restrictions), it being agreed that all such restrictive covenants are supported
by separate and distinct consideration. This Section 7(g) shall be construed and
interpreted in light of the duration of the applicable restrictive covenants.
(h) Employee has carefully read and considered the provisions of this
Section 7 and, having done so, agrees that the restrictive covenants in this
Section 7 impose a fair and reasonable restraint on Employee and are reasonably
required to protect the interests of the Company and USOP, and their respective
officers, directors, employees, and stockholders. It is further agreed that the
Company and Employee intend that such covenants be construed and enforced in
accordance with the changing activities, business, and locations of the Company
and USOP throughout the term of these covenants.
8. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business, financial and/or USOP (including all
trade secrets), in whatever form, whether oral, written, or electronic
(collectively, the "Confidential Information"), to which Employee has, or is
given (or has had or been given), access as a result of his employment by the
Company. It is agreed that the Confidential Information is confidential and
proprietary to the company and/or USOP because such Confidential Information
encompasses technical know-how, trade secrets, or technical, financial,
organizational, sales, or other valuable aspects of the Company's and USOP's
business and trade, including, without limitation, technologies, products,
processes, plans, clients, personnel, operations, and business activities. This
restriction shall not apply to any Confidential Information that (a) becomes
known generally to the public through no fault of the Employee; (b) is required
by applicable law, legal process, or any order or mandate of a court or other
governmental authority to be disclosed; or (c) is reasonably believed by
Employee, based upon the advice of legal counsel, to be required to be disclosed
in defense of a lawsuit or other legal or administrative action brought against
Employee; PROVIDED, that in the case of clauses (b) or (c), Employee shall give
the Company reasonable advance written notice of the Confidential Information
intended to be disclosed and the reasons and circumstances surrounding such
disclosure, in order to permit the Company to seek a protective order or other
appropriate request for confidential treatment of the applicable Confidential
Information.
9. INVENTIONS. Employee shall disclose promptly to the Company and USOP
any and all significant conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, that are conceived or made by
Employee, solely or jointly with another, during the period of employment or
within one year thereafter, and that are directly related to the business or
activities of the Company or USOP and that Employee conceives as a result of his
employment by the Company, regardless of whether or not such ideas, inventions,
or improvements qualify as "works for hire." Employee hereby assigns and agrees
to assign all his interests therein to the Company or its nominee.
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Whenever requested to do so by the Company, Employee shall execute any and all
applications, assignments, or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
10. RETURN OF COMPANY PROPERTY. Promptly upon termination of Employee's
employment by the Company for any reason or no reason, Employee or Employee's
personal representative shall return to the Company (a) all Confidential
Information; (b) all other records, designs, patents, business plans, financial
statements, manuals, memoranda, lists, correspondence, reports, records, charts,
advertising materials, and other data or property delivered to or compiled by
Employee by or on behalf of the Company, USOP or their respective
representatives, vendors, or customers that pertain to the business of the
Company or USOP, whether in paper, electronic, or other form; and (c) all keys,
credit cards, vehicles, and other property of the Company or USOP. Employee
shall not retain or cause to be retained any copies of the foregoing. Employee
hereby agrees that all of the foregoing shall be and remain the property of the
Company or USOP, as the case may be, and be subject at all times to their
discretion and control.
11. INDEMNIFICATION. In the event Employee is made a party to any
threatened or pending action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by the Company or USOP
against Employee, and excluding any action by Employee against the Company or
USOP), by reason of the fact that he is or was performing services under this
Agreement or as an officer or director of the Company, then, to the fullest
extent permitted by applicable law, the Company shall indemnify Employee against
all expenses (including reasonable attorneys' fees), judgments, fines, and
amounts paid in settlement, as actually and reasonably incurred by Employee in
connection therewith. Such indemnification shall continue as to Employee even if
he has ceased to be an employee, officer, or director of the Company and shall
inure to the benefit of his heirs and estate. The Company shall advance to
Employee all reasonable costs and expenses directly related to the defense of
such action, suit, or proceeding within 20 days after written request therefore
by Employee to the Company, PROVIDED, that such request shall include a written
undertaking by Employee, in a form acceptable to the Company, to repay such
advances if it shall ultimately be determined that Employee is or was not
entitled to be indemnified by the Company against such costs and expenses. In
the event that both Employee and the Company are made a party to the same
third-party action, complaint, suit, or proceeding, the Company (or, at its
option, USOP) will engage competent legal representation, and Employee agrees to
use the same representation; PROVIDED, that if counsel selected by the Company
shall have a conflict of interest that prevents such counsel from representing
Employee, Employee may engage separate counsel and the Company shall pay all
reasonable attorneys' fees of such separate counsel. The provisions of this
Section 11 are in addition to, and not in derogation of, the indemnification
provisions of the Company's By-laws. The foregoing indemnification also shall be
applicable to Employee in his capacity as an officer, director, or
representative of any subsidiary of USOP other than the Company, or any other
entity, but in each case only to the extent that Employee is serving at the
request of the Board or the Board of Directors of USOP.
12. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee, his employment by the
Company, and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client, or any other Person.
Further, Employee agrees to indemnify and hold harmless the Company and its
officers, directors, and representatives for any claim, including, but not
limited to, reasonable attorney's fees and expenses of investigation, of any
such third party that such third party may now have or may hereafter come to
have against the Company or such other persons, based upon or arising out of any
non-competition agreement, invention, secrecy, or other agreement between
Employee and such third party that was in existence as of the date of this
Agreement. To the extent that Employee had any oral or written
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employment agreement or understanding with the Company, this Agreement shall
automatically supersede such agreement or understanding, and upon execution of
this Agreement by Employee and the Company, such prior agreement or
understanding automatically shall be deemed to have been terminated and shall be
null and void.
13. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience, and skills. Employee agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement. This
Agreement may not be assigned or transferred by the Company without the prior
written consent of Employee. Subject to the preceding two sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
the parties hereto and their respective heirs, legal representatives,
successors, and assigns. Notwithstanding the foregoing, if Employee accepts
employment with a subsidiary or affiliate of USOP other than the Company, unless
Employee and his new employer agree otherwise in writing, this Agreement shall
automatically be deemed to have been assigned to such new employer (which shall
thereafter be an additional or substitute beneficiary of the covenants contained
herein, as appropriate), with the consent of Employee such assignment shall be
considered a condition of employment by such new employer, and references to the
"Company" in this Agreement shall be deemed to refer to such new employer. If
the Company is merged with or into another subsidiary or affiliate of USOP, such
action shall not be considered to cause an assignment of this Agreement, and the
surviving or successor entity shall become the beneficiary of this Agreement and
all references to the "Company" shall be deemed to refer to such surviving or
successor entity. It is intended that USOP will be a third-party beneficiary of
the rights of the Company under this Agreement. No other Person shall be a
third-party beneficiary.
14. COMPLETE AGREEMENT;WAIVER;AMENDMENT This Agreement is not a promise of
future employment. Employee has no oral representations, understandings, or
agreements with the Company or any of its officers, directors, or
representatives covering the same subject matter as this Agreement. This
Agreement together with the Merger Agreement, as of even date herewith, by and
between the Company and Employee, is the final, complete, and exclusive
statement and expression of the agreement between the Company and Employee with
respect to the subject matter hereof and thereof, and cannot be varied,
contradicted, or supplemented by evidence of any prior or contemporaneous oral
or written agreements. This written Agreement may not be later modified except
by a further writing signed by a duly authorized officer of the Company and
Employee, and no term of this Agreement may be waived except by a writing signed
by the party waiving the benefit of such term.
15. NOTICE. Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
<TABLE>
<S> <C>
To the Company: The Re-Print Corporation
2025 First Avenue
Birmingham, Alabama 35202
Attention: Secretary
with a copy to: U.S. Office Products Company
1440 New York Avenue, N.W.
Suite 310
Washington, D.C. 20005
Attn: Mark D. Director, Esq.
To Employee: Donald Ray Pate, Jr.
5149 Kirkwall Lane
Birmingham, AL 35242
</TABLE>
Notice shall be deemed given and effective three days after the deposit in the
U.S. mail of a writing addressed as above and sent first class mail, certified,
return receipt requested, or, if sent by express
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delivery, hand delivery, or facsimile, when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this Section 15.
16. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. This
severability provision shall be in addition to, and not in place of, the
provisions of Section 7(e) above. The paragraph headings herein are for
reference purposes only and are not intended in any way to describe, interpret,
define or limit the extent or intent of the Agreement or of any part hereof.
17. EQUITABLE REMEDY. Because of the difficulty of measuring economic
losses to the Company and/or USOP as a result of a breach of the restrictive
covenants set forth in Sections 7, 8, 9 and 10, and because of the immediate and
irreparable damage that would be caused to the Company and/or USOP for which
monetary damages would not be a sufficient remedy, it is hereby agreed that in
addition to all other remedies that may be available to the Company or USOP at
law or in equity, the Company and USOP shall be entitled to specific performance
and any injunctive or other equitable relief as a remedy for any breach or
threatened breach of the aforementioned restrictive covenants.
18. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. The direct expense of any arbitration proceeding shall be
borne by the Company. Each party shall bear its own counsel fees. The
arbitration proceeding shall be held in the city where the Company is located.
Notwithstanding the foregoing, the Company and/or USOP shall be entitled to seek
injunctive or other equitable relief, as contemplated by Section 17 above, from
any court of competent jurisdiction, without the need to resort in arbitration.
19. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Alabama, without regard to its conflict of
laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
THE RE-PRINT CORPORATION
By: /s/ KNEELAND B. WRIGHT
-----------------------------------
Name:
Title: C.A.O./Secretary
EMPLOYEE
/s/ DONALD RAY PATE, JR.
- --------------------------------------
Donald Ray Pate, Jr.
8
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEEMENT, dated as of this 27 day of June, 1997, is by and
between SAX ARTS AND CRAFTS, INC., a Delaware corporation (the "Company") and
RICHARD H. NAGEL ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of his skills and services, and Employee desires to accept employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT; TERM. The Company hereby employs Employee to perform the
duties described herein, and Employee hereby accepts employment with the
Company, for a term beginning on the date hereof and continuing for a period of
four (4) years (the "Term"). This Agreement may be terminated prior to the end
of the Term in the manner provided for in Section 5 below.
2. POSITION AND DUTIES. The Company hereby employs Employee as President
of the Company. As such, Employee shall have responsibilities, duties and
authority reasonably accorded to and expected of the president of the Company.
In addition, the Employee shall be responsible for such other duties as the
Board of Directors of the Company may direct. Employee will report directly to
the CEO of School Specialty, Inc. ("School"). Employee hereby accepts this
employment upon the terms and conditions herein contained and agrees to devote
all of his professional time, attention, and efforts to promote and further the
business of the Company. Employee shall faithfully adhere to, execute, and
fulfill all policies established by the Company's Board of Directors. Under no
circumstances shall the Employee be required by the Company to relocate from his
current place of residence to perform the services as described in this
Agreement.
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) BASE SALARY. Effective on the date hereof, the base salary payable
to Employee shall be One Hundred Twenty Five Thousand Dollars ($125,000.00)
per year, payable on a regular basis in accordance with the Company's
standard payroll procedures, but no less than monthly.
(b) INCENTIVE BONUS. During the Term, Employee shall be eligible to
receive an incentive bonus based upon his participation in School's
management bonus program as specified in Exhibit A as attached hereto. The
Employee shall be a participant of the School's management bonus
compensation category. This bonus compensation category normally offers a
30% annual bonus with the actual payout ranging from 0% to 100% of the base
salary of a qualified employee of the Company, based upon the financial
performance of the Company, and School, as well as the individual
performance of the qualified employee. The amount, manner of payment, and
form of consideration, if any, shall be determined by president of School in
his sole and absolute discretion, and such determination shall be binding
and final. To the extent that such bonus is to be determined in light of
financial performance during a specified fiscal period and this Agreement
commences on a date after the start of such fiscal period, any bonus payable
in respect of such fiscal period's results may be prorated. In addition, if
the
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period of Employee's employment hereunder expires before the end of a fiscal
period, and if Employee is eligible to receive a bonus at such time (such
eligibility being subject to the restrictions set forth in Section 5 below),
any bonus payable in respect of such fiscal period's results may be
prorated.
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the Term,
Employee shall be entitled to receive all perquisites and benefits as are
customarily provided by the Company to its employees, subject to such
changes, additions, or deletions as the Company may make generally from time
to time, as well as such other perquisites or benefits as may be specified
from time to time by the Board or the President of the Company.
Notwithstanding the foregoing, throughout the Employee's full time
employment with the Company under the terms of this Employment Agreement,
the Company shall provide the Employee with the use of the vehicle that is
currently provided to the Employee by the Company. The Company shall pay for
all operating, maintenance, repair and insurance expense associated with
that vehicle while the Employee is employed by the Company under the terms
of this Employment Agreement. At the discretion of the Company's Board of
Directors, the Employee may in the alternative receive a monthly auto
allowance. The amount of this allowance shall be determined by the Company
to provide the Employee with an equivalent benefit as providing the vehicle
in the manner described above.
4. EXPENSE REIMBURSEMENT. The Company shall reimburse Employee for or, at
the Company's option, pay all business travel and other out-of-pocket expenses
reasonably incurred by Employee in the performance of his services hereunder
during the Term. All reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request for reimbursement,
and in a format and manner consistent with the Company's expense reporting
policy, as well as applicable federal and state tax record keeping requirements.
5. TERMINATION; RIGHTS ON TERMINATION. Employee's employment may be
terminated in any one of the followings ways, prior to the expiration of the
Term:
(a) DEATH. The death of Employee shall immediately terminate the Term,
and no severance compensation shall be owed to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Employee shall have been unable to perform the
material duties of his position on a full-time basis for a period of four
consecutive months, or for a total of four months in any six-month period,
then 30 days after written notice to the Employee (which notice may be given
before or after the end of the aforementioned periods, but which shall not
be effective earlier than the last day of the applicable period), the
Company may terminate Employee's employment hereunder if Employee is unable
to resume his full-time duties at the conclusion of such notice period. If
Employee's employment is terminated as a result of Employee's disability,
the Company shall continue to pay Employee his base salary at the
then-current rate for the lesser of (i) three (3) months from the effective
date of termination, or (ii) whatever time period is remaining under the
then-current period of the Term (without regard to renewals thereof). These
payments shall be subject to lengthening of term or payment of additional
sums if so provided by the then current disability policy of the Company.
Such payments shall be made in accordance with the Company's regular payroll
cycle.
(c) TERMINATION BY THE COMPANY "FOR CAUSE". The Company may terminate
the Term 10 days after written notice to Employee "for cause," which shall
be: (I) Employee's material breach of this Agreement, which breach is not
cured within 10 days of receipt by Employee of written notice from the
Company specifying the breach; (ii) Employee's gross negligence in the
performance of his duties hereunder, intentional nonperformance or
mis-performance of such duties, or refusal to abide by or comply with the
directives of the Board, his superior officers, or the Company's policies
and procedures, which actions continue for a period of at least 10 days
after receipt by Employee of written notice of the need to cure or cease;
(iii) Employee's willful dishonesty, fraud, or misconduct
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with respect to the business or affairs of the Company or U.S. Products
Company ("USOP"), and that in the judgment of the Company or USOP materially
and adversely affects the operations or reputation of the Company or USOP;
(iv) Employee's conviction of a felony or other crime involving moral
turpitude; or (v) Employee's abuse of alcohol or drugs (legal or illegal)
that, in the Company's judgment, materially impairs Employee's ability to
perform his duties hereunder. In the event of a termination "for cause," as
enumerated above, Employee shall have no right to any severance
compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment,
the Company may, without cause, terminate the Term and Employee's
employment, effective 30 days after written notice is provided to the
Employee. Should Employee be terminated by the Company without cause, the
Company shall continue to pay Employee his base salary at the then-current
rate for the lesser of (i) twelve (12) months from the effective date of
termination, or (ii) whatever time period is remaining under the
then-current period of the Term (without regard to renewals thereof). Such
payments shall be made in accordance with the Company's regular payroll
cycle. If Employee resigns or otherwise terminates his employment for any
reason or for no reason, Employee shall receive no severance compensation.
(e) PAYMENT THROUGH TERMINATION. Upon termination of Employee's
employment for any reason provided above, Employee shall be entitled to
receive all compensation earned and all benefits and reimbursements
(including payments for accrued vacation and sick leave, in each case in
accordance with applicable policies of the Company) due through the
effective date of termination. Additional compensation subsequent to
termination, if any, will be due and payable to Employee only to the extent
and in the manner expressly provided above in this Section 5. With respect
to incentive bonus compensation, Employee shall be entitled to receive any
bonus declared but not paid prior to termination. In addition, in the event
of a termination by the Company under Section 5(b) or 5(d), Employee shall
be entitled to receive incentive bonus compensation through the end of the
Company's fiscal year in which termination occurs, calculated as if Employee
had remained employed by the Company through the end of such fiscal year,
and paid in such amounts, at such times, and in such forms as are determined
pursuant to Section 3(b) above. Except as specified in the preceding two
sentences, Employee shall not be entitled to receive any incentive bonus
compensation after the effective date of termination of his employment. All
other rights and obligations of USOP, the Company, and Employee under this
Agreement shall cease as of the effective date of termination, except that
Employee's obligations under Sections 6, 7, and 8 below shall survive such
termination in accordance with their terms.
6. CONFIDENTIAL INFORMATION. Employee hereby agrees to hold in strict
confidence and not to disclose to any third party any of the valuable,
confidential, and proprietary business, financial, technical, economic, sales,
and/or other types of proprietary business information relating to the Company
and/or USOP (including all trade secrets), in whatever form, whether oral,
written, or electronic (collectively, the "Confidential Information"), to which
Employee has, or is given (or has had or been given), access as a result of his
employment by the Company, for the term of his employment with the Company and
for two (2) years thereafter. Notwithstanding the foregoing the Employee shall
have a perpetual obligation to preserve the confidentiality of any confidential
information which would constitute a "trade secret" to the extent that such
confidential information remains a "trade secret" absent disclosure by the
Employee. It is agreed that the Confidential Information is confidential and
proprietary to the Company and/or USOP because such Confidential Information
encompasses technical know-how, trade secrets, or technical, financial,
organizational, sales, or other valuable aspects of the Company's and USOP's
business and trade, including, without limitation, technologies, products,
processes, plans, clients, personnel, operations, and business activities. This
restriction shall not apply to any Confidential Information that (a) becomes
known generally to the public through no fault of the Employee; (b) is required
by applicable law, legal process, or any order or mandate of a court or other
governmental authority to be disclosed; or (c) is reasonably
3
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believed by Employee, based upon the advice of legal counsel, to be required to
be disclosed in defense of a lawsuit or other legal or administrative action
brought against Employee; PROVIDED, that in the case of clauses (b) or (c),
Employee shall give the Company reasonable advance written notice of the
Confidential Information intended to be disclosed and the reasons and
circumstances surrounding such disclosure, in order to permit the Company to
seek a protective order or other appropriate request for confidential treatment
of the applicable Confidential Information.
7. INVENTIONS. Employee shall disclose promptly to the Company and USOP
any and all conceptions and ideas for inventions, improvements, and valuable
discoveries, whether patentable or not, that are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
year thereafter, and that are directly related to the business of activities of
the Company or USOP and that Employee conceives as a result of his employment by
the Company, regardless of whether or not such ideas, inventions, or
improvements qualify as "works for hire." Employee hereby assigns and agrees to
assign all his interests therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments, or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
8. RETURN OF COMPANY PROPERTY. Promptly upon termination of Employee's
employment by the Company for any reason or no reason, Employee or Employee's
personal representative shall return to the Company (a) all Confidential
Information; (b) all other records, designs, patents, business plans, financial
statements, manuals, memoranda, lists, correspondence, reports, records, charts,
advertising materials, and other data or property delivered to or compiled by
Employee by or on behalf of the Company, USOP or their respective
representatives, vendors, or customers that pertain to the business of the
Company or USOP, whether in paper, electronic, or other form; and (c) all keys,
credit cards, vehicles, and other property of the Company or USOP. Employee
shall not retain or cause to be retained any copies of the foregoing. Employee
hereby agrees that all of the foregoing shall be and remain the property of the
Company or USOP, as the case may be, and be subject at all times to their
discretion and control.
9. INDEMNIFICATION. In the event the Employee is made a party to any
threatened or pending action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by the Company, School,
or USOP against the Employee, and excluding any action by the Employee against
the Company, School or USOP), by reason of the fact that he is or was performing
services under this Agreement or as an officer or director of the Company, then,
to the fullest extent permitted by applicable law, the Company shall indemnify
the Employee against all expenses (including reasonable attorneys' fees),
judgements, fines, and amounts paid in settlement, as actually and reasonably
incurred by the Employee in connection therewith. Such indemnification shall
continue as to the Employee even if he has ceased to be an employee, officer, or
director of the Company and shall inure to the benefit of his heirs and estate.
The Company shall advance to the Employee all reasonable costs and expenses
directly related to the defense of such action, suit, or proceeding within
twenty (20) days after written request therefore by the Employee to the Company,
PROVIDED, that such request shall include a written undertaking by the Employee,
in a form acceptable to the Company, to repay such advances if it shall
ultimately be determined that the Employee is or was not entitled to be
indemnified by the Company against such costs and expenses. In the event that
both the Employee and the Company are made a party to the same third-party
action, complaint, suit, or proceeding, the Company (or, at its option, School
or USOP) will engage competent legal representation, and Employee agrees to use
the same representation; PROVIDED, that if counsel selected by the Company (or,
School or USOP) shall have a conflict of interest that prevents such counsel
from representing the Employee, the Employee may engage separate counsel and the
Company shall pay all reasonable attorneys' fees os such separate counsel. The
provisions of this Section 9 are in addition to, and not in derogation of, the
indemnification provisions of the Company's Bylaws. Notwithstanding anything to
the contrary within in this Section 9, the Employee shall not receive
indemnification hereunder to the extent that such claim, damages and or expenses
are based upon the actions or omissions
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of the Employee which result in the criminal conviction of the Employee or which
are determined by the Company, in its sole discretion, to be a willful or
grossly negligent act or omission of the Employee.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee, his employment by the
Company, and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client, or any other Person.
Further, Employee agrees to indemnify and hold harmless the Company and its
officers, directors, and representatives for any claim, including, but not
limited to, reasonable attorneys' fees and expenses of investigation, of any
such third party that such third party may now have or may hereafter come to
have against the Company or such other persons, based upon or arising out of any
non-competition agreement, invention, secrecy, or other agreement between
Employee and such third party that was in existence as of the date of this
Agreement. To the extent that Employee had any oral or written employment
agreement or understanding with the Company, this Agreement shall automatically
supersede such agreement or understanding, and upon execution of this Agreement
by Employee and the Company, such prior agreement or understanding automatically
shall be deemed to have been terminated and shall be null and void.
11. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience, and skills. Employee agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
This Agreement may be assigned or transferred by the Company without the
prior written consent of Employee. Subject to the preceding first sentence
of this Section 11, this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors, and assigns. Notwithstanding the
foregoing it is intended that USOP, the Company or its assign will be a
third-party beneficiary of the rights of the Company under this Agreement.
No other Person shall be a third-party beneficiary.
12. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not a
promise of future employment. Employee has no oral representations,
understandings, or agreements with the Company or any of its officers,
directors, or representatives covering the same subject matter as this
Agreement other than a Covenant Not to Compete Agreement entered into on
even date herewith. This written Agreement may not be later modified except
by a further writing signed by a duly authorized officer of the Company and
Employee, and no term of this Agreement may be waived except by a writing
signed by the party waiving the benefit of such term.
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13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
<TABLE>
<S> <C>
To the Company: School Specialty, Inc.
1000 North Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
Attention: Mr. Daniel P. Spalding
Fax: (414) 734-6276
With a copy to: U.S. Office Products Company
1025 Thomas Jefferson Street, N.W.
Suite 600 East
Washington, DC 20007
Attention: Mr. Mark D. Director
Fax: (202) 339-6733
To Employee: Richard H. Nagel
P.O. Box 51710
New Berlin, WI 53151
(Marked "Personal and Confidential")
With a copy to: Joseph F. Franzoi IV, Esq.
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, WI 54952
Fax: (414) 725-0998
</TABLE>
Notice shall be deemed given and effective three days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or, if sent by express delivery, hand
delivery, or facsimile, when actually received. Either party may change the
address for notice by notifying the other party of such change in accordance
with this Section 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. EQUITABLE REMEDY. Because of the difficulty of measuring economic
losses to the Company and/ or USOP as a result of a breach of the restrictive
covenants set forth in Sections 6 and 7, and because of the immediate and
irreparable damage that would be caused to the Company and/or USOP for which
monetary damages would not be a sufficient remedy, it is hereby agreed that in
addition to all other remedies that may be available to the Company or USOP at
law or in equity, the Company and USOP shall be entitled to specific performance
and any injunctive or other equitable relief as a remedy for any breach or
threatened breach of the aforementioned restrictive covenants.
16. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration
conducted in accordance with the rules of the American Arbitration Association
then in effect. The arbitrators shall not have the authority to add to, detract
from, or modify any provision hereof nor to award punitive damages to any
injured party. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the arbitrators' award in any court
having jurisdiction. The direct expense of any arbitration proceeding shall be
borne by the Company. Each party shall bear its own counsel fees. The
arbitration proceeding shall be held in Milwaukee, Wisconsin. Notwithstanding
the foregoing, the Company and/or USOP shall be entitled
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to seek injunctive or other equitable relief, as contemplated by Section 15
above, from any court of competent jurisdiction, without the need to resort to
arbitration.
17. GOVERNING LAW. This Agreement shall in respects be construed according
to the laws of the State of Delaware, without regard to its conflict of laws
principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
<TABLE>
<S> <C>
Company: SAX ARTS AND CRAFTS, INC.
/s/ DANIEL P. SPALDING
------------------------------------------
Daniel P. Spalding,
EXECUTIVE VICE-PRESIDENT
Employee:
/s/ RICHARD H. NAGEL
------------------------------------------
Richard H. Nagel,
INDIVIDUALLY
</TABLE>
7
<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,
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 reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 1, 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.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 1, 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
references to us under the heading "Experts" in such Prospectus.
BDO SEIDMAN, LLP
Atlanta, Georgia
April 30, 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
May 1, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 3, 1998,
relating to the financial statements of Sax Arts and Crafts, Inc. as of December
15, 1995 and December 25, 1996 and for each of the three years in the period
ended December 25, 1996 which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements of the Company included in the Registration
Statment on Form S-1 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-1-1996
<PERIOD-END> APR-26-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,703
<ALLOWANCES> (471)
<INVENTORY> 24,461
<CURRENT-ASSETS> 52,024
<PP&E> 14,478
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,685
<CURRENT-LIABILITIES> 38,405
<BONDS> 32,144
0
0
<COMMON> 0
<OTHER-SE> 17,136
<TOTAL-LIABILITY-AND-EQUITY> 87,685
<SALES> 191,746
<TOTAL-REVENUES> 191,746
<CGS> 136,577
<TOTAL-COSTS> 136,577
<OTHER-EXPENSES> 45,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,550
<INCOME-PRETAX> 7,367
<INCOME-TAX> (1,572)
<INCOME-CONTINUING> 8,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,939
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS has not been presented as such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that will occur upon the
consummation of the Distribution.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
SCHOOL SPECIALTY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE TWO YEARS ENDED DECEMBER 31, 1994, 1995, THE FOUR MONTHS ENDED
APRIL 30, 1996 AND THE FISCAL YEAR ENDED APRIL 26, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE
- ----------------------------- ---------------- ----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful January 1, 1994 $ 137,000 $ 121,000 $ $ (19,000)(a) December 31, 1994
accounts................... January 1, 1995 239,000 2,000 243,000(b) (30,000)(a) December 31, 1995
January 1, 1996 211,000 10,000 (19,000)(a) April 30, 1996
May 1, 1996 202,000 27,000 (1,000)(a) April 26, 1997
Accumulated amortization of January 1, 1994 1,540,000 757,000 (781,000)(c) December 31, 1994
intangibles................ January 1, 1995 2,297,000 1,098,000 (59,000)(c) December 31, 1995
January 1, 1996 2,614,000 203,000 April 30, 1996
May 1, 1996 2,817,000 566,000 April 26, 1997
<CAPTION>
BALANCE
AT END OF
DESCRIPTION PERIOD
- ----------------------------- -----------
<S> <C>
Allowance for doubtful $ 239,000
accounts................... 211,000
202,000
471,000
Accumulated amortization of 2,297,000
intangibles................ 2,614,000
2,817,000
3,324,000
</TABLE>
- ------------------------
(a) Represents (write-offs)/recoveries of uncollectible accounts receivable.
(b) Allowance for doubtful accounts acquired in purchase acquisitions.
(c) Represents (write-offs)/recoveries of fully amortized intangible assets.
1
