<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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)
</TABLE>
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1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DANIEL P. SPALDING
CHIEF EXECUTIVE OFFICER
SCHOOL SPECIALTY, INC.
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6000
------------------------
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, 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 TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE (2) OFFERING PRICE REGISTRATION FEE
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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
</TABLE>
(1) Approximate number of shares of School Specialty, Inc. common stock expected
to be distributed based upon an assumed distribution ratio of one share of
School Specialty, Inc. common stock for every one share of U.S. Office
Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of School
Specialty, Inc. common stock for every one share of U.S. Office Products
Company common stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act based on a book value
of School Specialty, Inc. as of October 25, 1997.
------------------------------
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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 19, 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>
SCHOOL SPECIALTY, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
SCHOOL SPECIALTY, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of School Specialty, Inc. ("School Specialty").
School Specialty is a Delaware corporation formed by U.S. Office Products that
will own substantially all the assets of, and will be responsible for
substantially all the liabilities associated with, U.S. Office Products'
Educational Supplies and Products Division. Pursuant to this distribution (the
"School Specialty Distribution"), all of the issued and outstanding shares of
the common stock, $.001 par value per share, of School Specialty (the "School
Specialty Common Stock") will be distributed to holders of record as of 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"). Each such holder 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 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 intends to seek approval for quotation of the
shares of School Specialty Common Stock under the symbol SCHS on the National
Market System of the Nasdaq Stock Market upon issuance, but there is no
assurance that such approval will be obtained or that an active trading market
in School Specialty Common Stock will develop following the School Specialty
Distribution.
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 on January 12, 1998. 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 at $27.00 per share 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."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 7.
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 7.
--------------------------
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 , 1998 and U.S. Office
Products Proxy Statement filed on , 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.
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 1
RISK FACTORS............................................................................................... 7
THE SCHOOL SPECIALTY DISTRIBUTION.......................................................................... 16
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, SCHOOL SPECIALTY AND THE OTHER SPIN-OFF COMPANIES AFTER THE
DISTRIBUTIONS............................................................................................ 24
DIVIDEND POLICY............................................................................................ 26
CAPITALIZATION............................................................................................. 27
SELECTED FINANCIAL DATA.................................................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SCHOOL SPECIALTY... 30
INDUSTRY OVERVIEW.......................................................................................... 37
BUSINESS................................................................................................... 39
MANAGEMENT OF SCHOOL SPECIALTY............................................................................. 46
RELATED PARTY TRANSACTIONS................................................................................. 53
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY................................................................. 54
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK.............................................................. 55
EXPERTS.................................................................................................... 57
LEGAL MATTERS.............................................................................................. 57
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
<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 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
Based on volume of sales, School Specialty, Inc. (the "Company" or "School
Specialty") is the largest distributor in the United States of non-textbook
educational supplies for grades pre-kindergarten through 12. School Specialty
distributes both general school supplies under the School Specialty and Re-Print
tradenames and specialty brands owned by School Specialty under the names
Childcraft Education Corp.-Registered Trademark-, Sax Arts &
Crafts-Registered Trademark- and Gresswell-Registered Trademark-. General school
supplies distributed by School Specialty include classroom supplies, art
supplies, instructional materials, furniture and equipment. Childcraft Education
Corp.-Registered Trademark-, Sax Arts & Crafts-Registered Trademark- and
Gresswell-Registered Trademark- distribute supplies for early childhood
education, art, and libraries, respectively. School Specialty believes that it
operates a unique blend of distribution methods, directing its sales efforts to
both the administrative and school levels of decision making in the educational
system. School Specialty's specialty brands enrich its general product offering
and open opportunities to distribute its general school supplies to the
customers of its specialty brands.
With over 32,000 stock keeping units (SKUs), School Specialty offers
customers one source for virtually all of their school supply needs. School
Specialty's general school supplies include 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. School Specialty's specialty brands offer products for
certain disciplines within the school supply market. Childcraft Education
Corp.-Registered Trademark- sells to the early childhood market, and carries
over 1,000 exclusive or proprietary products, including products manufactured by
its wholly-owned subsidiary, Bird-In-Hand Woodworks, Inc. ("Bird-in-Hand
Woodworks"), a leading manufacturer of wood products for classroom furniture and
equipment in the early childhood industry, such as library shelving, cubbies,
easels, desks, and play vehicles. Sax Arts & Crafts-Registered Trademark- is a
recognized leader for art instruction materials, including paints, brushes,
paper, ceramics, art metals, and materials for printmaking, fabric decoration,
and glass, leather, and wood crafts. Sax Arts & Crafts-Registered Trademark-
offers a toll free "Art Saavy Hotline" with a staff of 15 professional artists
available to answer customers' questions regarding products, media, and safety
data. Gresswell,-Registered Trademark- which operates in the United Kingdom,
offers library-related products such as furniture, children's furniture, media
display and storage, shelf display accessories, signs, shelving, presentation
equipment and materials for book maintenance, filing and storage, exhibition
display, and library security, as well as the expertise of dedicated sales and
design teams using the latest CAD technology to help customers in the planning,
design and installation of library projects.
School Specialty acts primarily as a distributor of products manufactured by
others, except for furniture manufactured by its Bird-in-Hand Woodworks
subsidiary, and school forms, planners and calendars produced by School
Specialty. School Specialty generally purchases products and holds them in
inventory to satisfy customer orders, though it also places customer orders
directly with School Specialty's suppliers. School Specialty markets its
products through both a "top down" approach to procurement officials at the
district (state, regional, and local) and school levels and a "bottom up"
approach to curriculum specialists and teachers. School Specialty's 290 sales
representatives focus primarily on administrative decision makers, while sales
to curriculum specialists and over 2.1 million teachers are primarily (but not
exclusively) through School Specialty's 6.9 million catalogs mailed each year.
<PAGE>
School Specialty's strategy is to increase earnings and cash flow through
(i) growth by acquisitions in geographic markets where School Specialty has
limited presence and in new specialty product lines, (ii) increased
profitability and efficiency, and (iii) penetration of new markets and expansion
of customer base in existing markets. School Specialty believes there are
extensive acquisition opportunities among the over 3,400 school supply
distributors in the United States. Many of these distributors are small, and
School Specialty believes it can reduce the operating costs of acquired
businesses through (i) application of the experience School Specialty has gained
in its 39 years of operation, (ii) the purchasing power School Specialty enjoys
as the largest distributor in the country and (iii) economies of scale. School
Specialty also believes it can increase sales through adding sales
representatives in geographic markets in which School Specialty does not have a
significant presence and cross merchandising. Cross merchandising refers to
School Specialty's practice of enriching the product mix of its general supplies
catalog by using the expertise of the staff of the specialty companies to assist
in the selection, procurement, merchandising and development of certain
proprietary lines and products in the general supplies catalog while
strengthening the buying power of the specialty companies through alignment with
its general distribution operations. In addition to the United States market,
School Specialty anticipates that its recent entry into the international market
through Don Gresswell, Ltd. will expand its sales of school supplies to Europe
and other parts of the world.
School Specialty is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products Company
("U.S. Office Products"). School Specialty, Inc., a Wisconsin corporation ("Old
School") was formed in October 1959, and was acquired by U.S. Office Products in
May 1996. U.S. Office Products' Educational Supplies and Products Division also
includes The Re-Print Corporation ("Re-Print"), which it acquired in July 1996,
and which has been in operation since 1921. The specialty product lines,
Childcraft Education Corp. ("Childcraft"), Sax Arts & Crafts, Inc. ("Sax Arts &
Crafts"), and Don Gresswell, Ltd. ("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 in
the United Kingdom, providing service to all 50 states and the United Kingdom.
School Specialty's principal office is at 1000 North Bluemound Drive, Appleton,
Wisconsin 54914, telephone (920) 734-2756.
2
<PAGE>
BACKGROUND OF THE SCHOOL SPECIALTY DISTRIBUTION
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THE DISTRIBUTION.................. On , 1998 (the "Record Date"), 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 on the Record Date (the "School
Specialty Distribution" or the "Distribution"). The
School Specialty Distribution is part of a comprehensive
restructuring plan (the "Strategic Restructuring Plan")
adopted by U.S. Office Products' Board of Directors on
January 12, 1998. The principal elements of 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"),
or approximately 28% of the outstanding shares of U.S.
Office Products Common Stock, at $27.00 per share (the
"Tender Offer"), and will incur additional
indebtedness to finance a substantial portion of the
purchase price for such shares.
- 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: Paridigm, Workflow Graphics, Inc., School
Specialty, Inc., and TDOP, 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.
- Following the Record Date, an affiliate ("CD&R") of
Clayton, Dubilier & Rice, Inc., a private investment
firm, will acquire U.S. Office Products Common Stock
and warrants to purchase additional U.S. Office
Products Common Stock for $270.0 million (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).
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;
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3
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- 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.
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 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 every
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.................. U.S. Office Products will receive an opinion of counsel
that for U.S. federal income tax purposes the receipt of
School Specialty Common Stock by U.S. Office Products
stockholders should be tax-free to U.S. Office Products
and the U.S. Office Products stockholders. See "The
School Specialty Distribution--U.S. Federal Income Tax
Consequences of the School Specialty Distribution."
ARRANGEMENTS AMONG U.S. OFFICE
PRODUCTS, SCHOOL SPECIALTY AND
THE OTHER SPIN-OFF COMPANIES
AFTER THE DISTRIBUTIONS......... School Specialty, U.S. Office Products and the other
Spin-Off Companies will enter into an agreement (the
"Distribution
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4
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<TABLE>
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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 assumed under the Distribution Agreement and
certain other liabilities.
School Specialty, U.S. Office Products and the Other
Spin-Off Companies will also enter into an agreement
(the "Tax Allocation Agreement") (i) allocating to each
Spin-Off Company responsibility for its share of U.S.
Office Products' consolidated tax liability for the
years that it was included in U.S. Office Products'
consolidated federal income tax returns, (ii) sharing
certain state, local and foreign taxes, and (iii)
providing for (a) indemnification by School Specialty
for certain taxes if they are assessed against U.S.
Office Products as a result of the Distribution and (b)
joint and several indemnification by School Specialty
and the other Spin-Off Companies for such taxes
resulting from certain acts taken by School Specialty or
any of the other Spin-Off Companies. The liability to
U.S. Office Products for taxes resulting from such acts
will be allocated among the Spin-Off Companies pursuant
to a separate agreement (the "Tax Indemnification
Agreement"). As a consequence, School Specialty will be
primarily liable for taxes resulting from acts taken by
School Specialty and liable (subject to indemnification
by the other Spin-Off Companies) for any taxes resulting
from acts taken by the Other Spin-Off Companies.
School Specialty, U.S. Office Products and the Other
Spin-Off Companies will also enter into an agreement
(the "Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "Arrangements Among U.S.
Office Products, School Specialty and the Other Spin-Off
Companies after the Distributions."
</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 7, including, among others, (i) 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 (xi) the tax consequences of
the School Specialty Distribution.
5
<PAGE>
SUMMARY FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FOUR MONTHS APRIL 26,
ENDED ------------------
YEAR ENDED DECEMBER 31, ----------- PRO
------------------------------------ APRIL 30, FORMA
1992 1993 1994 1995 1996 1997 1997(2)
------- ------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................. $65,042 $76,926 $119,510 $150,482 $28,616 $191,746 $339,546
Cost of revenues......... 48,111 56,280 87,750 105,757 20,201 136,577 235,327
------- ------- -------- -------- ----------- -------- --------
Gross profit............. 16,931 20,646 31,760 44,725 8,415 55,169 104,219
Selling, general and
administrative
expenses............... 17,729 18,294 27,281 39,869 10,307 43,462 83,239
Non-recurring acquisition
costs.................. 1,048 1,122 1,792
Restructuring costs...... 2,532 194 194
------- ------- -------- -------- ----------- -------- --------
Operating income
(loss)................. (1,846) 2,352 4,479 2,324 (3,014) 9,721 20,786
Interest expense......... 1,660 1,845 3,007 5,536 1,461 2,550 7,040
Interest income.......... (6)
Other (income) expense... 99 228 (86) (18) 67 (196) (159)
------- ------- -------- -------- ----------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes..... (3,605) 279 1,558 (3,194) (4,536) 7,367 13,905
Provision for (benefit
from) income taxes..... 216 199 218 173 139 (1,572) 6,396
------- ------- -------- -------- ----------- -------- --------
Net income (loss)........ $(3,821) $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,939 $ 7,509
------- ------- -------- -------- ----------- -------- --------
------- ------- -------- -------- ----------- -------- --------
Pro forma net income per
share.................. $ 0.08
--------
--------
Pro forma weighted
average shares
outstanding(3)......... 95,963
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------
PRO PRO
FORMA FORMA
OCTOBER 26, OCTOBER 25, OCTOBER 26, OCTOBER 25,
1996 1997 1996(2) 1997(2)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................. $130,673 $198,490 $234,821 $251,119
Cost of revenues......... 92,740 138,781 162,158 175,374
----------- ----------- ----------- -----------
Gross profit............. 37,933 59,709 72,663 75,745
Selling, general and
administrative
expenses............... 24,212 35,682 48,194 46,269
Non-recurring acquisition
costs.................. 1,792
Restructuring costs......
----------- ----------- ----------- -----------
Operating income
(loss)................. 11,929 24,027 24,469 29,476
Interest expense......... 1,725 1,570 3,880 3,880
Interest income.......... (24) (104)
Other (income) expense... 40 3 73 59
----------- ----------- ----------- -----------
Income (loss) before
provision for (benefit
from) income taxes..... 10,188 22,558 20,516 25,537
Provision for (benefit
from) income taxes..... (2,170) 10,151 9,437 11,747
----------- ----------- ----------- -----------
Net income (loss)........ $ 12,358 $ 12,407 $ 11,079 $ 13,790
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma net income per
share.................. $ 0.12 $ 0.14
----------- -----------
----------- -----------
Pro forma weighted
average shares
outstanding(3)......... 95,963 95,963
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, 1997
DECEMBER 31, -------------------
---------------------------------- APRIL 30, APRIL 26, PRO
1992 1993 1994 1995 1996 1997 ACTUAL FORMA(4)
------- ------- ------- ------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..... $ (51) $ 1,140 $ 3,512 $(1,052) $ (3,663) $ 13,619 $ 43,938 $ 81,458
Total assets.................. 21,905 23,190 44,267 54,040 54,573 87,685 201,304 237,772
Long-term debt, less current
portion..................... 8,205 7,175 11,675 15,294 15,031 565 457 79,737
Long-term payable to U.S.
Office Products............. 31,579 103,306
Stockholder's (deficit)
equity...................... (365) 545 1,827 (620) (4,267) 17,136 33,109 119,834
</TABLE>
- ------------------------
(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. The pro
forma financial data reflect acquisitions completed by the Company through
February 13, 1998.
(2) Gives effect to the School Specialty Distribution and the purchase
acquisitions completed by the Company since May 1, 1996 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) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) Gives effect to the School Specialty Distribution and the purchase
acquisition completed by the Company subsequent to October 25, 1997 as if
such transactions had been made on October 25, 1997. 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.
6
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
NO PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the School Specialty Distribution, there has been no public market
for School Specialty Common Stock, and there can be no assurance that an active
trading market will develop or, if one does develop, that it will continue.
Until School Specialty Common Stock is fully distributed and an orderly market
develops in School Specialty Common Stock, the price at which such stock trades
may fluctuate significantly and may be higher or lower than the price that would
be expected for a fully distributed issue. The price of School Specialty Common
Stock will be determined in the marketplace and may be influenced by many
factors, including (i) the depth and liquidity of the market for School
Specialty Common Stock, (ii) developments affecting School Specialty's
businesses generally, (iii) School Specialty's dividend policy, (iv) investor
perception of the school supplies industry generally, and (v) general economic
and market conditions.
Although School Specialty intends to apply for School Specialty Common Stock
to be quoted on the Nasdaq Stock Market National Market System ("Nasdaq Stock
Market") upon issuance, School Specialty cannot ensure that approval for such
quotation will be obtained. If such approval is granted, School Specialty cannot
ensure that it will continue to meet the requirements for quotation of School
Specialty Common Stock on the Nasdaq Stock Market. Regardless of whether School
Specialty Common Stock is quoted on the Nasdaq Stock Market or trades in the
over-the-counter market with quotations being published in the OTC Bulletin
Board and the NQB Pink Sheets, School Specialty cannot ensure that an effective
trading market will develop or, if one does develop, that it will be maintained.
A "when-issued" trading market in School Specialty Common Stock may develop
on or about the effective date of the registration statement of which this
Information Statement/Prospectus is a part. The existence of such a market means
that shares can be traded prior to the time certificates are actually available
or issued. Whether or not there is a "when-issued" market prior to the
availability of certificates, until an orderly market for School Specialty
Common Stock develops, the prices at which shares of such stock will trade may
be affected by an imbalance of supply and demand.
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. 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 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. 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 "--Limitations on Equity Offerings and the
Use of School Specialty Stock in Acquisitions" and "--Tax Matters" below.
7
<PAGE>
An important element of School Specialty's business strategy is to continue
to pursue acquisitions that either expand or complement its business in new or
existing regions and in new specialty brand or proprietary lines. There can be
no assurance that School Specialty will be able to identify and acquire
acceptable acquisition candidates on terms favorable to School Specialty and in
a timely manner to the extent necessary to fulfill its expansion plans. In
addition, 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. As School Specialty proceeds with its
acquisition strategy, it will continue to encounter the risks associated with
the integration of acquisitions describe below. See "Business--Business
Strategy--Acquisition Strategy."
LIMITATION ON EQUITY OFFERINGS AND THE USE OF COMPANY COMMON STOCK IN
ACQUISITIONS
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 without
jeopardizing the tax-free treatment of the School Specialty Distribution, the
amount of School Specialty capital stock that is issued in connection with an
acquisition by School Specialty or as part of an issuance of School Specialty
capital stock, if such acquisition or issuance is deemed to be part of a plan
that includes the School Specialty Distribution, when aggregated with any School
Specialty capital stock issuable upon the exercise of options granted in
connection with the School Specialty Distribution, including the options that
will be issued to Jonathan J. Ledecky pursuant to the Ledecky Services Agreement
(as defined herein), may be limited to 20% of the amount of School Specialty
capital stock that would be issued and outstanding after giving effect to all
such issuances. Depending upon the position that the IRS takes on these issues
in light of certain 1997 tax law changes, the 20% limitation may not apply.
However, in any event, a 50% limitation will apply to the issuance of School
Specialty capital stock. There is a rebuttable presumption that transactions
occurring within two years of the School Specialty Distribution would be subject
to this limitation. See "--Tax Matters" and "The Distribution--U.S. Federal
Income Tax Consequences of the Distribution". These limitations could adversely
affect the pace of School Specialty's acquisition program and its ability to
issue School Specialty Common Stock for other purposes, including equity
offerings.
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 and to convert them to the School Specialty business model. Several
of School Specialty's recent acquisitions have yet to be fully converted to the
School Specialty business model and are not performing as favorably as fully
integrated divisions. There can be no assurance that School Specialty will be
able to integrate these acquisitions or successfully convert them to the School
Specialty business model in a timely manner without substantial costs, delays,
or other problems. Once integrated and converted, these acquisitions may not
achieve sales, profitability, and asset productivity commensurate with School
Specialty's converted divisions. In addition to conversion 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
8
<PAGE>
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."
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION
School Specialty currently intends to finance some of its future
acquisitions by using shares of School Specialty Common Stock, cash, borrowed
funds or a combination thereof. If School Specialty Common Stock does not
maintain a sufficient market value, the price of School Specialty Common Stock
is highly volatile, or potential acquisition candidates are otherwise unwilling
to accept School Specialty Common Stock as part of the consideration for the
sale of their businesses, School Specialty may be required to use more of its
cash resources or more borrowed funds in order to initiate and maintain its
acquisition program. Such limitations also may cause School Specialty to rely
more heavily on cash or borrowed funds to support its acquisition program. If
School Specialty does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt or equity
offerings. The use of equity offerings in connection with the School Specialty
Distribution will also be subject to certain limitations on the number of shares
that School Specialty can issue without jeopardizing the tax-free treatment of
the School Specialty Distribution. See "--Limitations on Equity Offerings and
the Use of School Specialty Stock in Acquisitions" 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.
Upon completion of the School Specialty Distribution, School Specialty will
have authorized but unissued and unreserved shares of School Specialty
Common Stock, which (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), School Specialty will be able to issue in
order to finance acquisitions without obtaining stockholder approval for such
issuance. 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.
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 Intangible Assets."
MATERIAL AMOUNT OF INTANGIBLE ASSETS
Approximately $93.9 million, or 39.5% of the School Specialty's pro forma
total assets as of October 25, 1997 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 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
9
<PAGE>
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.
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. 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."
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
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.
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
"Arrangements Among U.S. Office Products, School Specialty and the Other
Spin-Off Companies After the Distributions." 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.
10
<PAGE>
The terms of the agreements that will govern the relationship among School
Specialty, U.S. Office Products, and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the management of
School Specialty and the other Spin-Off Companies prior to the Distributions and
while School Specialty and the other Spin-Off Companies are wholly-owned
subsidiaries of U.S. Office Products. The terms of these agreements, including
the allocation of general corporate and securities liabilities among U.S. Office
Products, School Specialty, and the other Spin-Off Companies may not be the same
as they would be if the agreements were the result of arm's length negotiations.
In addition, the agreements must contain certain terms specified in U.S. Office
Products' agreement with CD&R relating to the Equity Investment and must
otherwise be reasonably acceptable to CD&R. CD&R will not be a stockholder in
any of the Spin-Off Companies and its interests may be adverse to those of the
Spin-Off Companies. See "Arrangements Among U.S. Office Products, School
Specialty and the Other Spin-Off Companies After the Distributions."
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
U.S. Office Products will receive an opinion from Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes, the School Specialty Distribution should qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code of 1986, as amended (the
"Code"), and should not be subject to Section 355(e) of the Code. The opinion of
counsel will be based on certain assumptions and the accuracy of factual
representations made by U.S. Office Products and the Spin-Off Companies. A
ruling has not been, and will not be, sought from the Internal Revenue Service
(the "IRS") with respect to the U.S. federal income tax consequences of the
School Specialty Distribution, and it is possible that the IRS may take the
position that the School Specialty Distribution does not qualify as a tax-free
spin-off. Assuming the School Specialty Distribution qualifies under Section 355
of the Code as a tax-free spin-off and is not subject to Section 355(e), no gain
or loss will be recognized by either U.S. Office Products or the holders of U.S.
Office Products Common Stock (except with respect to cash received in lieu of
fractional shares) solely as a result of the distribution or receipt of Company
Common Stock in connection with the School Specialty Distribution.
If the School Specialty Distribution fails to qualify under Section 355 of
the Code 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. Neither U.S. Office Products
nor any of the Spin-Off Companies will be obligated to indemnify U.S. Office
Products stockholders for any such tax. In addition, U.S. Office Products will
be subject to a material corporate-level U.S. federal income tax (discussed in
the following paragraph).
Certain transactions involving U.S. Office Products or School Specialty
Common Stock may jeopardize the tax-free treatment of the School Specialty
Distribution. Section 355(e) of the Code, which was added in 1997, provides
generally that if 50% or more of the capital stock of U.S. Office Products or
School Specialty is acquired by one or more persons acting pursuant to a plan
that is deemed to include the School Specialty Distribution, U.S. Office
Products, but not the holders of U.S. Office Products Common Stock, will incur a
material U.S. federal income tax liability as a result of the School Specialty
Distribution. For purposes of Section 355(e), any acquisition or issuance of
shares of capital stock of USOP or School
11
<PAGE>
Specialty pursuant to arrangements existing at the time of the School Specialty
Distribution will generally be deemed to be part of a plan that includes the
School Specialty Distribution; any such acquisition or issuance occurring within
two years of the School Specialty Distribution will be rebuttably presumed to be
part of such a plan. In addition to the 50% limitation of Section 355(e), the
IRS may take the position that any issuance or acquisition of capital stock of
School Specialty that represents more than 20% of the capital stock of School
Specialty, in one or more transactions deemed to be part of a plan that includes
the School Specialty Distribution, will result in the School Specialty
Distribution failing to qualify as a tax-free spin-off under Section 355 of the
Code. If the School Specialty Distribution fails to qualify as a tax-free
spin-off, both U.S. Office Products and the U.S. Office Products stockholders
that receive School Specialty Common Stock in the School Specialty Distribution
would incur a material U.S. federal income tax liability. It is not clear
whether the IRS will assert this position following the adoption of Section
355(e). As a result of these limitations, the number of shares of capital stock
that School Specialty can issue following the School Specialty Distribution may
be limited. See "Limitations on Equity and the Use of Company Common Stock in
Acquisitions."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into
the Tax Allocation Agreement with School Specialty and the other Spin-Off
Companies 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 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
indemnify U.S. Office Products under the Tax Allocation Agreement. As a
consequence, School Specialty will be primarily liable for any Distribution
Taxes resulting from any Adverse Tax Act by School Specialty and liable (subject
to indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of the Distribution
Taxes based on the value of each company's common stock after the Distributions.
See "Arrangements Among U.S. Office Products, School Specialty and the Other
Spin-Off Companies After the Distributions--Tax Allocation Agreement" for a
detailed discussion of the Tax Allocation Agreement.
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-kindergarten through 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 both of School
Specialty's business segments 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."
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-Registered Trademark-.
12
<PAGE>
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.
LEVERAGE AND DEBT SERVICE
Upon the consummation of the School Specialty Distribution, School Specialty
will have more debt in relation to stockholders' equity than did U.S. Office
Products prior to the consummation of the School Specialty Distribution. As of
October 25, 1997, on a pro forma basis after giving effect to the School
Specialty Distribution, School Specialty and its consolidated subsidiaries would
have had an aggregate of approximately $80.0 million of outstanding indebtedness
(representing approximately 40% of its total capitalization). School Specialty
will have higher debt on a seasonal basis because debt levels will increase
approximately by $40.0 million through September 1998 to meet the seasonal
capital needs associated with school orders during these months.
School Specialty's leverage could have important consequences for
stockholders, including the following: (i) School Specialty's ability to obtain
additional financing on favorable terms may be impaired in the future; (ii) a
portion of School Specialty's cash flow from operations will be dedicated to the
payment of principal and interest on School Specialty's indebtedness, thereby
reducing the funds available for other purposes; (iii) covenants contained in
other financing agreements may restrict School Specialty's ability to dispose of
assets, incur additional indebtedness, repay other indebtedness, pay dividends,
create liens on assets, make investments or acquisitions, engage in certain
mergers or consolidations, make capital expenditures, or engage in other
corporate activities; and (iv) School Specialty may be more leveraged than some
of its competitors, which may affect its ability to adjust rapidly to changing
market conditions and could make School Specialty more vulnerable in the event
of a downturn in general economic conditions or in School Specialty's business.
School Specialty's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on School Specialty's
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to certain financial, business and other factors beyond
School Specialty's control. If School Specialty's cash flow and capital
resources are insufficient to fund its debt service obligations, School
Specialty may be forced to reduce or delay planned expansion and capital
expenditures, sell assets, obtain additional equity capital, or restructure its
debt. Although School Specialty's management believes that School Specialty's
cash flow will be adequate to meet interest and principal payments, there can be
no assurance that School Specialty's operating results, cash flow, and capital
resources will be sufficient for payment of its indebtedness in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of School Specialty--Liquidity and Capital Resources."
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of School Specialty's acquisitions have not
been established by independent appraisals, but generally have been determined
through arm's length negotiations between School Specialty's management and
representatives of such companies. The consideration paid for each such company
has been based primarily on the value of such company as a going concern and not
on the value
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of the acquired assets. Valuations of these companies determined solely by
appraisals of the acquired assets would have been less than the consideration
paid for the companies. No assurance can be given that the future performance of
such companies will be commensurate with the consideration paid. School
Specialty does not expect to value future acquisitions on the basis of asset
appraisals. Therefore, this risk will apply to future acquisitions as well.
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 of School Specialty and is expected to provide services to School
Specialty after the School Specialty Distribution pursuant to an agreement
entered into between Mr. Ledecky and U.S Office Products which provides that the
Company and the other Spin-Off Companies will succeed to certain rights of, and
obligations under, such agreement following the Distribution. 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.
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, on its ability to finance and
manage 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 it would not encounter 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.
NO DIVIDENDS
School Specialty does not expect to pay cash dividends on School Specialty
Common Stock in the foreseeable future. The decision whether to apply legally
available funds to the payment of dividends on School Specialty Common Stock
will be made by the School Specialty Board of Directors from time to time in the
exercise of its business judgment, taking into account, among other things,
School Specialty's
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results of operations and financial condition, any then existing or proposed
commitments by School Specialty for the use of available funds, and School
Specialty's obligations with respect to the holders of any then outstanding
indebtedness or preferred stock. School Specialty's ability to pay dividends may
be restricted from time to time by financial covenants in its credit agreements.
See "Dividend Policy."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF SCHOOL SPECIALTY
COMMON STOCK
Sales of substantial amounts of School Specialty Common Stock in the public
market following the Distribution could have an adverse effect on the market
price of School Specialty Common Stock. Upon completion of the School Specialty
Distribution, School Specialty will have shares of School Specialty Common
Stock outstanding. Additional shares may be issued either in connection with
acquisitions by School Specialty or upon exercise of outstanding options and
options that may be issued in the future. See "Management of School
Specialty--Executive Compensation." Upon completion of the School Specialty
Distribution, it is anticipated that the Company will have outstanding options
to acquire approximately shares of School Specialty Common Stock,
including options held by employees of School Specialty that were converted from
options to acquire U.S. Office Products Common Stock that such employees had
previously held. The exact number of Shares that may be issued upon exercise of
such options cannot be determined until the Distribution Date. In addition,
options to acquire shares of School Specialty Common Stock, representing up to
7.5% of the outstanding School Specialty Common Stock determined as of the
Distribution Date, will be issued pursuant to the Ledecky Service Agreement (as
defined herein). See "Management of School Specialty--Director Compensation and
Other Arrangements" and "The School Specialty Distribution--Effect on
Outstanding U.S. Office Products Options Held by School Specialty Employees". If
significant numbers of additional shares are issued at any one time that are not
subject to restrictions on sale and are sold in the market, the market price of
School Specialty Common Stock could be adversely affected.
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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. Fractional share interests will be
aggregated and sold by the Distribution Agent and the cash proceeds will be
distributed to those stockholders entitled to a fractional interest.
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 "Arrangements Among U.S. Office Products, School Specialty, and
Other Spin-Off Companies After the Distributions--Distribution Agreement."
School Specialty will include the businesses of the following wholly-owned
subsidiaries of U.S. Office Products: Old School, 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
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 adopted by U.S. Office Products' Board of Directors on January 12, 1998.
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, or approximately
28% of the outstanding shares, at $27.00 per share 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.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group, (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
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REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products approved the Strategic
Restructuring Plan, including the Distributions, on January 12, 1998. 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 also will allow U.S. Office Products and the Spin-Off
Companies to offer their employees more focused incentive compensation packages.
The incentive compensation packages (which are expected to consist primarily of
stock options) will offer the officers and other key employees of each Spin-Off
Company equity interests in a company whose performance is tied directly to the
business for which they work. The Company's ability to issue stock options (as
well as other equity) will be subject to certain limitations in order to avoid
triggering certain adverse federal income tax consequences. See "U.S. Federal
Income Tax Consequences of the School Specialty Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as 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 of U.S. Office Products Common Stock at a price
of $27.00 per share. 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 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 purchase of
U.S. Office Products Common Stock pursuant to the Tender Offer, and
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U.S. Office Products' lenders having consented to the Tender Offer or the debt
to them having been refinanced; (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 having been satisfied.
The aggregate tender price for the shares to be purchased in the Tender
Offer is $1.0 billion. U.S. Office Products expects to finance the aggregate
tender price through a combination of the net proceeds of the Equity Investment,
additional senior secured bank debt, and issuance of subordinated debt
securities. U.S. Office Products anticipates that the foregoing borrowings will
increase its outstanding debt by approximately $800.0 million. In addition,
because elements of the Strategic Restructuring Plan would violate covenants in
U.S. Office Products' existing bank credit facility, that facility will either
have to be modified with the lenders' consent or refinanced. Approximately
$350.5 million was outstanding under the existing bank credit facility as of
February 12, 1998. U.S. Office Products is currently engaged in discussions with
potential lenders and investment banks regarding financing for the Tender Offer
and refinancing of its bank credit facility. U.S. Office Products expects that
it will be able to obtain the necessary financing on acceptable terms. However,
to date, no commitments have been obtained and there can be no assurance that
financing for the Tender Offer will be obtained on acceptable terms.
The Record Date for the Distributions will occur immediately 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 approximately 28% of the issued and outstanding shares 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 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 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. 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.
Under the Investment Agreement, the U.S. Office Products Board of Directors
will consist of nine directors, including the Chief Executive Officer of U.S.
Office Products, three designees of CD&R, and five persons selected by the
current U.S. Office Products Board of Directors. CD&R's obligation to consummate
the Equity Investment is conditioned on two of the designees of the U.S. Office
Products
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Board of Directors being satisfactory to CD&R. Thereafter, for so long as CD&R
maintains certain levels of ownership of U.S. Office Products Common Stock, CD&R
will have the right to nominate three members of the U.S. Office Products Board
of Directors and to designate the Chairman of the Board. Certain U.S. Office
Products Board of Directors' decisions will be subject to super-majority voting
provisions that, under certain circumstances, may require the concurrence of at
least two directors nominated by CD&R. CD&R will be subject to certain
restrictions and limitations with respect to transactions in U.S. Office
Products Common Stock.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
receipt of necessary antitrust and other regulatory clearance; (ii) absence of
litigation; (iii) U.S. Office Products stockholder approval of the issuance of
shares in the Equity Investment; (iv) 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; (v)
execution and delivery of the Tax Allocation Agreement containing certain terms
specified in the Investment Agreement and otherwise as reasonably approved by
CD&R; (vi) execution of documents relating to financing of the Tender Offer
satisfactory in form and substance to CD&R; (vii) 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; (viii) absence of any
development since October 25, 1997 that would have a material adverse effect
after giving effect to the distributions; and (ix) U.S. Office Products' debt
immediately following completion of the transactions contemplated by the
Strategic Restructuring Plan shall not exceed $1.4 billion (assuming conversion
of certain convertible debt) and outstanding debt of the Spin-Off Companies
shall be at least $130.0 million plus expenditures by such entities for
acquisitions after the date of the Investment Agreement. See "Arrangements Among
U.S. Office Products, School Specialty and the Other Spin-Off Companies After
the Distributions--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 of
and advisor to 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.
For additional information on the terms of the options to be granted by School
Specialty to Mr. Ledecky, see "Management of School Specialty--Director
Compensation."
School Specialty is also exploring the issuance of School Specialty Common
Stock in a public offering concurrent with or soon after the School Specialty
Distribution, the amount of which has not been determined. 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
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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
"The School Specialty Distribution--U.S. Federal Income Tax Consequences of the
School Specialty Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION
The following summary describes the material U.S. federal income tax
consequences of the School Specialty Distribution by U.S. Office Products to
holders of U.S. Office Products Common Stock on the Record Date. The summary is
based on the Code, and regulations, rulings, and judicial decisions as of the
date hereof, 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 this summary is based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the School Specialty Distribution and of the holding, and
disposition of the School Specialty Common Stock may differ from the treatment
described below.
This summary applies only to holders of U.S. Office Products Common Stock
who hold U.S. Office Products Common Stock as a capital asset, and does not deal
with 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.
This summary is for general information only. It does not address all
aspects of U.S. federal income taxation that may be relevant to holders of U.S.
Office Products Common Stock in light of their particular circumstances, nor
does 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. U.S. Office Products will receive an opinion of Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes the School Specialty Distribution should qualify as a tax-free spin-off
under Section 355 of the Code, and should not be subject to Section 355(e) of
the Code. The opinion of counsel will be based on certain assumptions and the
accuracy of factual representations made by U.S. Office Products and School
Specialty. Neither U.S. Office Products nor School Specialty is aware of any
present facts or circumstances which should cause such representations and
assumptions to be untrue. However, the opinion of counsel is not binding on
either the IRS or the courts. 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 of the Code and is not subject 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
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Common Stock and the Spin-Off Companies Common Stock (including any
fractional shares) received with respect to such U.S. Office Products Common
Stock in proportion to their relative fair market values on the Distribution
Date of School Specialty. Such allocation must be calculated separately for
each block of U.S. Office Products Common Stock (shares purchased at the
same time and at the same cost) with respect to which the Spin-Off
Companies' common stock is received.
4. The holding period of the School Specialty Common Stock (including
any fractional shares) received in the School Specialty Distribution will
include the holding period of the U.S. Office Products Common Stock with
respect to which it was distributed.
Treasury regulations governing Section 355 of the Code 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 of the Code 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, an opinion of counsel is not binding on the IRS or the courts. It is,
therefore, possible that the IRS may take the position that the School Specialty
Distribution does not qualify as a tax-free spin-off.
If the School Specialty Distribution fails to qualify as a tax-free spin-off
under Section 355 of the Code:
1. U.S. Office Products will recognize gain, if any, equal to the
difference between U.S. Office Products' tax basis in the School Specialty
Common Stock on the date of the School Specialty Distribution and the fair
market value of the School Specialty Common Stock on the date of the School
Specialty Distribution.
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 date of the School Specialty Distribution) 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 date of the
School Specialty Distribution 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 date of the School Specialty
Distribution.
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
21
<PAGE>
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 if the U.S. Office Products Common Stock is held as a capital asset.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Certain transactions involving
U.S. Office Products or School Specialty Common Stock may jeopardize the
tax-free treatment of the School Specialty Distribution. Section 355(e) of the
Code, which was added in 1997, provides generally that if 50% or more of the
capital stock of U.S. Office Products or School Specialty is acquired by one or
more persons acting pursuant to a plan that is deemed to include the School
Specialty Distribution, U.S. Office Products, but not the holders of U.S. Office
Products Common Stock, will incur a material U.S. federal income tax liability
as a result of the School Specialty Distribution. For purposes of Section
355(e), any acquisition or issuance of shares of capital stock of USOP or School
Specialty pursuant to arrangements existing at the time of the School Specialty
Distribution will generally be deemed to be part of a plan that includes the
School Specialty Distribution; any such acquisition or issuance occurring within
two years of the School Specialty Distribution will be rebuttably presumed to be
part of such a plan. In addition to the 50% limitation of Section 355(e), the
IRS may take the position that any issuance or acquisition of capital stock of
School Specialty that represents more than 20% of the capital stock of School
Specialty, in one or more transactions deemed to be part of a plan that includes
the School Specialty Distribution, will result in the School Specialty
Distribution failing to qualify as a tax-free spin-off under Section 355 of the
Code. If the School Specialty Distribution fails to qualify as a tax-free
spin-off, both U.S. Office Products and the U.S. Office Products stockholders
that receive School Specialty Common Stock in the School Specialty Distribution
would incur a material U.S. federal income tax liability. It is not clear
whether the IRS will assert this position following the adoption of Section
355(e).
School Specialty capital stock issuable upon exercise of options to be
granted to Jonathan J. Ledecky pursuant to the Ledecky Services Agreement (as
defined herein), School Specialty capital stock issuable upon the exercise of
other options granted in connection with the School Specialty Distribution, and
School Specialty capital stock issued in connection with acquisitions or public
offerings contemplated at the time of the School Specialty Distribution would
likely be included as stock issuances that are subject to the 50% (or 20%)
limitation described above. Moreover, as noted above, for purposes of the 50%
limitation, any issuance of shares of School Specialty capital stock within two
years of the School Specialty Distribution will be rebuttably presumed to be
part of a plan that includes the School Specialty Distribution. Accordingly, the
number of shares that may be issued by School Specialty following the School
Specialty Distribution may be limited.
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 of the Distributions is
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 primarily liable for any Distribution
Taxes resulting from any adverse Tax Act by School Specialty. 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 been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies.
See "Arrangements Among U.S. Office Products, School Specialty and the Other
Spin-Off Companies After the Distributions--Tax Allocation Agreement" for a
detailed discussion of the Tax Allocation Agreement.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK IS FOR GENERAL
INFORMATION ONLY AND 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.
22
<PAGE>
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. The number of shares of School
Specialty Common Stock that each optionholder will receive, and the exercise
price of the options will be determined by a formula designed to provide each
optionholder with options having an aggregate value after the Tender Offer and
as of the Distribution Date (equal to the excess or deficit of then-current
trading prices over the price, times the number of shares subject to options)
equivalent to the aggregate value, immediately prior to the Distribution Date,
of the U.S. Office Products options they replace. 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. At , 1998, persons who are
expected to become School Specialty employees held options to purchase, in the
aggregate, shares of U.S. Office Products Common Stock.
RESTRICTIONS ON TRANSFER
Shares of School Specialty Common Stock distributed to the U.S. Office
Products Stockholders pursuant to School Specialty Distribution will be freely
transferable under the Securities Act, except for shares received by any persons
who may be deemed to be "affiliates" of School Specialty as that term is defined
in Rule 144 promulgated under the Securities Act. Persons who may be deemed to
be affiliates of School Specialty after School Specialty Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, School Specialty and may include certain officers and
directors of School Specialty as well as principal stockholders of School
Specialty. Persons who are affiliates of School Specialty will be permitted to
sell their shares of School Specialty Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions provided
for private transactions or Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that the direct legal, financial advisory,
investment banking, financing, accounting, printing, mailing and other expenses
(including the fees of U.S. Office Products' and the Spin-Off Companies'
transfer agents) of the Strategic Restructuring Plan, including the
Distributions, will total approximately $ . 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 "Arrangements Among U.S. Office Products, School Specialty and
the Other Spin-Off Companies--Distribution Agreement."
23
<PAGE>
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, SCHOOL SPECIALTY
AND THE OTHER SPIN-OFF COMPANIES AFTER THE DISTRIBUTIONS
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 arms'-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 allocated between U.S. Office
Products and the applicable Spin-Off Company under a formula to be determined.
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 the
Spin-Off Companies 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 the
applicable Spin-Off Company their respective damages and expenses in accordance
with the agreed upon allocation of recovery rights, which will be determined
prior to the School Specialty Distribution.
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. School Specialty
estimates that there will be no additional debt.
ASSUMPTION OF 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
24
<PAGE>
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
Benefits Agreement and related agreements, (iii) its liabilities for the debt
described above, (iv) certain securities liabilities and (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. In addition, the
Distribution Agreement is expected to provide for sharing of certain liabilities
among some or all of the parties. First, each of U.S. Office Products, School
Specialty and the other Spin-Off Companies will bear a portion, on a basis to be
determined, of (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), (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) and (iii) transactions 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.
Second, if U.S. Office Products is entitled to an indemnity from one of the
other Spin-Off Companies and such debt proves to be uncollectible, such
liabilities will be shared on a basis to be determined.
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
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.
U.S. Office Products estimates that if all of the Distributions fail to
qualify as tax-free spin-offs under Section 355 of the Code or U.S. Office
Products recognizes taxable gain as a result of the application of Section
355(e) of the Code with respect to all of the Distributions, the aggregate
corporate U.S. federal income tax liability (before interest and penalties) that
would result would be approximately $ (based on an estimate of the value
of the Spin-Off Companies; the actual value of the Spin-Off Companies cannot be
determined until there is public trading of the Spin-Off Companies' common
stock). The Tax Allocation Agreement will 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 primarily
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
25
<PAGE>
is determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, each of U.S. Office Products and the
Spin-Off Companies will be liable for its pro rata portion of such Distribution
Taxes based on the value of each company's common stock after the Distributions.
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.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of School Specialty at October
25, 1997, (i) on an actual basis; and (ii) on a pro forma basis to reflect the
School Specialty Distribution, the allocation of $80.0 million of debt by U.S.
Office Products and the purchase acquisition completed subsequent to October 25,
1997. 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>
OCTOBER 25, 1997
-------------------------
ACTUAL PRO FORMA
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................................................ $ 273 $ 263
Short-term payable to U.S. Office Products............................................. 31,356
---------- -------------
Total short-term debt............................................................ $ 31,629 $ 263
---------- -------------
---------- -------------
Long-term debt......................................................................... $ 457 $ 79,737
Long-term payable to U.S. Office Products.............................................. 103,306
Stockholder's equity:
Divisional equity.................................................................... 23,551 110,276
Retained earnings.................................................................... 9,558 9,558
---------- -------------
Total stockholder's equity....................................................... 33,109 119,834
---------- -------------
Total capitalization............................................................. $ 136,872 $ 199,571
---------- -------------
---------- -------------
</TABLE>
27
<PAGE>
SELECTED FINANCIAL DATA
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 or incorporated herein by reference. The
Selected Financial Data for the six months ended October 26, 1996 and October
25, 1997 (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 financial position
and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the
Distribution and the acquisitions completed by School Specialty between May 1,
1996 and February 13, 1998 as if all such transactions had been made on May 1,
1996. In addition, the pro forma information is based on available information
and certain assumptions and adjustments.
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.
28
<PAGE>
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
FOUR MONTHS APRIL 26, -----------
ENDED ----------------------
YEAR ENDED DECEMBER 31, ------------ PRO
-------------------------------------------- APRIL 30, FORMA OCTOBER 26,
1992 1993 1994 1995 1996 1997 1997(2) 1996
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................. $ 65,042 $ 76,926 $ 119,510 $ 150,482 $ 28,616 $ 191,746 $ 339,546 $ 130,673
Cost of revenues......... 48,111 56,280 87,750 105,757 20,201 136,577 235,327 92,740
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
Gross profit............. 16,931 20,646 31,760 44,725 8,415 55,169 104,219 37,933
Selling, general and
administrative
expenses............... 17,729 18,294 27,281 39,869 10,307 43,462 83,239 24,212
Non-recurring acquisition
costs.................. 1,048 1,122 1,792 1,792
Restructuring costs...... 2,532 194 194
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
Operating income
(loss)................. (1,846) 2,352 4,479 2,324 (3,014) 9,721 20,786 11,929
Interest expense......... 1,660 1,845 3,007 5,536 1,461 2,550 7,040 1,725
Interest income.......... (6) (24)
Other (income) expense... 99 228 (86) (18) 67 (196) (159) 40
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
Income (loss) before
provision for (benefit
from) income taxes..... (3,605) 279 1,558 (3,194) (4,536) 7,367 13,905 10,188
Provision for (benefit
from) income taxes..... 216 199 218 173 139 (1,572) 6,396 (2,170)
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
Net income (loss)........ $ (3,821) $ 80 $ 1,340 $ (3,367) $ (4,675) $ 8,939 $ 7,509 $ 12,358
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
--------- --------- ---------- ---------- ------------ ---------- ---------- -----------
Pro forma net income per
share.................. $ 0.08
----------
----------
Pro forma weighted
average shares
outstanding(3)......... 95,963
<CAPTION>
PRO PRO
FORMA FORMA
OCTOBER 25, OCTOBER 26, OCTOBER 25,
1997 1996(2) 1997(2)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................. $ 198,490 $ 234,821 $ 251,119
Cost of revenues......... 138,781 162,158 175,374
----------- ----------- -----------
Gross profit............. 59,709 72,663 75,745
Selling, general and
administrative
expenses............... 35,682 48,194 46,269
Non-recurring acquisition
costs..................
Restructuring costs......
----------- ----------- -----------
Operating income
(loss)................. 24,027 24,469 29,476
Interest expense......... 1,570 3,880 3,880
Interest income.......... (104)
Other (income) expense... 3 73 59
----------- ----------- -----------
Income (loss) before
provision for (benefit
from) income taxes..... 22,558 20,516 25,537
Provision for (benefit
from) income taxes..... 10,151 9,437 11,747
----------- ----------- -----------
Net income (loss)........ $ 12,407 $ 11,079 $ 13,790
----------- ----------- -----------
----------- ----------- -----------
Pro forma net income per
share.................. $ 0.12 $ 0.14
----------- -----------
----------- -----------
Pro forma weighted
average shares
outstanding(3)......... 95,963 95,963
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ APRIL 30, APRIL 26,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................................... $ (51) $ 1,140 $ 3,512 $ (1,052) $ (3,663) $ 13,619
Total assets.................................................... 21,905 23,190 44,267 54,040 54,573 87,685
Long-term debt, less current portion............................ 8,205 7,175 11,675 15,294 15,031 565
Long-term payable to U.S. Office Products....................... 31,579
Stockholder's (deficit) equity.................................. (365) 545 1,827 (620) (4,267) 17,136
<CAPTION>
OCTOBER 25, 1997
----------------------
PRO
ACTUAL FORMA (4)
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................................... $ 43,938 $ 81,458
Total assets.................................................... 201,304 237,772
Long-term debt, less current portion............................ 457 79,737
Long-term payable to U.S. Office Products....................... 103,306
Stockholder's (deficit) equity.................................. 33,109 119,834
</TABLE>
- ------------------------
(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
February 13, 1998.
(2) Gives effect to the School Specialty Distribution and the purchase
acquisitions completed by School Specialty since May 1, 1996 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) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(h) of Notes to Pro Forma Combined
Financial Statements included herein.
(4) Gives effect to the School Specialty Distribution and the purchase
acquisition completed by School Specialty subsequent to October 25, 1997 as
if such transactions had been made on October 25, 1997. 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.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SCHOOL SPECIALTY
INTRODUCTION
The Company's consolidated financial statements give retroactive effect to
the two business combinations accounted for under the pooling-of-interests
method during the period from May 1996 to July 1996 (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 for
the years ended December 31, 1994 and 1995, the fiscal year ended April 26, 1997
and for the six months ended October 26, 1996 and October 25, 1997, as well as
for the fiscal year ended April 26, 1997 and for the six months ended October
26, 1996 and October 25, 1997 on a pro forma basis reflecting the 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>
FOR THE FISCAL YEAR
ENDED FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED ------------------------ -------------------------------------------
-------------------------------- PRO FORMA PRO FORMA
DECEMBER 31, DECEMBER 31, APRIL 26, APRIL 26, OCTOBER 26, OCTOBER 25, OCTOBER 26,
1994 1995 1997 1997 1996 1997 1996
--------------- --------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......... 73.4 70.3 71.2 69.3 71.0 69.9 69.1
------ ------ ----------- ----------- ------ ------ ------
Gross profit........... 26.6 29.7 28.8 30.7 29.0 30.1 30.9
Selling, general and
administrative
expenses............... 22.9 26.5 22.7 24.5 18.5 18.0 20.5
Non-recurring acquisition
costs.................. 0.9 1.4
Restructuring costs...... 1.7 0.1 0.1
------ ------ ----------- ----------- ------ ------ ------
Operating income....... 3.7 1.5 5.1 6.1 9.1 12.1 10.4
Interest expense, net.... 2.5 3.6 1.3 2.0 1.3 0.8 1.7
Other (income)........... (0.1) (0.1) (0.1)
------ ------ ----------- ----------- ------ ------ ------
Income (Loss) before
provision for income
taxes.................. 1.3 (2.1) 3.9 4.1 7.8 11.4 8.7
Provision for (benefit
from) income taxes..... 0.2 0.1 (0.8) 1.9 (1.7) 5.1 4.0
------ ------ ----------- ----------- ------ ------ ------
Net income (Loss)........ 1.1% (2.2)% 4.7% 2.2% 9.5% 6.3% 4.7%
------ ------ ----------- ----------- ------ ------ ------
------ ------ ----------- ----------- ------ ------ ------
<CAPTION>
PRO FORMA
OCTOBER 25,
1997
-------------
<S> <C>
Revenues................. 100.0%
Cost of revenues......... 69.8
------
Gross profit........... 30.2
Selling, general and
administrative
expenses............... 18.5
Non-recurring acquisition
costs..................
Restructuring costs......
------
Operating income....... 11.7
Interest expense, net.... 1.5
Other (income)...........
------
Income (Loss) before
provision for income
taxes.................. 10.2
Provision for (benefit
from) income taxes..... 4.7
------
Net income (Loss)........ 5.5%
------
------
</TABLE>
30
<PAGE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Pro forma revenues increased 6.9%, from $234.8 million for the six months
ended October 26, 1996, to $251.1 million for the six months ended October 25,
1997. 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 4.2%, from $72.7 million, or 30.9% of revenues, for
the six months ended October 26, 1996 to $75.7 million, or 30.2% of revenues,
for the six months ended October 25, 1997. The decrease in gross profit as a
percentage of revenues was primarily due to higher freight costs 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 decreased 4.0%, from
$48.2 million, or 20.5% of revenues, for the six months ended October 26, 1996
to $46.3 million, or 18.5% of revenues, for the six months ended October 25,
1997. The decrease in selling, general and administrative expenses as a
percentage of revenues reflects the assimilation 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.
Provision for income taxes increased from $9.4 million for the six months
ended October 26, 1996 to $11.7 million for the six months ended October 25,
1997, 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.
CONSOLIDATED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Consolidated revenues increased 51.9%, from $130.7 million for the six
months ended October 26, 1996, to $198.5 million for the six months ended
October 25, 1997. This increase was primarily due to the inclusion of revenues
from the six companies acquired in business combinations accounted for under the
purchase method during the six months ended October 25, 1997 (the "Fiscal 1998
Purchased Companies") from their respective dates of acquisition and revenues
from the Fiscal 1997 Purchased Companies for the entire six month period.
Revenues also increased due to sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.
Gross profit increased 57.4%, from $37.9 million, or 29.0% of revenues, for
the six months ended October 25, 1996 to $59.7 million, or 30.1% of revenues,
for the six months ended October 25, 1997. 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 the higher margin specialty product lines during the six
months ended October 25, 1997, and as a result of improved purchasing and rebate
programs negotiated with vendors.
Selling, general and administrative expenses increased 47.4%, from $24.2
million, or 18.5% of revenues, for the six months ended October 26, 1996 to
$35.7 million, or 18.0% of revenues, for the six months ended October 25, 1997.
The decrease in selling, general and administrative expenses as a percentage of
revenues was due primarily to the assimilation of the Fiscal 1997 Purchased
Companies and
31
<PAGE>
the consolidation of two warehouses into one regional facility in the
Northeastern U.S during the third quarter of fiscal 1997.
The Company incurred non-recurring acquisition costs of $1.8 million for the
six months ended October 26, 1996, 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, various regulatory fees and recognition of transaction-related
obligations. The Company does not anticipate incurring any additional such costs
for the next two years because the Company is precluded from completing
acquisitions under the pooling-of-interests method as a result of the
Distribution. 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.
The Company does not anticipate incurring any such costs for the next two years
since, as a result of the School Specialty Distribution, the Company is
precluded from completing acquisitions under the pooling of interests method of
accounting for two years from the Distribution Date.
Interest expense, net of interest income, decreased 13.8%, from $1.7 million
for the six months ended October 26, 1996 to $1.6 million for the six months
ended October 25, 1997.
Provision for income taxes increased from a tax benefit of $2.2 million for
the six months ended October 25, 1996 to tax expense of $10.2 million for the
six months ended October 25, 1997, reflecting effective income tax rates of
- -21.3% and 45.0%, respectively. The income tax benefit during the six months
ended October 26, 1996 is primarily due to the reversal of a deferred tax asset
valuation allowance of approximately $5.3 million established by one of the
Pooled Companies prior to acquisition, consisting primarily of the tax benefit
of a net operating loss carryforward, as it was considered more likely than not
the deferred tax benefits would be realized. The high effective income tax rate
for the six months ended October 25, 1997, compared to the federal statutory
rate of 35.0%, was primarily due to state income taxes and non-deductible
goodwill amortization.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 27.4%, from $150.5 million in 1995, to
$191.7 million in fiscal 1997. This increase was primarily due to the inclusion,
for fiscal 1997, of revenues from the Fiscal 1997 Purchased Companies from their
respective dates of acquisition, sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.
Gross profit increased 23.4%, from $44.7 million, or 29.7% of revenues, in
1995 to $55.2 million, or 28.8% of revenues, in fiscal 1997. The decrease in
gross profit as a percentage of revenues was due primarily to a shift in revenue
mix, resulting from the acquisition of the Fiscal 1997 Purchased Companies,
which traditionally had lower gross profits as a percentage of revenues. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors and the Company's ability to take advantage of term
discounts due to improved cash flows.
Selling, general and administrative expenses increased 9.0%, from $39.9
million, or 26.5% of revenues, in 1995 to $43.5 million, or 22.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses as
a percentage of revenues was due primarily to the consolidation of two
warehouses into one regional facility in the Northeastern U.S. during third
quarter of fiscal 1997, the assimilation 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 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
32
<PAGE>
assessments and appraisals, various regulatory fees and recognition of
transaction-related obligations. The Company does not anticipate incurring any
additional such costs for the next two years because the Company is precluded
from completing acquisitions under the pooling-of-interests method as a result
of the Distribution. GAAP requires 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.
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 53.9%, from $5.5 million
in 1995 to $2.6 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, lower interest
rates being charged on the Company's short-term debt with U.S. Office Products
and no interest being charged on the Company's long-term debt with U.S. Office
Products.
Provision for income taxes decreased from $173,000 in 1995 to a tax benefit
of $1.6 million in fiscal 1997, reflecting effective income tax rates of -5.4%
and -21.3%, 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
income tax benefit in fiscal 1997 was the result of the Company reversing a
deferred tax asset valuation allowance of approximately $5.3 million.
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 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 carry forward the benefit of which had not been reflected
as income in prior years.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At October 25, 1997 the Company had working capital of $43.9 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 October 25, 1997
was $136.9 million. On a pro forma basis at October 25, 1997, the Company had
working capital of $81.5 million and capitalization of $199.6 million.
During the six months ended October 25, 1997, net cash used in operating
activities was $3.0 million. Operating activities were primarily impacted by
increased receivables attributed to the seasonality of the Company's business.
Net cash used in investing activities was $71.5 million, including $68.1 million
for acquisitions and $3.4 million for additions to property and equipment. Net
cash provided by financing activities was $74.4 million, including $76.4 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, partially offset by $1.9 used to repay indebtedness.
During the six months ended October 26, 1996, net cash used in operating
activities was $7.7 million. Operating activities were impacted by increased
receivables attributed to the seasonality of the Company's business. Net cash
used in investing activities was $14.5 million, including $7.2 million for
acquisitions, $5.7 for additions to property and equipment and $1.6 million to
pay non-recurring acquisition costs. Net cash provided by financing activities
was $22.2 million, including $65.0 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 six months ended October 26, 1996,
partially offset by $45.6 million used for the repayment of indebtedness,
primarily at the companies acquired during the six months ended October 26,
1996.
During fiscal 1997, net cash provided by operating activities was $2.6
million. 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 $14.1 million, including $58.3 million provided by U.S.
Office Products to fund the cash portion of the purchase price and the repayment
of debt associated with the fiscal 1997 Purchased Companies and the payment of
debt of the Pooled Companies, partially offset by $46.9 million used for the net
repayment of indebtedness, primarily at the fiscal 1997 Purchased Companies.
During 1995, net cash provided by operating activities was $4.8 million. Net
cash used in investing activities was $6.0 million, including $5.4 million for
acquisitions and $881,000 for additions to property and equipment. Net cash
provided by financing activities was $1.2 million, including net proceeds from
the issuance of debt of $2.4 million and $500,000 received from the issuance of
common stock partially offset by payments of indebtedness of $1.5 million.
During 1994, net cash used in operating activities was $268,000. Net cash
used in investing activities was $2.9 million, including $2.1 million for
acquisitions and $630,000 for additions to property and equipment. Net cash
provided by financing activities was $3.2 million, consisting of proceeds from
the issuance of debt of $5.1 million, partially offset by payments of
indebtedness of $2.0 million.
The Company's anticipated capital expenditures budget for the next twelve
months is approximately $2.0 million. The largest items include operational and
financial reporting software, computer hardware and warehouse equipment.
The Company expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $80.0 million of debt by U.S. Office
Products resulting in the forgiveness of $86.7 million at October 25, 1997,
which will be reflected in the pro forma combined financial statements as a
contribution of capital by U.S. Office Products. The Company intends to enter
into a credit facility concurrently with the Distribution which will contain
certain financial and other covenants, including maintenance of certain
financial tests and ratios, limitations on capital expenditures and restrictions
on the incurrence of debt or liens, the sale of assets, the payment of
dividends, transactions with affiliates and other transactions. The
34
<PAGE>
Company expects that the credit facility will be adequate 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 bank covenants.
School Specialty is also exploring the issuance of School Specialty Common
Stock in a public offering concurrent with or soon after the School Specialty
Distribution, the amount of which has not been determined. 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 that will
be issued in such a public offering has not been determined and will 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 "The School
Specialty Distribution--U.S. Federal Income Tax Consequences of the School
Specialty Distribution."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been dramatically higher in the first
two quarters of its fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of each school year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company, which could contribute to the further fluctuation in its
quarterly operating results. Therefore, results for any quarter are not
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for the year ended December 31, 1995 and the fiscal year ended
April 26, 1997 (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.
<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)
</TABLE>
35
<PAGE>
<TABLE>
<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)....................................... 5,345 7,013 (787) (2,632) 8,939
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the year ended December 31, 1994 and 1995 or the
fiscal year ended April 26, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all
prior-period EPS data presented. The Company intends to adopt SFAS No. 128 in
fiscal 1998. The implementation of SFAS No. 128 is not expected to have a
material effect on the Company's earnings per share as determined under current
accounting rules.
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.
36
<PAGE>
INDUSTRY OVERVIEW
The school supply market consists of the sale of non-textbook school
supplies, furniture and equipment for school and classroom use to school
districts, individual schools, teachers, and curriculum specialists who purchase
School Specialty's products for school and classroom use. According to data
collected by the National School Supply & Equipment Association ("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 $20.0 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 $130.0
million. School Specialty believes the demand for timely order fulfillment at
competitive prices, combined with the need to invest in automated inventory
systems and electronic ordering systems, is accelerating the trend toward
consolidation in the industry.
The volume of school supplies is influenced by the size of the student
population. According to the U.S. Department of Education student enrollment in
grades kindergarten through 12 began growing in 1986. Student enrollment reached
an all-time peak in 1996 with 51.5 million students. Current projections by the
U.S. Department of Education indicate that, student enrollment will continue to
grow to 54.4 million in 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. In constant 1994-95 dollars, $257.3 billion in
expenditures is projected to grow to $284.2 billion by the year 2001, and to
$314.1 billion by the year 2007. These rising expenditures include a projected
increase in per pupil spending in current dollars from $5,961 per pupil in 1997
to $7,179 in the year 2001.
The following table sets forth information published by U.S. Department of
Education regarding the growth in enrollment in grades kindergarten through 12
and the projected growth in expenditures from 1997 through 2001.
37
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PROJECTED ENROLLMENT IN PUBLIC AND PRIVATE ELEMENTARY AND SECONDARY SCHOOLS
<S> <C>
No. of Students (millions)
1997 52.2
1998 52.7
1999 53.1
2000 53.5
2001 53.7
Year
SOURCE: U.S. Department of Education
Projected Current Expenditures Per Pupil in Public Elementary and Secondary
Schools
$ Per Pupil
1997 $5,961
1998 $6,208
1999 $6,487
2000 $6,833
2001 $7,179
</TABLE>
38
<PAGE>
BUSINESS
OVERVIEW
Based on volume of sales, School Specialty is the largest distributor in the
United States of non-textbook educational supplies for grades pre-kindergarten
through 12. School Specialty distributes both general school supplies under the
School Specialty and Re-Print tradenames and specialty brands owned by School
Specialty under the names Childcraft Education Corp.-Registered Trademark-, Sax
Arts & Crafts-Registered Trademark- and Gresswell-Registered Trademark-. General
school supplies distributed by School Specialty include classroom supplies, art
supplies, instructional materials, furniture and equipment. Childcraft Education
Corp.-Registered Trademark-, Sax Arts & Crafts-Registered Trademark- and
Gresswell-Registered Trademark- distribute supplies for early childhood
education, art, and libraries, respectively. School Specialty believes that it
operates a unique blend of distribution methods, directing its sales efforts to
both the administrative and school levels of decision making in the educational
system. School Specialty's specialty brands enrich its general product offering
and open opportunities to distribute its general school supplies to the
customers of its specialty brands.
With over 32,000 stock keeping units (SKUs), School Specialty offers
customers one source for virtually all of their school supply needs. School
Specialty's general school supplies include 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. School Specialty's specialty brands offer products for
certain disciplines within the school supply market. Childcraft Education
Corp.-Registered Trademark- sells to the early childhood market, and carries
over 1,000 exclusive or proprietary products, including products manufactured by
its wholly-owned subsidiary, Bird-In-Hand Woodworks, a leading manufacturer of
wood products for classroom furniture and equipment in the early childhood
industry, such as library shelving, cubbies, easels, desks, and play vehicles.
Sax Arts & Crafts-Registered Trademark- is a recognized leader for art
instruction materials, including paints, brushes, paper, ceramics, art metals,
and materials for printmaking, fabric decoration, and glass, leather, and wood
crafts. Sax Arts & Crafts-Registered Trademark- offers a toll free "Art Saavy
Hotline" with a staff of 15 professional artists available to answer customers'
questions regarding products, media, and safety data.
Gresswell,-Registered Trademark- which operates in the United Kingdom, offers
library-related products such as furniture, children's furniture, media display
and storage, shelf display accessories, signs, shelving, presentation equipment
and materials for book maintenance, filing and storage, exhibition display, and
library security, as well as the expertise of dedicated sales and design teams
using the latest CAD technology to help customers in the planning, design and
installation of library projects.
School Specialty acts primarily as a distributor of products manufactured by
others, except for furniture manufactured by its Bird-in-Hand Woodworks
subsidiary, and school forms, planners and calendars produced by School
Specialty. School Specialty generally purchases products and holds them in
inventory to satisfy customer orders, though it also places customer orders
directly with School Specialty's suppliers. School Specialty markets its
products through both a "top down" approach to procurement officials at the
district (state, regional, and local) and school levels and a "bottom up"
approach to curriculum specialists and teachers. School Specialty's 290 sales
representatives focus primarily on administrative decision makers, while sales
to curriculum specialists and over 2.1 million teachers are primarily (but not
exclusively) through School Specialty's 6.9 million catalogs mailed each year.
BUSINESS STRATEGY
School Specialty's strategy is to increase earnings and cash flow through
(i) growth by acquisitions in geographic markets where School Specialty is not
well represented and into new specialty product lines, (ii) increased
profitability and efficiency of acquired companies, and (iii) penetration of new
markets and expanding the customer base in existing markets.
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<PAGE>
ACQUISITION STRATEGY
School Specialty believes there are extensive acquisition opportunities
among the over 3,400 school supply distributors in the United States. School
Specialty intends to focus its acquisition efforts on geographic markets in
which it is not well represented and on acquisition of new specialty product
lines. School Specialty is currently seeking acquisition candidates primarily in
states where the predictions for growth in student population and education
spending are high but is not limiting itself to those markets. With respect to
new specialty product lines, School Specialty is focusing on acquisitions of
businesses that supply materials for art, library, science, physical education,
media centers, technology lab and music subjects.
School Specialty gained experience in locating, acquiring and integrating
acquisitions through the acquisition activity of Old School prior to its
acquisition by U.S. Office Products and through the acquisition program carried
on by U.S. Office Products. From 1991 until it joined U.S. Office Products in
1996, Old School acquired five businesses with aggregate annual revenues at the
time of acquisition of over $90.0 million. Since May 1996 when it joined U.S.
Office Products, Old School has acquired an additional 14 businesses, adding
annual revenues of over $225.0 million. Of the 19 acquisitions completed by Old
School, 16 (accounting for $237.0 million of annual revenue) have been general
school supply businesses and three (accounting for $78.0 million of annual
revenue) have been specialty products businesses. Current management of School
Specialty has been involved in substantially all of these acquisitions.
In furtherance of its acquisition strategy, School Specialty routinely
reviews and conducts investigations of potential acquisitions. When School
Specialty believes a favorable opportunity exists, School Specialty seeks to
enter into discussions with the owners of such businesses regarding the
possibility of an acquisition by School Specialty. As of the date of this
Information Statement/Prospectus, School Specialty does not have any agreements
or pending acquisitions and has not entered into any letters of intent with
respect to pending acquisitions.
COST REDUCTION AND OTHER EFFICIENCIES
School Specialty believes that significant operating synergies are available
in the acquisitions it makes through centralizing management-intensive,
fixed-cost administrative functions at its corporate headquarters. Such
functions include catalog production, management information systems,
administration, finance, accounting, organizational development, and
acquisitions. When fully integrated into School Specialty's distribution model,
the regional distribution divisions are free to focus on direct sales, customer
service, warehousing, and delivery. School Specialty's goal is to retain
experienced employees who can be promoted to higher levels of productivity.
Employees performing redundant administrative tasks are re-deployed to line
functions or their positions are eliminated.
As part of its integration of acquired businesses, School Specialty
introduces its catalog and merchandising plan and related inventory to take full
advantage of its volume purchasing power and seeks to negotiate better prices
and terms from its suppliers. By implementing its inventory management system,
School Specialty seeks to increase annual turnover of inventory from the levels
experienced at the acquired companies to higher levels generally achieved in
School Specialty's fully converted acquisitions.
School Specialty also seeks to improve the fill rates of orders that are
filled from in-stock products from the rates at acquired companies. School
Specialty's fill rate at fully integrated acquisitions is approximately 96%.
Higher fill rates reduce order fulfillment costs and improve customer
satisfaction. School Specialty implements its proprietary PC-based Order
Management System (OMS-Registered Trademark-) to allow customers to process
orders based on pricing specifically negotiated by School Specialty and
individual customers for a particular group of products used by such customer.
School Specialty is currently in the process of eliminating redundant
facilities. School Specialty believes that six distribution centers,
strategically located throughout the United States, can effectively
40
<PAGE>
serve all regions of distribution for its general supply business. School
Specialty has completed the relocation or expansion of five general supply
distribution facilities and is in the process of reviewing further
consolidations of its remaining 12 general supply distribution facilities
located in the U.S.
EXPANSION OF SALES EFFORTS
The Company is now in the process of expanding its sales force into new
geographic territories. School Specialty is also extending access to its
proprietary Order Management System OMS-Registered Trademark- and
SchoolSpec-Registered Trademark- system to new school districts and school
buildings. OMS-Registered Trademark- allows schools to develop records relating
to historical purchase orders and to develop accurate budgets based upon prior
orders. OMS allows order to be sent electronically to School Specialty and
processed for immediate inventory allocation and shipment.
SchoolSpec-Registered Trademark- is a proprietary PC-based furniture
specification and bidding system developed by School Specialty to facilitate
school furniture and equipment purchases and planning at the school level and
also to help School Specialty sales associates enhance the sales of furniture
and equipment.
Childcraft Education Corp.-Registered Trademark-, Sax Arts &
Crafts-Registered Trademark-, and Gresswell-Registered Trademark- are also
expanding and strengthening their specialists in the early childhood, art and
library functions of education systems to increase their market share.
PRODUCT LINES
School Specialty offers customers throughout the country one stop for
virtually all of their school supply needs. With over 32,000 SKUs to choose
from, the school district procurement officer, the principal, and the teacher
can obtain from one source 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.
Re-Print offers substantially similar product offerings but focuses more closely
on catalog distribution and sales directly to teachers. 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 for specific territories and School Specialty enjoys volume purchasing
power in open furniture lines.
School Specialty's specialty brands offer product lines for specific
educational disciplines. Childcraft Education Corp.-Registered Trademark-
distributes early childhood education supplies and materials. It also
distributes early childhood wood classroom furniture and equipment (produced by
its subsidiary, Bird-in-Hand Woodworks) such as library shelving, cubbies,
easels, desks, and play vehicles. Sax Arts & Crafts-Registered Trademark-
distributes materials for art instruction, including paints, brushes, paper,
ceramics, art metals, and materials for printmaking, fabric decoration, and
glass, leather, and wood crafts. Gresswell-Registered Trademark- offers
library-related products through its mail order division. These products include
furniture, children's furniture, media display and storage, shelf display
accessories, signs, shelving, presentation equipment, and materials for book
maintenance, filing and storage, exhibition display, and library security.
Shelving, counters, and office furniture may be installed by the
Gresswell-Registered Trademark- Projects Division.
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.
41
<PAGE>
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 unique 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 Education
Corp.-Registered Trademark-, Sax Arts & Crafts-Registered Trademark-, and
Gresswell-Registered Trademark-) 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 ascertian their supply needs and solve their problems.
The representatives maintain contact with customers throughout the order cycle,
and assist in processing orders.
School Specialty's primary compensation program for sales representatives is
based on commissions as a percentage of gross profit on sales. For new and
transitioning sales representatives, School Specialty offers salary and expense
reimbursement until the representative is moved to a full commission
compensation structure.
School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft Education
Corp-Registered Trademark-, Gresswell-Registered Trademark-, and Sax Arts &
Crafts-Registered Trademark- 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 number of catalogs distributed with respect to the two general supply
distributions and each brand name 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 general catalogs................................... 115,000 296,750 450,750 600,000
Re-Print............................................................ 998,000 1,175,000 2,275,000 3,400,000
Childcraft Education Corp-Registered Trademark-..................... 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell-Registered Trademark-..................................... 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts-Registered Trademark-............................. 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.
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<PAGE>
Pricing for School Specialty's product offerings varies by product and
channel of distribution. School Specialty's catalog pricing is based in part on
vendor pricing and is priced to generate a profit margin to School Specialty.
School Specialty generally offers a negotiated discount from catalog price for
supplies and responds to quote and bid requests for furniture and equipment. In
addition, local sales representatives work with School Specialty's corporate
sales force and school supply buyers to achieve a pricing structure based upon
the mix of products being procured that is acceptable to school buyers.
School Specialty generally purchases products and holds them in inventory to
satisfy customer orders, though it also places customer orders directly with
School Specialty's suppliers. Furniture is generally shipped direct 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 central 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 forecast 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.
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-Registered Trademark-, 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%.
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. Reprint and Sax Arts &
Craft-Registered Trademark- rely on carriers such as Roadway Package Services,
United Parcel Service and the U.S. Postal Service for distribution to customers.
INFORMATION SYSTEMS
School Specialty uses two principal information systems, one for its general
distribution and another for its specialty market distribution. In the general
school supply distribution, School Specialty utilizes a specialized distribution
software package used primarily in the office products and paper distribution
markets. The software offers a fully integrated process from sales order entry
through customer invoicing,
43
<PAGE>
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 are moving toward the common MACS system. School Specialty intends
to continue to use two principal information systems in its business.
YEAR 2000 COMPLIANCE
School Specialty's current information systems as well as those being
considered for acquisition by School Specialty's mail order and specialty
distribution divisions, currently meet information standards for Year 2000
compliance. School Specialty does not expect that it will incur any material
costs and expenses related to bringing its information systems to Year 2000
compliance.
COMPETITION
School Specialty operates in a highly competitive environment. School
Specialty'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, primarily office
products contract stationers and office products superstores. As for the
traditional school supply distributors, School Specialty believes that there are
only two other companies with sales in excess of $130.0 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, they 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 employees 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.
44
<PAGE>
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 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 NA
Bethlehem, Pennsylvania........................................... 25,600 Leased February 28, 1998
Birmingham, Alabama............................................... 180,365 Leased November 20, 2006
Bowling Green, Kentucky........................................... 42,000 Leased June 30, 2001
Cary, Illinois.................................................... 75,767 Owned NA
Enfield, London, England.......................................... 8,000 Owned NA
Fargo, North Dakota............................................... 45,571 Owned NA
Fresno, California................................................ 18,480 Leased December 31, 2001
Hoddesdon, London, England........................................ 10,000 Leased September 1999
Hoddesdon, London, England........................................ 10,000 Leased September 2015
Great Falls, Montana.............................................. 47,571 Owned NA
Lancaster, Pennsylvania........................................... 75,434 Leased December 31, 2002
Lancaster, Pennsylvania........................................... 204,105 Leased February 28, 1999
Mt. Laurel, New Jersey............................................ 48,000 Leased May 31, 1998
New Berlin, Wisconsin............................................. 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma........................................... 37,340 Leased July 16, 2001
Pollocksville, North Carolina..................................... 84,071 Owned NA
Portland, Oregon.................................................. 30,456 Leased May 31, 2001
Salina, Kansas.................................................... 123,000 Owned NA
</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.
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<PAGE>
MANAGEMENT OF SCHOOL SPECIALTY
DIRECTORS AND EXECUTIVE OFFICERS
Following the School Specialty Distribution, it is anticipated that the
directors and executive officers of School Specialty will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Daniel P. Spalding................................... 43 Chairman of the Board and Chief Executive Officer
David J. Vander Zanden............................... 43 President, Chief Operating Officer, and Director*
Donald J. Noskowiak.................................. 40 Executive Vice President and Chief Financial Officer
Douglas Moskonas..................................... 53 Executive Vice President for School Specialty
Divisions
Melvin D. Hilbrown................................... 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 Education
Corp.
Michael J. Killoren.................................. 41 Vice President for School Specialty Divisions
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 are expected to
join the Board of Directors of School Specialty promptly following the School
Specialty Distribution. Mr. Vander Zanden is expected to commence his employment
with School Specialty in March 1998.
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 has been chosen to become the Chief Operating Officer
of School Specialty in March 1998. He is currently President of Ariens Company
since 1992, a manufacturer of outdoor power 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. Before coming to School Specialty, Mr.
Noskowiak served as Controller and Chief Financial Officer for Doucas Motors, an
automotive dealership chain based in Fond du Lac, Wisconsin from 1990 through
1992. Mr. Noskowiak is a CPA.
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
46
<PAGE>
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.
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-Registered Trademark- 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 The
Reprint Corp. in 1996 and serves as President of The Re-Print Corp. Mr. Pate has
served as President of The Re-Print Corp. since he acquired The Re-Print Corp.
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.-Registered Trademark- in 1997 and serves as President
of Childcraft Education Corp.-Registered Trademark- Mr. Suchodolski has been
President of Childcraft Education Corp.-Registered Trademark- 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 Education
Corp.
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.
JONATHAN J. LEDECKY will serve as a Director of School Specialty and each of
the other Spin-Off Companies 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., the nation's largest manufacturer of
office furniture products. 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.
47
<PAGE>
ROCHELLE LAMM WALLACH is President of Strong Advisory Services, a division
of Strong Capital Management. Ms. Wallach joined Strong Capital Management in
1994. 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.
Directors are elected for a one year term and hold office until their
successors have been elected and qualified or until such directors' earlier
resignation or removal.
The School Specialty Board intends to create an Audit Committee effective as
of the Distribution Date. 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 intends to create a Compensation Committee
effective as of the Distribution Date. 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 26,
1997 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,......................................... $ 178,846 -- -- --
Chairman of the Board, CEO, and Director
Ronald E. Suchodolski,(1)................................... 141,535 $ 30,000 -- --
President,
Childcraft Education Corp.-Registered Trademark-
Richard H. Nagel,(1)(2)..................................... 118,000 29,500 -- $ 32,000
President, Sax Arts & Crafts-Registered Trademark-
Donald Ray Pate, Jr......................................... 220,901 -- -- --
President, The Re-Print Corp.
Douglas Moskonas............................................ 97,266 44,500 15,000 --
President, School Specialty Division
</TABLE>
- ------------------------
(1) Mr. Suchodolski and Mr. Nagel joined School Specialty in May and July 1997,
respectively. The compensation information included in this table reflects
the compensation received when employed by predecessor companies.
(2) Other compensation refers to Mr. Nagel's automobile allowance and stay-bonus
compensation received by his prior employer.
No options to acquire securities of School Specialty were granted to or held
by the Named Officers in the year ended April 26, 1997. 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 26, 1997.
As described above, all options were generated 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
48
<PAGE>
School Specialty Common Stock in connection with the School Specialty
Distribution. See "The School Specialty Distribution--Effect on Outstanding U.S.
Office Products Options Held by School Specialty Employees."
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 26, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE 5% 10%
- ------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding (4)............... -- 0.0% $ -- -- $ -- $ --
Ronald E. Suchodolski(5)............. -- 0.0% -- -- -- --
Richard H. Nagel(6).................. -- 0.0% -- -- -- --
Donald Ray Pate, Jr.................. -- 0.0% -- -- -- --
Douglas Moskonas(7).................. 15,000 6.0% $ 26.58 5/13/2006 250,740 635,425
</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) 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 1997.
(3) 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.
(4) After the end of the fiscal year, Daniel P. Spalding was granted 150,000
options at an exercise price of $15.17, which expire on April 28, 2007.
(5) After the end of the fiscal year, Ronald E. Suchodolski was granted 20,000
options at an exercise price of $18.00, which expire on December 12, 2007.
(6) After the end of the fiscal year, Richard H. Nagel was granted 20,000
options at an exercise price of $18.00, which expire on December 12, 2007.
(7) After the end of the fiscal year, Douglas Moskonas was granted 20,000
options at an exercise price of $18.00, which expire on December 12, 2007.
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 26, 1997. As described above, all
options were granted by U.S. Office Products as options to acquire U.S. Office
Products Common Stock and are expected to be replaced with options to acquire
shares of School Specialty Common Stock in connection with the Distribution. See
"The School Specialty Distribution--Effect on Outstanding U.S. Office Products
Options held by School Specialty Employees."
49
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED 1997
AND FISCAL YEAR ENDED 1997 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-
NUMBER UNEXERCISED OPTIONS MONEY (3) OPTIONS AT
FISCAL
SHARES HELD AT APRIL 26, 1997(#) YEAR END($)(4)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding......... -- $ -- -- -- $ -- $ --
Ronald E. Suchodolski...... -- -- -- -- -- --
Richard H. Nagel........... -- -- -- -- -- --
Donald Ray Pate, Jr........ -- -- -- -- -- --
Douglas Moskonas........... -- -- -- 15,000 -- --
</TABLE>
- ------------------------
(1) Represents the number of shares received upon exercise or, if no shares were
received, the number of shares with respect to which options were exercised.
(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 $15.08, the closing market price of U.S.
Office Products' Common Stock at April 26, 1997.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
School Specialty expects to grant non-management directors options
to purchase School Specialty Common Stock for each year of service.
Non-management 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 (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 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 November 4, 1997 employment agreement
with U.S. Office Products.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products and also provides certain benefits and obligations with
respect to School Specialty and the other Spin-Off Companies. Under the Ledecky
Services Agreement, Mr. Ledecky will remain an employee of U.S. Office Products,
at an annual salary of $48,000, through June 30, 2001, with the contract
terminable only if he violates the non-competition provision of the Ledecky
Services Agreement.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions, until the fourth anniversary of the Distribution
Date. 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 and 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 in effect as of January 13,
1998.) The Ledecky Services Agreement prohibits calling upon managerial
employees of the U.S. Office Products Companies to hire them away and Mr.
Ledecky 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 is also barred from hiring away for
Consolidation Capital Corporation any
50
<PAGE>
person then or in the preceding one year employed by the U.S. Office Products
Companies. The Ledecky Services Agreement includes Mr. Ledecky's agreement that
four years is a reasonable period of time for this provision and that U.S.
Office Products will assign to School Specialty and the other Spin-Off Companies
the ability to enforce the noncompetition provisions described above as to their
own businesses.
Under the Ledecky Services Agreement, the Board of Directors of U.S. Office
Products has agreed that Mr. Ledecky will receive a stock option for School
Specialty Common Stock from School Specialty as of the Distribution Date. The
Board of Directors of U.S. Office Products intends the option to be compensation
for Mr. Ledecky's services to School Specialty as a director, and certain
services as an employee. The option will cover up to 7.5% of the outstanding
School Specialty Common Stock determined as of the Distribution Date, with no
anti-dilution provisions in the event of issuance of additional shares of School
Specialty 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 (the "Initial Trading Price") on the day School Specialty's
Common Stock is first publicly traded (the "First Trade Date").
Mr. Ledecky's option will be fully exercisable as to two-thirds of the
shares it covers when granted. The remainder of the option will become
exercisable as follows: (i) as of the 18-month anniversary of the First Trade
Date if the average closing trading price over the 15 business days preceding
that anniversary date exceeds the Initial Trading Price (with the prices
adjusted for stock splits or reverse stock splits or other corporate events that
cause School Specialty to adjust substantially all outstanding options) by at
least 25% or (ii) as of the sixth anniversary of the First Trade Date if the
clause (i) condition is not met and Mr. Ledecky is still employed by U.S. Office
Products at that anniversary. Option exercisability will accelerate if Mr.
Ledecky dies before the option expires or if and to the extent that School
Specialty accelerates the exercise schedule of options for substantially all
management option holders. All unexercised portions of the option will expire
ten years after its date of grant or, if applicable, as of the date Mr. Ledecky
violates his noncompetition 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 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 Distribution, School
Specialty intends to enter into an employment agreement with David J. Vander
Zanden (President and Chief Operating Officer), that will take effect upon the
commencement of his employment in March 1998.
Daniel P. Spalding, Chief Executive Officer of School Specialty, entered
into an employment contract with Old School on April 29, 1996. The contract has
an initial term of four years but, unless terminated, is automatically extended
at the end of each of the last three years of the initial term for another year.
Mr. Spalding receives a base salary of $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 2/3 vote of the then-present
initial Directors or any Directors subsequently installed by them; (iii) any
reorganization of U.S. Office Products unless 75%
51
<PAGE>
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 will become President and Chief Operating Officer in
March 1998. 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 The Re-Print Corp. 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 expects to create a Compensation Committee, which
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.
52
<PAGE>
RELATED PARTY TRANSACTIONS
On April 29, 1996, U.S. Office Products acquired Old School through a merger
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.
U.S. Office Products acquired The Re-Print Corp. on July 26, 1996 through a
reverse merger in which it issued 1,950,000 million shares of U.S. Office
Products Common Stock as consideration. In that transaction, Donald Ray Pate,
Jr., President of The Re-Print Corp., 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).
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.
53
<PAGE>
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY
The following table sets forth the number and percentage of outstanding
shares of School Specialty Common Stock that are expected to be beneficially
owned 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. The table reflects shares of U.S. Office Products Common Stock owned as
of February 12, 1998. Assuming a Distribution Ratio of one for one, the number
and percent of shares of School Specialty Common Stock beneficially owned by
each of the following on the Distribution Date should be equal to the number of
U.S. Office Products Common Stock owned by them on the Distribution Date (which
will exclude any shares purchased from these persons in the Tender Offer),
except that the number of shares beneficially owned with respect to options that
are exercisable within 60 days of the Distribution Date may be different
depending on the ratio at which options for U.S. Office Products Common Stock
are replaced with options for School Specialty Common Stock. See "The School
Specialty Distribution--Effect on Outstanding U.S. Office Products Options held
by School Specialty Employees." Except as otherwise indicated, the business
address of each of the following is 1000 North Bluemound Drive, Appleton,
Wisconsin 54914.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Daniel P. Spalding (1)...................................................................... 200,299 *
Ronald Suchodolski.......................................................................... 0 0
Jonathan J. Ledecky(2)...................................................................... 2,428,125 1.7%
Richard H. Nagel............................................................................ 0 0
Donald Ray Pate, Jr......................................................................... 1,076,028 *
Douglas Moskonas(3)......................................................................... 7,500 *
Leo C. McKenna.............................................................................. 13,088 *
All current executive officers and directors as a group (12 persons)........................ 3,756,128 3.4
5% STOCKHOLDERS
FMR Corp.(4)................................................................................ 15,754,406 11.2
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(4)................................................. 8,262,886 5.9
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes 37,500 shares which may be acquired upon exercise of options
exercisable within 60 days following the School Specialty Distribution.
(2) In addition, Mr. Ledecky has an option that will become exercisable on the
Distribution Date for a number of shares of School Specialty Common Stock
equal to 5% of the shares issued and outstanding on the Distribution Date.
See "Management of School Specialty--Director Compensation and Other
Arrangements." Excludes options for U.S. Office Products Common Stock that
will not be converted into options for School Specialty Common Stock at the
time of the School Specialty Distribution.
(3) Includes 7,500 shares which may be acquired upon exercise of options
exercisable within 60 days following the School Specialty Distribution.
(4) Based on a Schedule 13G filed with the SEC.
54
<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, School Specialty's authorized capital
stock is expected to 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,
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.
55
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
School Specialty is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. School Specialty has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.
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.
TRANSFER AGENT AND REGISTRAR
School Specialty has not yet appointed a Transfer Agent and Registrar for
the School Specialty Common Stock but expects to do so prior to the School
Specialty Distribution.
56
<PAGE>
EXPERTS
The financial statements included in this Information Statement/Prospectus
(except as they relate to the unaudited interim periods) have been audited by
various independent accountants. The companies and periods covered by these
audits are indicated in the individual accountants' reports. Such financial
statements have been so included in reliance on the reports of the various
independent accountants given on the authority of such firms 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.
57
<PAGE>
SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SCHOOL SPECIALTY, INC.
Introduction to Pro Forma Financial Information........................................................ F-2
Pro Forma Combined Balance Sheet as of October 25, 1997 (unaudited).................................... F-4
Pro Forma Combined Statement of Income for the six months ended October 25, 1997 (unaudited)........... F-5
Pro Forma Combined Statement of Income for the six months ended October 26, 1996 (unaudited)........... F-6
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997 (unaudited)............ F-7
Notes to Pro Forma Combined Financial Statements....................................................... F-8
Report of Price Waterhouse LLP, Independent Accountants................................................ F-9
Report of Ernst & Young LLP, Independent Auditors...................................................... F-10
Report of BDO Seidman, LLP, Independent Auditors....................................................... F-11
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and October 25, 1997 (unaudited)....... F-12
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 six months ended October 26, 1996
(unaudited) and October 25, 1997 (unaudited).......................................................... F-13
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 six months
ended October 25, 1997 (unaudited).................................................................... F-14
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 six months ended October 26, 1996
(unaudited) and October 25, 1997 (unaudited).......................................................... F-15
Notes to Consolidated Financial Statements............................................................. F-17
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent Accountants................................... F-31
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited).......... F-32
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-33
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-34
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-35
Notes to the Consolidated Financial Statements........................................................... F-36
SAX ARTS AND CRAFTS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-41
Balance Sheets as of December 16, 1995, and December 25, 1996 and June 29, 1997 (unaudited).............. F-42
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-43
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-44
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-45
Notes to Financial Statements............................................................................ F-46
</TABLE>
F-1
<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 February 13,
1998.
The pro forma combined balance sheet gives effect to the Distribution and
the acquisition of American Academic Suppliers Holding Corporation and
Subsidiary ("American Academic") by the Company after October 25, 1997, as if
both transactions had occurred as of the Company's most recent balance sheet
date, October 25, 1997.
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 six months ended October
25, 1997 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 six months ended October 25, 1997
includes the unaudited financial information of the Company for the six months
ended October 25, 1997 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 October 25, 1997.
The pro forma combined statement of income for the six months ended October
26, 1996 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 six months ended October 26, 1996 includes (i) the unaudited
financial information of the Company for the six months ended October 26, 1996;
(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 October 26, 1996; and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through October 26, 1996.
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 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.
F-2
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Although the Company expects that it will incur some additional corporate
management and other costs in connection with being an independent public
company, management does not expect such costs to exceed the allocated corporate
overheads reflected in the historical financial statements. Accordingly, neither
the elimination of the allocated corporate overheads nor the anticipated costs
have been included in the pro forma combined financial information of the
Company.
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-3
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
OCTOBER 25, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SCHOOL
SPECIALTY, AMERICAN PRO FORMA PRO FORMA
INC. ACADEMIC ADJUSTMENTS COMBINED
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ $ 10 $ (10)(b) $
Accounts receivable, net................................ 71,410 9,037 80,447
Inventory............................................... 29,118 1,985 31,103
Prepaid and other current assets........................ 7,842 267 8,109
------------- ----------- ----------- -----------
Total current assets................................ 108,370 11,299 (10) 119,659
Property and equipment, net............................... 19,377 2,830 22,207
Intangible assets, net.................................... 71,525 4,024 18,325(a) 93,874
Other assets.............................................. 2,032 2,032
------------- ----------- ----------- -----------
Total assets........................................ $ 201,304 $ 18,153 $ 18,315 $ 237,772
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt......................................... $ 273 $ 7,543 $ (7,553)(b) $ 263
Short-term Payable to U.S. Office Products.............. 31,356 (31,356)(b)
Accounts payable........................................ 19,555 2,993 22,548
Accrued compensation.................................... 4,276 4,276
Other accrued liabilities............................... 8,972 2,142 11,114
------------- ----------- ----------- -----------
Total current liabilities........................... 64,432 12,678 (38,909) 38,201
Long-term debt............................................ 457 79,280(b) 79,737
Long-term Payable to U.S. Office Products................. 103,306 23,800(a)
(127,106)(b)
------------- ----------- ----------- -----------
Total liabilities................................... 168,195 12,678 (62,935) 117,938
Stockholder's equity:
Divisional equity....................................... 23,551 86,725(b) 110,276
Retained earnings....................................... 9,558 9,558
Equity in Purchased Company............................. 5,475 (5,475)(a)
------------- ----------- ----------- -----------
Total stockholder's equity.......................... 33,109 5,475 81,250 119,834
------------- ----------- ----------- -----------
Total liabilities and stockholder's equity.......... $ 201,304 $ 18,153 $ 18,315 $ 237,772
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-4
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SCHOOL SAX FISCAL 1998
SPECIALTY, ARTS & AMERICAN PURCHASE
INC. CRAFTS ACADEMIC ACQUISITIONS
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues............................................................ $ 198,490 $ 7,764 $ 34,076 $ 10,789
Cost of revenues.................................................... 138,781 4,494 24,610 7,489
-------------- ----------- ----------- -------------
Gross profit.................................................... 59,709 3,270 9,466 3,300
Selling, general and administrative expenses........................ 34,911 1,779 6,023 2,339
Amortization expense................................................ 771
-------------- ----------- ----------- -------------
Operating income................................................ 24,027 1,491 3,443 961
Other (income) expense:
Interest expense.................................................. 1,570 100 400 38
Interest income................................................... (104) (5)
Other............................................................. 3 (2) 58
-------------- ----------- ----------- -------------
Income before provision for income taxes............................ 22,558 1,393 3,043 870
Provision for income taxes.......................................... 10,151 539 974 29
-------------- ----------- ----------- -------------
Net income.......................................................... $ 12,407 $ 854 $ 2,069 $ 841
-------------- ----------- ----------- -------------
-------------- ----------- ----------- -------------
Pro forma weighted average shares outstanding.......................
Pro forma net income per share......................................
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues............................................................ $ $ 251,119
Cost of revenues.................................................... 175,374
------------- -----------
Gross profit.................................................... 75,745
Selling, general and administrative expenses........................ 45,052
Amortization expense................................................ 446(d) 1,217
------------- -----------
Operating income................................................ (446) 29,476
Other (income) expense:
Interest expense.................................................. 1,772(f) 3,880
Interest income................................................... 109(f)
Other............................................................. 59
------------- -----------
Income before provision for income taxes............................ (2,327) 25,537
Provision for income taxes.......................................... 54(g) 11,747
------------- -----------
Net income.......................................................... $ (2,381) $ 13,790
------------- -----------
------------- -----------
Pro forma weighted average shares outstanding....................... 95,963(h)
Pro forma net income per share...................................... $ 0.14
-----------
-----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-5
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 26, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS
------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................ $ 130,673 $ 23,293 $ 28,499 $ 37,536 $ 14,820
Cost of revenues................................................ 92,740 13,482 20,615 23,953 11,368
------------- --------- ----------- ----------- -----------
Gross profit.................................................... 37,933 9,811 7,884 13,583 3,452
Selling, general and administrative expenses.................... 23,983 5,339 5,074 9,406 3,312
Amortization expense............................................ 229
Non-recurring acquisition costs................................. 1,792
------------- --------- ----------- ----------- -----------
Operating income................................................ 11,929 4,472 2,810 4,177 140
Other (income) expense:
Interest expense................................................ 1,725 300 400 69 176
Interest income................................................. (24) (27)
Other........................................................... 40 (8) 51 (10)
------------- --------- ----------- ----------- -----------
Income before provision for income taxes........................ 10,188 4,180 2,410 4,084 (26)
Provision for income taxes...................................... (2,170) 1,618 87 111
------------- --------- ----------- ----------- -----------
Net income...................................................... $ 12,358 $ 2,562 $ 2,410 $ 3,997 $ (137)
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
Pro forma weighted average shares outstanding...................
Pro forma net income per share..................................
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- -----------
<S> <C> <C>
Revenues........................................................ $ $ 234,821
Cost of revenues................................................ 162,158
----------- -----------
Gross profit.................................................... 72,663
Selling, general and administrative expenses.................... (124)(c) 46,990
Amortization expense............................................ 975(d) 1,204
Non-recurring acquisition costs................................. (1,792)(e)
----------- -----------
Operating income................................................ 941 24,469
Other (income) expense:
Interest expense................................................ 1,210(f) 3,880
Interest income................................................. 51(f)
Other........................................................... 73
----------- -----------
Income before provision for income taxes........................ (320) 20,516
Provision for income taxes...................................... 9,791(g) 9,437
----------- -----------
Net income...................................................... $ (10,111) $ 11,079
----------- -----------
----------- -----------
Pro forma weighted average shares outstanding................... 95,963(h)
Pro forma net income per share.................................. $ 0.12
-----------
-----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-6
<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
SAX FISCAL 1998 FISCAL 1997 PRO
SCHOOL ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA FORMA
SPECIALTY, INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
--------------- ------- -------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $191,746 $34,542 $40,563 $57,875 $14,820 $ $339,546
Cost of revenues.............. 136,577 20,067 29,608 37,707 11,368 235,327
--------------- ------- -------- ------------ ------------ ----------- --------
Gross profit.............. 55,169 14,475 10,955 20,168 3,452 104,219
Selling, general and
administrative expenses..... 42,896 9,698 8,102 16,949 3,313 (124)(c) 80,834
Amortization expense.......... 566 1,839(d) 2,405
Non-recurring acquisition
costs....................... 1,792 (1,792)(e)
Restructuring costs........... 194 194
--------------- ------- -------- ------------ ------------ ----------- --------
Operating income.......... 9,721 4,777 2,853 3,219 139 77 20,786
Other (income) expense:
Interest expense............ 2,550 474 850 234 176 2,756(f) 7,040
Interest income............. (45) 45(f)
Other....................... (196) (33) 81 (11) (159 )
--------------- ------- -------- ------------ ------------ ----------- --------
Income (Loss) before provision
for income taxes............ 7,367 4,336 2,003 2,949 (26) (2,724) 13,905
Provision for income taxes.... (1,572) 1,664 681 140 111 5,372(g) 6,396
--------------- ------- -------- ------------ ------------ ----------- --------
Net (Loss) income............. $ 8,939 $ 2,672 $ 1,322 $ 2,809 $ (137) $(8,096) $ 7,509
--------------- ------- -------- ------------ ------------ ----------- --------
--------------- ------- -------- ------------ ------------ ----------- --------
Pro forma weighted average
shares outstanding.......... 95,963 (h)
Pro forma net income per
share....................... $ 0.08
--------
--------
</TABLE>
See accompanying notes for pro forma combined financial statements.
F-7
<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
acquisitions of American Academic. The portion of the consideration assigned
to goodwill ($18,325) 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 payment of debt of $10 and forgiveness of $86,725 of debt due to
U.S. Office Products as U.S. Office Products agreed to allocate only $80,000
of debt to the Company at the date of the Distribution. The $86,725 of net
debt forgiven has been reflected as a contribution of capital to the Company
by U.S. Office Products.
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.
(d) 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.
(e) Adjustment to reflect the reduction in non-recurring acquisition costs
related to pooling-of-interests business combinations of $1,792 for the
fiscal year ended April 26, 1997 and $1,792 for the six months ended October
26, 1996.
(f) Adjustment to reflect the increase in interest expense as a result of U.S.
Office Products allocating $80,000 of debt to the Company. Although U.S.
Office Products forgave $86,725 of debt due from the Company, U.S. Office
Products had not historically charged the Company interest on any portion of
the long-term debt payable to U.S. Office Products.
(g) Adjustment to calculate the provision for income taxes on the combined pro
forma results at an effective income tax rate of approximately 46%. The
difference between the effective tax rate of 46% and the statutory tax rate
of 35% relates primarily to state income taxes and non-deductible goodwill.
(h) The weighted average shares outstanding used to calculate pro forma earnings
per share is based upon 95,963 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 133,000 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 Registration
Statement of which this Information Statement/Prospectus is a part, 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-8
<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-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
SCHOOL SPECIALTY, INC.
We have audited the accompanying consolidated statements of operations 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-10
<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-11
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, OCTOBER 25,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 46 $ $
Accounts receivable, less allowance for doubtful accounts of $202, $471 and
$732, respectively......................................................... 13,129 17,232 71,410
Inventories.................................................................. 20,276 24,461 29,118
Prepaid expenses and other current assets.................................... 5,556 10,331 7,842
--------- --------- -----------
Total current assets..................................................... 39,007 52,024 108,370
Property and equipment, net.................................................... 7,647 14,478 19,377
Intangible assets, net......................................................... 7,142 20,824 71,525
Other assets................................................................... 777 359 2,032
--------- --------- -----------
Total assets............................................................. $ 54,573 $ 87,685 $ 201,304
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Short-term debt.............................................................. $ 25,887 $ 262 $ 273
Short-term payable to U.S. Office Products................................... 26,692 31,356
Accounts payable............................................................. 11,933 9,091 19,555
Accrued compensation......................................................... 785 860 4,276
Other accrued liabilities.................................................... 4,065 1,500 8,972
--------- --------- -----------
Total current liabilities................................................ 42,670 38,405 64,432
Long-term debt................................................................. 15,031 565 457
Long-term payable to U.S. Office Products...................................... 31,579 103,306
Deferred income taxes.......................................................... 1,139
--------- --------- -----------
Total liabilities........................................................ 58,840 70,549 168,195
--------- --------- -----------
Commitments and contingencies
Stockholder's (deficit) equity:
Divisional equity............................................................ 7,487 19,985 23,551
Retained (deficit) earnings.................................................. (11,754) (2,849) 9,558
--------- --------- -----------
Total stockholder's (deficit) equity..................................... (4,267) 17,136 33,109
--------- --------- -----------
Total liabilities and stockholder's (deficit) equity..................... $ 54,573 $ 87,685 $ 201,304
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOUR FISCAL FOR THE SIX
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------------------- ------------- ------------- ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26, OCTOBER 25,
1994 1995 1996 1997 1996 1997
------------ ------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................ $ 119,510 $ 150,482 $ 28,616 $ 191,746 $ 130,673 $ 198,490
Cost of revenues.................... 87,750 105,757 20,201 136,577 92,740 138,781
------------ ------------ ------------- ------------- ----------- -----------
Gross profit.................. 31,760 44,725 8,415 55,169 37,933 59,709
Selling, general and administrative
expenses.......................... 27,281 39,869 10,307 43,462 24,212 35,682
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 11,929 24,027
Other (income) expense:
Interest expense................ 3,007 5,536 1,461 2,550 1,725 1,570
Interest income................. (6) (24) (104)
Other........................... (86) (18) 67 (196) 40 3
------------ ------------ ------------- ------------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes....... 1,558 (3,194) (4,536) 7,367 10,188 22,558
Provision for (benefit from) income
taxes............................. 218 173 139 (1,572) (2,170) 10,151
------------ ------------ ------------- ------------- ----------- -----------
Net income (loss)................... $ 1,340 $ (3,367) $ (4,675) $ 8,939 $ 12,358 $ 12,407
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<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................................................................ 8,939 8,939
----------- ---------- ------------
Balance at April 26, 1997................................................... 19,985 (2,849) 17,136
Unaudited data:
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 3,566 3,566
Net income................................................................ 12,407 12,407
----------- ---------- ------------
Balance at October 25, 1997 (unaudited)..................................... $ 23,551 $ 9,558 $ 33,109
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FOUR FOR THE FOR THE SIX
MONTHS FISCAL MONTHS
FOR THE YEAR ENDED ENDED YEAR ENDED ENDED
---------------------------- ------------ ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26,
1994 1995 1996 1997 1996
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................... $ 1,340 $ (3,367) $ (4,675) $ 8,939 $ 12,358
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 1,719 2,927 674 2,106 990
Non-recurring acquisition costs............. 1,122 1,792 1,792
Other....................................... 231 277 118 115 86
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 (24,164)
Inventory............................... 4,365 (2,523) (4,376) 2,737 10,051
Prepaid expenses and other current
assets................................ (989) (338) (443) (2,361) (384)
Accounts payable........................ (4,367) 2,642 3,459 (6,969) (6,891)
Accrued liabilities..................... (341) 2,544 (784) (5,070) (1,535)
------------- ------------- ------------ ------------- -----------
Net cash provided by (used in)
operating activities.............. (268) 4,828 (1,178) 2,566 (7,697)
------------- ------------- ------------ ------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (2,106) (5,389) (7,734) (7,171)
Additions to property and equipment............. (630) (881) (120) (7,216) (5,743)
Payments of non-recurring acquisition costs..... (1,122) (1,792) (1,632)
Other........................................... (120) 178 414
------------- ------------- ------------ ------------- -----------
Net cash used in investing
activities........................ (2,856) (6,092) (828) (16,742) (14,546)
------------- ------------- ------------ ------------- -----------
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 1,715 750 750
Payments of long-term debt...................... (2,023) (1,488) (194) (16,962) (16,788)
Proceeds from (payments of) short-term debt,
net........................................... 3,295 655 1,263 (29,908) (28,778)
Advances from U.S. Office Products Company...... 58,271 65,034
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 14,130 22,197
------------- ------------- ------------ ------------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 78 (108) 5 (46) (46)
Cash and cash equivalents at beginning of
period.......................................... 71 149 41 46 46
------------- ------------- ------------ ------------- -----------
Cash and cash equivalents at end of period........ $ 149 $ 41 $ 46 $ $
------------- ------------- ------------ ------------- -----------
------------- ------------- ------------ ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid............................... $ 2,850 $ 5,564 $ 1,461 $ 456 $ 420
Income taxes paid (refunded)................ $ 236 $ 9 $ (3) $ (132) $ (45)
<CAPTION>
OCTOBER 25,
1997
-----------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 12,407
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 1,968
Non-recurring acquisition costs.............
Other....................................... 74
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable..................... (42,271)
Inventory............................... 11,697
Prepaid expenses and other current
assets................................ 4,929
Accounts payable........................ 2,458
Accrued liabilities..................... 5,768
-----------
Net cash provided by (used in)
operating activities.............. (2,970)
-----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (68,099)
Additions to property and equipment............. (3,373)
Payments of non-recurring acquisition costs.....
Other...........................................
-----------
Net cash used in investing
activities........................ (71,472)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock..........
Proceeds from issuance of long-term debt........
Payments of long-term debt...................... (108)
Proceeds from (payments of) short-term debt,
net........................................... (1,840)
Advances from U.S. Office Products Company...... 76,390
Payments of dividends at Pooled Companies.......
Purchase of treasury stock at Pooled Company....
-----------
Net cash provided by financing
activities........................ 74,442
-----------
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............................... $ 18
Income taxes paid (refunded)................ $
</TABLE>
F-15
<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 six months
ended October 26, 1996 and October 25, 1997. 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 SIX
FOR THE MONTHS
FOR THE YEAR ENDED FOR THE FOUR FISCAL ENDED
---------------------------- MONTHS ENDED YEAR ENDED -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26,
1994 1995 1996 1997 1996
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable............................... $ 8,112 $ 1,589 $ $ 5,381 $ 3,958
Inventories....................................... 9,743 1,823 6,922 6,513
Prepaid expenses and other current assets......... 823 502 2,371 2,337
Property and equipment............................ 2,211 4,536 1,155 1,153
Intangible assets................................. 3,268 14,248 11,386
Other assets...................................... 1,488 156 29 29
Short-term debt................................... (6,785) (191) (4,283) (3,383)
Accounts payable.................................. (6,447) (274) (4,012) (3,525)
Accrued liabilities............................... (1,661) (225) (1,846) (1,466)
Long-term debt.................................... (5,378) (5,795) (1,746) (1,746)
------------- ------------- ------------- ------------- -----------
Net assets acquired................. $ 2,106 $ 5,389 $ $ 18,219 $ 15,256
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ $ $ $ 10,485 $ 8,085
Cash paid, net of cash acquired................... 2,106 5,389 7,734 7,171
------------- ------------- ------------- ------------- -----------
Total............................... $ 2,106 $ 5,389 $ $ 18,219 $ 15,256
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
<CAPTION>
OCTOBER 25,
1997
-----------
<S> <C>
Accounts receivable............................... $ 11,907
Inventories....................................... 16,354
Prepaid expenses and other current assets......... 2,229
Property and equipment............................ 4,408
Intangible assets................................. 51,471
Other assets...................................... 210
Short-term debt................................... (1,850)
Accounts payable.................................. (7,933)
Accrued liabilities............................... (5,131)
Long-term debt....................................
-----------
Net assets acquired................. $ 71,665
-----------
-----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ 3,566
Cash paid, net of cash acquired................... 68,099
-----------
Total............................... $ 71,665
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<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 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 U.S. Office Products'
Educational Supplies and Products 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 Educational Supplies and Products division was created by U.S. Office
Products in May 1996 and completed two business combinations accounted for under
the pooling-of-interests method during the period from May 1996 to July 1996
(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-17
<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.
F-18
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method, franchise agreements and non-compete
agreements. Substantially all goodwill is amortized on a straight line basis
over an estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Intangible assets associated with non-compete
agreements are being amortized over their respective terms.
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.
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, various regulatory fees and
recognition of transaction related obligations. 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.
F-19
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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)."
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS"). SFAS 128 simplifies the standards for computing EPS
and makes the presentation comparable to international EPS standards by
replacing the presentation of primary EPS with a presentation of basic EPS. It
also 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 common 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 Company intends to adopt SFAS 128
in the fiscal year ended April 25, 1998. The implementation of SFAS 128 is not
expected to have a material effect on the Company's earnings per share as
determined under current accounting rules. Historical earnings per share 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 on the consummation of
the Distribution.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of October 25, 1997 and the results
of operations and of cash flows for the six months ended October 26, 1996 and
October 25, 1997, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, U.S. Office Products issued common stock to acquire the
Pooled Companies. The Company's consolidated financial statements give
retroactive effect to the acquisitions of the Pooled
F-20
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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
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................................................................. $ 8,598 $ 341 $ 8,939
For the six months ended October 26, 1996 (unaudited):
Revenues................................................................... $ 120,347 $ 10,326 $ 130,673
Net income................................................................. $ 12,177 $ 181 $ 12,358
For the six months ended October 25, 1997 (unaudited):
Revenues................................................................... $ 198,490 $ $ 198,490
Net income................................................................. $ 12,407 $ $ 12,407
</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.
F-21
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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 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 and the
inclusion of a federal income tax provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
------------------------
<S> <C> <C>
DECEMBER 31, APRIL 26,
1995 1997
------------ ----------
Revenues............................................................................... $ 206,329 $ 206,566
Net income (loss)...................................................................... (1,199) 2,939
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of 1995 or the results
which may occur in the future.
NOTE 5--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
--------------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at April 30 1996.................................... $ 641 $ 469 $ 1422 $ 2,532
Additions................................................. 194 194
Utilizations.............................................. (641) (469) (1,465) (2,575)
----- ----- ------------ ---------
Balance at April 26, 1997................................... 151 151
Utilizations..............................................
----- ----- ------------ ---------
Balance at October 25, 1997 (unaudited)..................... $ $ $ 151 $ 151
----- ----- ------------ ---------
----- ----- ------------ ---------
</TABLE>
F-22
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
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>
Prepaid catalog fees......................................................................... $ 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>
Prepaid catalog fees represent costs which have been paid to produce Company
catalogs which will be used in future periods. These prepaid catalog fees will
be expensed in the periods the catalogs are used.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Land........................................................................................ $ 58 $ 729
Buildings................................................................................... 2,042 6,488
Furniture and fixtures...................................................................... 882 6,502
Warehouse Equipment......................................................................... 8,767 3,163
Leasehold improvements...................................................................... 631 2,185
--------- ---------
12,380 19,067
Less: Accumulated depreciation.............................................................. (4,733) (4,589)
--------- ---------
Net property and equipment.................................................................. $ 7,647 $ 14,478
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996 and the fiscal year ended April 26, 1997 was
$888, $1,645, $470 and $1,540, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, OCTOBER 25,
1996 1997 1997
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill...................................................................... $ 4,510 $ 18,456 $ 69,398
Other......................................................................... 6,000 5,692 6,159
--------- --------- ------------
10,510 24,148 75,557
Less: Accumulated amortization................................................ (3,368) (3,324) (4,032)
--------- --------- ------------
Net intangible assets.................................................... $ 7,142 $ 20,824 $ 71,525
--------- --------- ------------
--------- --------- ------------
</TABLE>
F-23
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INTANGIBLE ASSETS (CONTINUED)
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
six months ended October 25, 1997 was $757, $1,098, $204, $566 and $771,
respectively.
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................................................................... 584 314
--------- ---------
17,579 797
Less: Current maturities of long-term debt.................................................. (2,548) (232)
--------- ---------
Total long-term debt.................................................................... $ 15,031 $ 565
--------- ---------
--------- ---------
</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-24
<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 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. No
interest has been allocated to the Company on the outstanding payable. 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....................................................... 574
Normal operating costs paid by U.S. Office Products................................ 1,423
---------
Balance at April 26, 1997.......................................................... $ 31,579
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 was $27,269.
U.S. Office Products has charged the Company interest on the short-term
payable to U.S. Office Products at the prime rate in effect at the time. 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. U.S Office Products has not charged the Company interest
on the long-term payable to U.S. Office Products. The Company's financial
statements include allocations of interest expense from U.S. Office Products
totaling $2,232 during the year ended April 26, 1997. If the Company had been
charged interest on all debt allocated by U.S. Office Products during fiscal
1997, interest expense would have totaled $4,554.
The Company expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $80.0 million of debt by U.S. Office
Products resulting in the forgiveness of $86.7 million at October 25, 1997,
which would be reflected in the financial statements as a contribution of
capital by U.S. Office Products. The Company intends to enter into a credit
facility concurrently with the Distribution which will contain certain financial
and other covenants, including maintenance of certain financial tests
F-25
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
and ratios, limitations on capital expenditures and restrictions on the
incurrence of debt or liens, the sale of assets, the payment of dividends,
transactions with affiliates and other transactions.
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 (1,742)
------ ------------ ------------- -------------
Total provision for income taxes.................. $ 218 $ 173 $ 139 $ (1,572)
------ ------------ ------------- -------------
------ ------------ ------------- -------------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ (349) $ 265
Allowance for doubtful accounts............................................................ 106 193
Net operating loss carryforward............................................................ 3,536 2,229
Accrued liabilities........................................................................ 332 421
Prepaid catalog advertising/restructuring.................................................. (205) (1,893)
--------- ---------
Total current deferred tax assets........................................................ 3,420 1,215
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (126) (289)
Intangible assets.......................................................................... 622 258
--------- ---------
Total long-term deferred tax asset (liabilities)......................................... 496 (31)
--------- ---------
Subtotal................................................................................. 3,916 1,184
--------- ---------
Valuation allowance........................................................................ (5,055)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (1,139) $ 1,184
--------- ---------
--------- ---------
</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.
F-26
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate........................... 34.0% 34.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit
for fiscal 1997..................................... 9.6 1.0
Net operating loss utilized........................... (33.0)
No benefit for current year net operating loss........ (34.0) (32.8)
Reversal of valuation allowance....................... (63.9)
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 )% (21.3 )%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998......................................................................................... $ 232 $ 871
1999......................................................................................... 118 806
2000......................................................................................... 6 599
2001......................................................................................... 517
2002......................................................................................... 496
Thereafter................................................................................... 1,057
----- -----------
Total minimum lease payments................................................................. 356 $ 4,346
-----------
-----------
Less: Amounts representing interest (42)
-----
Present value of net minimum lease payments.................................................. $ 314
-----
-----
</TABLE>
Rent expense for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996 and the fiscal year ended April 26, 1997 was $1,486,
$1,947, $600 and $1,817, respectively.
F-27
<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 is 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-28
<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
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive 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. At
April 26, 1997, there were approximately 249,600 options to purchase shares of
U.S. Office Products common stock held by Company employees.
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-29
<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)....................................... 5,345 7,013 (787) (2,632) 8,939
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
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 six business combinations accounted for
under the purchase method for an aggregate purchase price of $71,665 consisting
of $68,099 of cash and U.S. Office Products Common Stock with a market value of
$3,566. The results of operations for the six months ended October 25, 1997
include the results of the acquired company's 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 and the inclusion of a federal
income tax provision on all earnings:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
APRIL 26, 1997
----------------
<S> <C>
Revenues........................................................................................ $ 339,546
Net income...................................................................................... 7,509
</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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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 registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Appleton,
State of Wisconsin, on February 17, 1998.
SCHOOL SPECIALTY, INC.
By: /s/ DANIEL P. SPALDING
-----------------------------------------
Name: Daniel P. Spalding
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
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 2/17/98
- ------------------------------ (Principal Executive
Daniel P. Spalding Officer); Director
/s/ DONALD J. NOSKOWIAK Chief Financial Officer 2/17/98
- ------------------------------ (Principal Financial and
Donald J. Noskowiak Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1* 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 Graphics, Inc., Paradigm
Concepts, Inc., TDOP, Inc., and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., TDOP, Inc., and School Specialty, Inc.
10.3* Tax Indemnification Agreement among Workflow Graphics, Inc., Paradigm Concepts, Inc., TDOP, Inc., and
School Specialty, Inc.
10.4* Employee Benefits Agreement among Workflow Graphics, Inc., Paradigm Concepts, Inc., TDOP, 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 Reprint Corp.
10.7* Employment Agreement dated June 27, 1997, between Richard H. Nagel and Sax Arts & Crafts, Inc.
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 David J. Vander Zanden to be named as director
23.7 Consent of Jonathan J. Ledecky to be named as director
23.8 Consent of Leo C. McKenna to be named as director
23.9 Consent of Rochelle Lamm Wallach to be named as director
27 Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment.
II-4
<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
February 16, 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 100,000,000 shares of its
common stock.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 13, 1998
<PAGE>
EXHIBIT 23.4
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 8, 1996,
relating to the financial statements of The RePrint Corporation, which appears
in such Prospectus. We also consent to the references to us under the heading
"Experts" in such Prospectus.
BDO SIEDMAN, LLP
Atlanta, Georgia
February 13, 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 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
February 13, 1998
<PAGE>
EXHIBIT 23.6
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
School Specialty, Inc. (the "Company") in the registration statement on Form S-1
to be filed by the Company with the Securities and Exchange Commission relating
to the distribution by U.S. Office Products Company, the sole shareholder of the
Company, of shares of common stock, par value $.001, of the Company.
<TABLE>
<CAPTION>
/s/ DAVID J. VANDER ZANDEN
--------------------------------------------
David J. Vander Zanden
<S> <C>
Dated: February 12, 1998
</TABLE>
<PAGE>
EXHIBIT 23.7
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
School Specialty, Inc. (the "Company") in the registration statement on Form S-1
to be filed by the Company with the Securities and Exchange Commission relating
to the distribution by U.S. Office Products Company, the sole shareholder of the
Company, of shares of common stock, par value $.001, of the Company.
<TABLE>
<CAPTION>
/s/ JONATHAN J. LEDECKY
--------------------------------------------
Jonathan J. Ledecky
<S> <C>
Dated: February 12, 1998
</TABLE>
<PAGE>
EXHIBIT 23.8
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
School Specialty, Inc. (the "Company") in the registration statement on Form S-1
to be filed by the Company with the Securities and Exchange Commission relating
to the distribution by U.S. Office Products Company, the sole shareholder of the
Company, of shares of common stock, par value $.001, of the Company.
<TABLE>
<CAPTION>
/s/ LEO C. MCKENNA
--------------------------------------------
Leo C. McKenna
<S> <C>
Dated: February 13, 1998
</TABLE>
<PAGE>
EXHIBIT 23.9
CONSENT TO BE NAMED AS A DIRECTOR
I hereby consent to be named as a person who will become a director of
School Specialty, Inc. (the "Company") in the registration statement on Form S-1
to be filed by the Company with the Securities and Exchange Commission relating
to the distribution by U.S. Office Products Company, the sole shareholder of the
Company, of shares of common stock, par value $.001, of the Company.
<TABLE>
<CAPTION>
/s/ ROCHELLE LAMM WALLACH
--------------------------------------------
Rochelle Lamm Wallach
<S> <C>
Dated: February 11, 1998
</TABLE>
<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>
