<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 333-46537
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
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>
------------------------
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DANIEL P. SPALDING
CHIEF EXECUTIVE OFFICER
SCHOOL SPECIALTY, INC.
1000 NORTH BLUEMOUND DRIVE
APPLETON, WISCONSIN 54914
(920) 734-2756
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
TELEPHONE NO: (202) 663-6000
FACSIMILE NO: (202) 663-6363
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED
MAXIMUM PROPOSED AMOUNT OF
AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION FEE
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE (2)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share, to be distributed to
holders of U.S. Office Products
Company common stock.............. 100,000,000(1) $.331 $33,109,000 $9,768
</TABLE>
(1) Approximate number of shares of School Specialty, Inc. common stock expected
to be distributed based upon an assumed distribution ratio of one share of
School Specialty, Inc. common stock for every one share of U.S. Office
Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of School
Specialty, Inc. common stock for every one share of U.S. Office Products
Company common stock.
(2) The Company has previously paid the Securities and Exchange Commission the
registration fee.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1998
INFORMATION STATEMENT/PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS INFORMATION
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
SCHOOL SPECIALTY, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
SCHOOL SPECIALTY, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of School Specialty, Inc. ("School Specialty").
School Specialty is a Delaware corporation formed by U.S. Office Products that
will own substantially all the assets of, and will be responsible for
substantially all the liabilities associated with, U.S. Office Products'
Educational Supplies and Products Division. Pursuant to this distribution (the
"School Specialty Distribution"), all of the issued and outstanding shares of
the common stock, $.001 par value per share, of School Specialty (the "School
Specialty Common Stock") will be distributed to holders of record as of the
close of business on June 9, 1998 (the "Record Date") of the common stock, par
value $.001 per share, of U.S. Office Products ("U.S. Office Products Common
Stock"). The Company currently estimates that each such holder will receive one
share of School Specialty Common Stock for every nine shares of U.S. Office
Products Common Stock held on the Record Date (the "Distribution Ratio").
Fractional shares will be aggregated into whole shares of School Specialty
Common Stock and sold on the open market by the Distribution Agent (as defined
herein). The proceeds of such sales will be distributed to holders who otherwise
would be entitled to receive fractional shares. See "The School Specialty
Distribution-- General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of School Specialty Common Stock they receive in
the Distribution. There is no current public trading market for School Specialty
Common Stock. School Specialty has applied for quotation of the shares of School
Specialty Common Stock on the Nasdaq National Market under the symbol "ABCZ".
The School Specialty Distribution is an element of a comprehensive
restructuring plan adopted by the Board of Directors of U.S. Office Products,
including modifications made since first adopting this plan (as so modified, the
"Strategic Restructuring Plan"). The principal elements of the Strategic
Restructuring Plan are (1) a self-tender offer by U.S. Office Products (the
"Tender Offer") to purchase 37,037,037 shares of U.S. Office Products Common
Stock (including shares that may be issued on exercise of vested and unvested
options for U.S. Office Products Common Stock) at $27.00 per share (or, in the
case of stock options, at $27.00 minus the exercise price of the options) and
the incurrence of debt to pay a portion of the purchase price in the Tender
Offer; (2) after acceptance of shares in the Tender Offer, the pro rata
distribution to U.S. Office Products stockholders of shares of four companies
that will conduct U.S. Office Products' current print management, technology
solutions, educational supplies and corporate travel services businesses (the
"Distributions"); and (3) the sale to an affiliate ("CD&R") of an investment
fund managed by Clayton, Dubilier & Rice, Inc. ("CD&R, Inc.") of equity
interests in U.S. Office Products (the "Equity Investment") following acceptance
of shares in the Tender Offer and the Record Date for the Distributions. In
addition to this Information Statement/Prospectus, U.S. Office Products is
distributing a Tender Offer Statement regarding the Tender Offer and a Proxy
Statement regarding stockholder approval of the issuance of securities in the
Equity Investment. See "Additional Information."
All holders of U.S. Office Products Common Stock, including the executive
officers and directors of the Company, have the right to participate in the
Tender Offer. The Company has been advised that all of the executive officers
and directors who hold shares (or options to purchase shares) of U.S. Office
Products Common Stock, except for Donald Ray Pate, Jr., intend to tender shares
and options in the Tender Offer. See "Management of School Specialty."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 12.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/ PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 12.
--------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
--------------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS JUNE , 1998
<PAGE>
ADDITIONAL INFORMATION
School Specialty has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (including exhibits, schedules, and
amendments thereto, the "School Specialty Form S-1") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), with respect to School Specialty
Common Stock. This Information Statement/Prospectus, while forming a part of the
School Specialty Form S-1, does not contain all of the information set forth in
the School Specialty Form S-1. Reference is hereby made to the School Specialty
Form S-1 for further information with respect to School Specialty and the
securities to be distributed to U.S. Office Products stockholders in the School
Specialty Distribution. Statements contained herein concerning the provisions of
documents filed as exhibits to the School Specialty Form S-1 are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the SEC.
The School Specialty Form S-1 is available for inspection and copying at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Regional Offices of the SEC
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates or on the Internet at http://www.sec.gov.
Following the School Specialty Distribution, School Specialty will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the SEC that will be
available for inspection and copying at the SEC's public reference facilities
referred to above. Copies of such material can be obtained by mail at prescribed
rates by writing to the Public Reference Branch of the SEC at the address
referred to above.
Additional information regarding the Strategic Restructuring Plan and School
Specialty may be found in reports, proxy statements and other information filed
by U.S. Office Products with the SEC, including U.S. Office Products Tender
Offer Statement on Schedule 13E-4 filed on May 4, 1998 and U.S. Office Products
Proxy Statement filed on April 30, 1998.
School Specialty intends to furnish 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, Executive Vice-President--Administration, General Counsel and
Secretary of U.S. Office Products, or Donald H. Platt, Executive Vice President,
Chief Financial Officer and Treasurer of U.S. Office Products, at 1025 Thomas
Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007, telephone (202)
339-6700. After the School Specialty Distribution, holders of School Specialty
Common Stock having inquiries related to their investment in School Specialty
should contact Daniel P. Spalding, Chief Executive Officer, at 1000 North
Bluemound Drive, P.O. Box 1579, Appleton, Wisconsin 54914, telephone (920)
734-2756.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
------------------------
Until , 1998, the expiration of the twenty-fifth calendar day
following the School Specialty Distribution, all dealers effecting transactions
in registered securities, whether or not participating in this distribution, may
be required to deliver an Information Statement/Prospectus.
------------------------
Childcraft Education Corp.-Registered Trademark- is a trademark of
Childcraft Education Corp. School Specialty-Registered Trademark- and Education
Access-Registered Trademark- are trademarks of School Specialty. Gresswell is a
common law trademark of School Specialty.
2
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TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 4
RISK FACTORS............................................................................................... 12
THE SCHOOL SPECIALTY DISTRIBUTION.......................................................................... 20
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS.................................................................... 32
DIVIDEND POLICY............................................................................................ 34
CAPITALIZATION............................................................................................. 35
SELECTED FINANCIAL DATA.................................................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF SCHOOL SPECIALTY... 39
INDUSTRY OVERVIEW.......................................................................................... 48
BUSINESS................................................................................................... 49
MANAGEMENT OF SCHOOL SPECIALTY............................................................................. 56
CERTAIN TRANSACTIONS....................................................................................... 65
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY................................................................. 66
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK.............................................................. 68
EXPERTS.................................................................................................... 72
LEGAL MATTERS.............................................................................................. 72
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD READ THE INFORMATION
STATEMENT/PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT INDICATES OTHERWISE,
THE INFORMATION HEREIN DOES NOT REFLECT THE PUBLIC OFFERING OF SHARES OF SCHOOL
SPECIALTY COMMON STOCK (INCLUDING EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IN FULL) BY SCHOOL SPECIALTY (THE "OFFERING"). WHERE THE CONTEXT REQUIRES
AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION HEREIN HAS BEEN
ADJUSTED FOR THE DISTRIBUTION RATIO. UNLESS THE CONTEXT REQUIRES OTHERWISE,
REFERENCES TO (I) U.S. OFFICE PRODUCTS AND THE COMPANY (OR SCHOOL SPECIALTY)
SHALL INCLUDE THEIR RESPECTIVE SUBSIDIARIES, AND (II) THE COMPANY (OR SCHOOL
SPECIALTY) PRIOR TO THE DISTRIBUTION DATE SHALL REFER TO THE EDUCATIONAL
SUPPLIES AND PRODUCTS DIVISION OF U.S. OFFICE PRODUCTS.
THE COMPANY
School Specialty, Inc. (the "Company" or "School Specialty") believes that
it is the largest U.S. distributor focusing on non-textbook educational supplies
and furniture for grades pre-kindergarten through 12 ("pre-K-12"). The Company
provides a comprehensive offering of high quality educational supplies and
furniture to school districts, school administrators and teachers through the
broad distribution of its catalogs. School Specialty distributes general school
supplies, including classroom and art supplies, instruction materials, furniture
and equipment. The Company also distributes supplies and furniture for certain
educational disciplines, including early childhood education under the
Childcraft name, art supplies under the Sax Arts & Crafts name and
library-related products under the Gresswell name. In order to broaden its
geographic presence and product offering, the Company has acquired 15 companies
since May 1996. For the twelve months ended January 24, 1998, the Company's
revenues aggregated $279.6 million and operating income aggregated $19.7
million, which represented compound annual increases of 32% and 62%,
respectively, over revenues and operating income for the year ended December 31,
1994. For the twelve months ended January 24, 1998, the Company's pro forma
revenues (giving effect to all acquisitions made since the beginning of such
period) aggregated $377.2 million and pro forma operating income aggregated
$23.7 million, which represented compound annual increases of 45% and 71%,
respectively, over revenues and operating income for the year ended December 31,
1994.
With over 32,000 stock keeping units ("SKUs"), School Specialty offers
customers one source for virtually all of their non-textbook school supply and
furniture needs. School Specialty markets its products through an innovative
two-pronged approach, targeting both administrators and teachers to cover the
full spectrum of decision makers. The Company's "top down" approach, utilizing
its 290 sales representatives and its School Specialty general supply and
furniture catalog (the "School Specialty Catalog"), focuses on procurement
officials at the state, regional and local levels, while its "bottom up"
approach focuses on curriculum specialists and teachers. Sales to curriculum
specialists and over 2.1 million teachers are made primarily through the 6.3
million general supply catalogs of The Re-Print Corp. ("Re-Print") and specialty
catalogs that are mailed each year.
The Company believes that annual sales of non-textbook educational supplies
and equipment to the school supply market aggregate approximately $6.1 billion,
with over $3.6 billion sold to institutions and $2.5 billion sold to consumers.
The Company also believes that there are over 3,400 distributors of school
supplies, the majority of which are family- or employee-owned companies with
revenues under $20 million that operate in a single region. The Company believes
the demand for timely order fulfillment at competitive prices, combined with the
need to invest in automated inventory and electronic ordering systems, is
accelerating the trend toward consolidation in the industry. School Specialty
also believes that it is well positioned to capitalize on this consolidation as
the largest distributor in its industry with annual revenues which it believes
exceed those of its next two largest competitors combined. Although the Company
is the largest distributor in the industry, its share of the $6.1 billion school
supply market is less than 6%, giving the Company substantial growth
opportunities.
4
<PAGE>
The volume of school supplies is directly influenced by the size of the
student population. Kindergarten through 12th grade ("K-12") student enrollment
reached an all-time peak in 1996 with 51.5 million students and the U.S.
Department of Education projects that student enrollment will continue to grow
to 54.3 million by the year 2006. As a result of these trends, the U.S.
Department of Education projects that expenditures in public elementary and
secondary schools will continue to rise through the year 2007. These rising
expenditures include a projected increase in total per pupil spending in current
dollars from $5,961 per pupil in 1997 to $7,179 by the year 2001. The Company
believes that as the largest U.S. distributor of non-textbook educational
supplies it will be a major beneficiary of this growth in expenditures.
KEY STRENGTHS
School Specialty attributes its strong competitive position to the following
key strengths:
LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment, exceptional customer service and brand name recognition. The
Company believes its annual revenues exceed those of its next two largest
competitors combined and that its large size and brand recognition have resulted
in significant buying power, economies of scale and customer loyalty.
BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and as a result currently offers over 32,000 SKUs ranging from classroom
supplies to playground equipment. School Specialty offers customers one source
for virtually all of their school supply needs.
INNOVATIVE TWO-PRONGED DISTRIBUTION. The Company targets administrative
decision makers with a "top down" approach through its 290 person sales force
and School Specialty Catalog, and teachers and curriculum specialists with a
"bottom up" approach primarily through the 6.3 million Re-Print general supply,
and specialty catalogs mailed each year.
ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. The Company believes that it can generate significant
economies of scale and rapidly improve the margins of acquired entities, as well
as increase sales, by channeling acquired entities products through its broad
distribution network. See "Business--Company Strengths".
USE OF TECHNOLOGY. The Company believes that through the utilization of
technology in areas such as (i) purchasing and inventory management, (ii)
customer order fulfillment, and (iii) database management, School Specialty is
able to turn inventory more quickly than competitors, offer customers more
convenient and cost effective product ordering methods and conduct more
precisely targeted sales and marketing campaigns.
EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its shareholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.
GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the
5
<PAGE>
Company has a limited presence, and (ii) specialty companies focusing on
disciplines such as physical education, science, technology and music.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 6.3% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase revenues by adding sales representatives
in geographic markets in which the Company does not have a significant presence.
In addition, the Company believes that it can further increase revenues by cross
merchandising its specialty product lines to its general supplies customers.
RECENT DEVELOPMENTS
On March 20, 1998, the Company acquired the catalog business of Education
Access, a catalog reseller of technology solutions for the K-12 education
market. This new product line will offer curriculum software, productivity
software, peripherals, networking products and other related products through
catalogs mailed twice a year.
BACKGROUND OF THE SCHOOL SPECIALTY DISTRIBUTION
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THE DISTRIBUTION.................. Shares of common stock, par value $.001 per share, of
School Specialty (the "Company Common Stock" or the
"School Specialty Common Stock") will, subject to
certain conditions, be distributed to the stockholders
of record of U.S. Office Products (the "School Specialty
Distribution" or the "Distribution") as of June 9, 1998
(the "Record Date"). The School Specialty Distribution
is part of a comprehensive restructuring plan adopted by
the U.S. Office Products' Board of Directors on January
12, 1998. The principal elements of the plan (including
modifications the Board of Directors has made since
first adopting this plan, as so modified, the "Strategic
Restructuring Plan") are:
- Pursuant to a self-tender offer, U.S. Office Products
is offering to purchase 37,037,037 shares of its
common stock $.001 par value ("U.S. Office Products
Common Stock"), including shares that may be issued on
exercise of vested and unvested options for U.S.
Office Products Common Stock at $27.00 per share (or
in the case of stock options, at $27.00 minus the
exercise price of the options) (the "Tender Offer").
- After acceptance of the shares in the Tender Offer,
U.S. Office Products will distribute to U.S. Office
Products' stockholders the shares of four separate
companies: Aztec Technology Partners, Inc., Workflow
Management, Inc., School Specialty, and Navigant
International, Inc. (collectively the "Spin-Off
Companies"). The distributions of the shares of the
Spin-Off Companies are referred to in this Information
Statement/Prospectus as the "Distributions." The
Spin-Off Companies will hold U.S. Office Products'
current technology solutions, print management,
educational supplies, and corporate travel services
businesses, respectively.
</TABLE>
6
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<TABLE>
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- Following the Record Date, an affiliate ("CD&R") of an
investment fund managed by Clayton, Dubilier & Rice,
Inc., ("CD&R, Inc.") a private investment firm, will
acquire for $270.0 million, shares of U.S. Office
Products Common Stock representing 24.9% of the
outstanding equity of U.S. Office Products (after
giving effect to the Tender Offer and issuance of
shares to CD&R) and warrants to purchase additional
U.S. Office Products Common Stock (the "Equity
Investment"). CD&R will not acquire any interests in
the Spin-Off Companies.
U.S. Office Products will retain its North American
Office Products Group (which includes the office supply,
office furniture, and office coffee and beverage
services businesses), Mail Boxes, Etc., its New Zealand
and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer).
In conjunction with the Strategic Restructuring Plan,
U.S. Office Products plans to undertake the following
transactions (the "Financing Transactions"):
- Pursuant to a tender offer, U.S. Office Products will
purchase any or all of its 5 1/2% convertible
subordinated notes due 2003 (the "2003 Notes") for a
purchase price of 94.5% of the principal amount and
accrued interest of such notes (the "2003 Note
Tender").
- Pursuant to an exchange offer, U.S. Office Products
will exchange any or all of its 5 1/2% convertible
subordinated notes due 2001 (the "2001 Notes") for
U.S. Office Products Common Stock (the "2001 Note
Offer") at an exchange rate of 61.483 shares of U.S.
Office Products Common Stock per $1,000 principal
amount of 2001 Notes, which effectively reduces the
conversion price on the 2001 Notes from $19.00 to
$16.17 while the 2001 Note Offer is open.
- Pursuant to a commitment letter from a group of
lenders, U.S. Office Products plans to enter into a
new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least
$400.0 million in Senior Subordinated Notes in a
private placement.
REASONS FOR THE DISTRIBUTIONS..... The Distributions are intended to separate the Spin-Off
Companies from U.S. Office Products' other businesses so
that each can:
- adopt strategies and pursue objectives that are
appropriate to its respective industry, geographic
territories and stage of growth;
- pursue an independent acquisition program that allows
for a more focused use of resources and, where stock
is used as consideration, provide stock of a public
company that is in the same industry as the businesses
being acquired;
- be recognized by the financial community as a distinct
business that can be evaluated more readily and
compared more easily to industry peers; and
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7
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<TABLE>
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- implement more focused incentive compensation packages
that respond to specific industry and market
conditions and enhance employee retention objectives.
The Distributions are also integral to the objectives of
the Equity Investment, which is conditioned on
completion of all of the Distributions. See "The School
Specialty Distribution-- Reasons for the Distributions."
SHARES TO BE DISTRIBUTED.......... Approximately 12,299,593 shares of School Specialty
Common Stock will be distributed to stockholders of U.S.
Office Products in the School Specialty Distribution.
This amount is equal to (a) approximately 110,700,000
shares of U.S. Office Products Common Stock expected to
be outstanding on the date of the School Specialty
Distribution (which is equal to (i) approximately
133,800,000 shares of U.S. Office Products Common Stock
outstanding on April 25, 1998, plus (ii) approximately
8,900,000 shares of U.S. Office Products Common Stock
assumed to be issued on conversion of the 2001 Notes,
plus (iii) approximately 5,000,000 shares of U.S. Office
Products Common Stock assumed to be issued upon exercise
of stock options accepted in the Tender Offer, less (iv)
37,037,037 shares (including shares that may be issued
on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be repurchased in the
Tender Offer, divided by (b) the Distribution Ratio. The
number of shares to be distributed could be greater if
additional shares of U.S. Office Products Common Stock
are issued prior to the Record Date pursuant to
outstanding convertible debt securities or stock options
of U.S. Office Products.
DISTRIBUTION RATIO................ Each U.S. Office Products stockholder will receive one
share of School Specialty Common Stock for every nine
shares of U.S. Office Products common stock held on the
Record Date.
FRACTIONAL SHARE INTERESTS........ Fractional share interests will be aggregated and sold
by the Distribution Agent and the cash proceeds will be
distributed to those U.S. Office Products stockholders
entitled to a fractional interest. See "The School
Specialty Distribution--General."
RECORD DATE....................... June 9, 1998.
DISTRIBUTION DATE................. The effective time of the Distributions is expected to
be 12:01 a.m. on June 10, 1998 (the "Distribution
Date").
MAILING DATE...................... Certificates representing shares of School Specialty
Common Stock are expected to be mailed to U.S. Office
Products stockholders as soon as practicable after the
Distribution Date.
DISTRIBUTION AGENT................ American Stock Transfer & Trust Company
TAX CONSEQUENCES.................. Wilmer, Cutler & Pickering expects to deliver an opinion
at the time of the Distributions stating that, subject
to the matters discussed therein, for U.S. federal
income tax purposes the receipt of School Specialty
Common Stock by U.S. Office Products stockholders will
be tax-free to U.S. Office Products and the U.S. Office
Products stockholders (except with respect to cash
received in lieu of fractional shares). See "The School
Specialty Distribution--U.S. Federal Income Tax
Consequences of the School Specialty Distribution."
THE SPIN-OFFS FROM U.S. OFFICE
PRODUCTS........................ School Specialty, U.S. Office Products and the other
Spin-Off Companies will enter into an agreement (the
"Distribution
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Agreement") in connection with the Distribution pursuant
to which, among other things, (i) equity interests in
the domestic U.S. Office Products subsidiaries that
engage in the business of the distribution of school
supplies will be transferred to School Specialty, (ii)
liabilities will be allocated among School Specialty,
U.S. Office Products and the other Spin-Off Companies,
and (iii) School Specialty, U.S. Office Products and the
other Spin-Off Companies will indemnify one another for
liabilities allocated to them under the Distribution
Agreement and a share of certain other liabilities.
School Specialty, U.S. Office Products and the Other
Spin-Off Companies will also enter into an agreement
(the "Tax Allocation Agreement") (i) allocating to each
Spin-Off Company responsibility for its share of U.S.
Office Products' consolidated tax liability for the
years that it was included in U.S. Office Products'
consolidated federal income tax returns, (ii) sharing
certain state, local and foreign taxes, and (iii)
providing for (a) indemnification by School Specialty
for certain taxes if they are assessed against U.S.
Office Products as a result of the Distribution and (b)
joint and several indemnification by School Specialty
and the other Spin-Off Companies for such taxes
resulting from certain acts taken by School Specialty or
any of the other Spin-Off Companies. The liability to
U.S. Office Products for taxes resulting from such acts
will be allocated among the Spin-Off Companies pursuant
to a separate agreement (the "Tax Indemnification
Agreement"). As a consequence, School Specialty will be
primarily liable for taxes resulting from acts taken by
School Specialty and liable (subject to indemnification
by the other Spin-Off Companies) for any taxes resulting
from acts taken by the other Spin-Off Companies.
School Specialty, U.S. Office Products and the other
Spin-Off Companies will also enter into an agreement
(the "Employee Benefits Agreement") relating to the
allocation of assets, liabilities, and responsibilities
with respect to employee benefit plans and programs and
certain related matters. See "The Spin-Offs from U.S.
Office Products."
</TABLE>
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on page 12, including, among others, (i) the potential volatility of
the trading price and risk associated with the absence of a prior trading market
for shares of School Specialty Common Stock, (ii) dependence upon acquisitions
for further growth, (iii) limitations on the use of School Specialty Common
Stock in acquisitions, (iv) risks related to integration of acquisitions and
acquisition financing, (v) risks associated with seasonal influences related to
largest school supply orders occurring in the May to October period, (vi) risks
related to management of School Supply's rapid growth, (vii) the risks inherent
in the school supplies distribution business, (viii) conflicts of interest
resulting from the fact that (a) the Distribution Agreement is not the result of
arms-length negotiation and (b) the fact that stock options are being issued to
certain officers and directors of the Spin-Off Companies in connection with the
Distributions, and (ix) the tax consequences of the School Specialty
Distribution.
9
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL(1)
-------------------------------------------------------
FISCAL
YEAR
FOUR MONTHS ENDED NINE MONTHS
FISCAL YEAR ENDED ENDED -------- ENDED
DECEMBER 31, ----------- APRIL -----------
------------------ APRIL 30, 26, JANUARY 25,
1994 1995 1996 1997 1997
-------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $119,510 $150,482 $28,616 $191,746 $159,977
Cost of revenues...... 87,750 105,757 20,201 136,577 114,380
-------- -------- ----------- -------- -----------
Gross profit.......... 31,760 44,725 8,415 55,169 45,597
Selling, general and
administrative
expenses............ 27,281 39,869 10,307 43,462 33,396
Non-recurring
acquisition costs... 1,122 1,792 1,792
Restructuring costs... 2,532 194
-------- -------- ----------- -------- -----------
Operating income
(loss).............. 4,479 2,324 (3,014) 9,721 10,409
Interest expense...... 3,007 5,536 1,461 4,197 3,358
Interest income....... (6) (101)
Other (income)
expense............. (86) (18) 67 (196) (204)
-------- -------- ----------- -------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 1,558 (3,194) (4,536) 5,720 7,356
Provision for (benefit
from) income
taxes(4)............ 218 173 139 (2,412) 3,750
-------- -------- ----------- -------- -----------
Net income (loss)..... $ 1,340 $ (3,367) $(4,675) $ 8,132 $ 3,606
-------- -------- ----------- -------- -----------
-------- -------- ----------- -------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38
Diluted........... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37
Weighted average
shares
outstanding(5):
Basic............. 5,062 6,562 8,611 10,003 9,553
Diluted........... 5,078 6,669 8,789 10,196 9,758
<CAPTION>
PRO FORMA(2)
---------------------------------------------------------
TWELVE TWELVE
MONTHS MONTHS
ENDED FISCAL YEAR NINE MONTHS ENDED ENDED
----------- ENDED APRIL 26, ------------------------- -----------
JANUARY 24, JANUARY 24, --------------- JANUARY 25, JANUARY 24, JANUARY 24,
1998 1998(3) 1997 1997 1998 1998(3)
----------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues.............. $247,880 $279,649 $350,760 $292,244 $318,667 $377,183
Cost of revenues...... 176,501 198,698 244,396 203,705 227,485 268,176
----------- ----------- --------------- ----------- ----------- -----------
Gross profit.......... 71,379 80,951 106,364 88,539 91,182 109,007
Selling, general and
administrative
expenses............ 50,999 61,065 85,430 66,926 66,623 85,127
Non-recurring
acquisition costs... 1,792 1,792
Restructuring costs... 194 194 194
----------- ----------- --------------- ----------- ----------- -----------
Operating income
(loss).............. 20,380 19,692 18,948 19,821 24,559 23,686
Interest expense...... 4,100 4,939 7,300 5,535 5,535 7,300
Interest income....... (109) (8)
Other (income)
expense............. 441 449 (158) (174) 522 538
----------- ----------- --------------- ----------- ----------- -----------
Income (loss) before
provision for
(benefit from)
income taxes........ 15,948 14,312 11,806 14,460 18,502 15,848
Provision for (benefit
from) income
taxes(4)............ 7,113 951 92 6,651 8,511 1,952
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss)..... $ 8,835 $ 13,351 $ 11,714 $ 7,809 $ 9,991 $ 13,896
----------- ----------- --------------- ----------- ----------- -----------
----------- ----------- --------------- ----------- ----------- -----------
Net income (loss) per
share(5):
Basic............. $ 0.69 $ 1.08 $ 0.95 $ 0.63 $ 0.81 $ 1.13
Diluted........... $ 0.68 $ 1.06 $ 0.95 $ 0.63 $ 0.81 $ 1.13
Weighted average
shares
outstanding(5):
Basic............. 12,751 12,401 12,300 12,300 12,300 12,300
Diluted........... 13,020 12,642 12,300 12,300 12,300 12,300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ 3,512 $ (1,052)
Total assets................................................................................................ 44,267 54,040
Long-term debt, less current portion........................................................................ 11,675 15,294
Long-term payable to U.S. Office Products...................................................................
Stockholder's (deficit) equity.............................................................................. 1,827 (620)
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ (3,663) $ 14,460
Total assets................................................................................................ 54,573 87,685
Long-term debt, less current portion........................................................................ 15,031 566
Long-term payable to U.S. Office Products................................................................... 33,226
Stockholder's (deficit) equity.............................................................................. (4,267) 16,329
<CAPTION>
JANUARY 24, 1998
----------------------
PRO
ACTUAL FORMA(6)
---------- ----------
BALANCE SHEET DATA:
Working capital (deficit)................................................................................... $ 43,613 $ 60,586
Total assets................................................................................................ 201,207 204,457
Long-term debt, less current portion........................................................................ 385 82,978
Long-term payable to U.S. Office Products................................................................... 62,470
Stockholder's (deficit) equity.............................................................................. 98,492 98,492
</TABLE>
10
<PAGE>
- ------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") have been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method is included from the dates of their respective acquisitions.
(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
the Company since May 1, 1996 as if all such transactions had occurred on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(3) The results for the historical and pro forma 12 months ended January 24,
1998 have been calculated based upon the historical and pro forma results
for the fiscal year ended April 26, 1997 less the historical and pro forma
results for the nine months ended January 25, 1997 plus the historical and
pro forma results for the nine months ended January 24, 1998 respectively.
(4) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) include a benefit from income
taxes of $2.4 million primarily arising from the reversal of a $5.3 million
valuation allowance in the quarter ended April 26, 1997. The valuation
allowance had been established in fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's deferred tax
assets, because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to the Company's
being acquired by U.S. Office Products, because it was deemed "more likely
than not", based on improved results, that such tax benefit would be
realized.
(5) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate, and in the
Offering, would have been $14.7 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of proceeds from such sales to reduce
debt, would have been:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
-------------
FISCAL YEAR ENDED JANUARY 25,
APRIL 26, 1997 1997
----------------- -------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic..................................................................................... $ 0.90 $ 0.61
Diluted................................................................................... $ 0.90 $ 0.61
<CAPTION>
TWELVE MONTHS ENDED
JANUARY 24, JANUARY 24,
1998 1998
------------- ---------------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic..................................................................................... $ 0.76 $ 1.05
Diluted................................................................................... $ 0.76 $ 1.05
</TABLE>
(6) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by the Company subsequent
to January 24, 1998, and (iii) the Distribution as if such transactions had
occurred on January 24, 1998. The pro forma balance sheet data are not
necessarily indicative of the financial position that would have been
achieved had these events actually then occurred and should not be construed
as representative of future financial position.
11
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
POTENTIAL VOLATILITY OF STOCK PRICE; RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR
IMMEDIATE SALE
As a result of the School Specialty Distribution, stockholders of U.S.
Office Products will acquire 12,299,593 shares of School Specialty Common Stock
that will be freely tradeable without restrictions or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by "affiliates" of School Specialty within the meaning of the
Securities Act will be subject to the resale limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). Because the School Specialty Distribution
is being made to existing shareholders of U.S. Office Products, who have not
made an affirmative decision to invest in School Specialty Common Stock, there
can be no assurance that some or all of these shareholders will not sell the
shares of School Specialty Common Stock into the market shortly after the School
Specialty Distribution. In addition, U.S. Office Products is included in certain
broad-based indices tracked by a number of investment companies and other
institutional investors, and such investors can be expected to sell the shares
of School Specialty Common Stock they receive in the School Specialty
Distribution shortly thereafter.
In addition, upon completion of the Offering and the School Specialty
Distribution, School Specialty will have outstanding (i) 2,125,000 shares of
School Specialty Common Stock issued in the Offering and (ii) 250,000 shares of
School Specialty Common Stock issued to Messrs. Spalding, Vander Zanden and
Pate. Following the Offering and the School Specialty Distribution, in view of
the large number of shares freely-tradeable and available for immediate sale,
the market for School Specialty's Common Stock could be highly volatile and
could adversely affect the trading price of School Specialty Common Stock. See
"Management of School Specialty--Director Compensation and Other Arrangements".
Officers and directors of School Specialty who together will hold an aggregate
of 114,355 shares of School Specialty Common Stock have agreed not to sell or
otherwise dispose of any School Specialty Common Stock after the Distribution
without the prior written consent of the Underwriters for a period of 180 days
from the date of this Information Statement/Prospectus (the "Lock-Up
Agreements"). The Company intends to register the shares of School Specialty
Common Stock reserved for issuance pursuant to its stock option plan as soon as
practicable after the closing of the Offering.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into a
tax allocation agreement with School Specialty and the other Spin-Off Companies
(the "Tax Allocation Agreement") which will provide that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any losses
associated with taxes related to the Distributions ("Distribution Taxes") if an
action or omission (an "Adverse Tax Act") of any of the Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. School Specialty will also enter into a tax
indemnification agreement with the other Spin-Off Companies (the "Tax
Indemnification Agreement") under which the Spin-Off Company that is responsible
for the Adverse Tax Act will indemnify the other Spin-Off Companies for any
liability to indemnify U.S. Office Products under the Tax Allocation Agreement.
As a consequence, School Specialty will be liable for any Distribution Taxes
resulting from any Adverse Tax Act by School Specialty and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of the Distribution
Taxes based on the value of each company's common stock after the Distributions.
As a result, School Specialty could become liable for a pro rata portion of
Distribution Taxes with respect not only to the School Specialty
12
<PAGE>
Distribution, but also any of the other Distributions. See "The Spin-Offs from
U.S. Office Products--Tax Allocation Agreement and Tax Indemnification
Agreement" for a detailed discussion of the Tax Allocation Agreement and the Tax
Indemnification Agreement.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES
Under the Distribution Agreement, School Specialty will be liable for (i)
any liabilities arising out of or in connection with the business conducted by
it or its subsidiaries, (ii) its liabilities under the Employee Benefits
Agreement, Tax Allocation Agreement and related agreements described under "The
Spin-Offs From U.S. Office Products", (iii) the U.S. Office Products debt that
has been allocated to the Company (see "The Spin-Offs From U.S. Office
Products--Distribution Agreement--Debt"), (iv) liabilities under the securities
laws relating to the Prospectus in respect of the Offering and portions of this
Information Statement/Prospectus distributed to stockholders of U.S. Office
Products in connection with the School Specialty Distribution, as well as other
securities law liabilities related to the School Specialty business that arise
from information supplied to U.S. Office Products (or that should have been
supplied, but was not) by School Specialty, (v) U.S. Office Products'
liabilities for earn-outs from acquisitions in respect of School Specialty and
its subsidiaries, (vi) School Specialty's costs and expenses related to the
Offering and its bank financing, and (vii) $1.0 million of the transaction costs
(including legal, accounting, investment banking and financial advisory) and
other fees incurred by U.S. Office Products in connection with its Strategic
Restructuring Plan. Each of the other Spin-Off Companies will be similarly
obligated to U.S. Office Products. School Specialty and the other Spin-Off
Companies have also agreed to bear a pro rata portion of U.S. Office Products'
liabilities under the securities laws (other than claims relating solely to a
specific Spin-Off Company or relating specifically to the continuing businesses
of U.S. Office Products) and U.S. Office Products' general corporate liabilities
(other than debt, except for that specifically allocated to the Spin-Off
Companies) incurred prior to the Distributions (i.e., liabilities not related to
the conduct of a particular distributed or retained subsidiary's business) (the
"Shared Liabilities"). If one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, the non-defaulting Spin-Off Companies
will be obligated on a pro rata basis to pay such obligation ("Default
Liability"). As a result of the Shared Liabilities and Default Liability, School
Specialty could be obligated to U.S. Office Products in respect of obligations
and liabilities not related to its business or operations and over which neither
it nor its management has or has had any control or responsibility. The
aggregate of the Shared Liabilities and Default Liability for which any Spin-Off
Company may be liable is, however, limited to $1.75 million. The Company's pro
rata share of Shared Liabilities and Default Liability is described below under
"The Spin-Offs from U.S. Office Products--The Distribution
Agreement--Liabilities." Also see "--Potential Liability for Taxes Related to
the Distributions."
RISKS RELATED TO INTEGRATION OF OPERATIONS AND ACQUISITIONS
An important element of School Specialty's business strategy for its
distribution divisions is to integrate its acquisitions into its existing
operations. There can be no assurance that School Specialty will be able to
integrate future acquisitions in a timely manner without substantial costs,
delays, or other problems. Once integrated, acquisitions may not achieve sales,
profitability, and asset productivity commensurate with School Specialty's
existing divisions. In addition to integration risks for distribution divisions,
acquisitions of both distribution divisions and specialty brand companies
involve a number of special risks, including adverse short-term effects on
School Specialty's reported operating results (including those adverse
short-term effects caused by severance payments to employees of acquired
companies, restructuring charges associated with the acquisitions and other
expenses associated with a change of control, as well as non-recurring
acquisition costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations, and various other
acquisition-related costs), the diversion of management's time and attention,
the dependence on retaining, hiring, and training key personnel, the
amortization of acquired intangible assets, and risks associated with
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on School Specialty's operations and
13
<PAGE>
financial condition. Furthermore, although School Specialty conducts due
diligence and generally requires representations, warranties, and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of School
Specialty. See "Business--Company Growth Strategy--Pursue Acquisitions
Aggressively Strategy".
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
One of School Specialty's strategies is to increase its revenues and the
markets it serves through the acquisition of additional school supply
distribution businesses. There can be no assurance that suitable candidates for
acquisitions can be identified or, if suitable candidates are identified, that
acquisitions can be completed on acceptable terms, if at all. There can be no
assurance that future acquisitions will prove profitable at the time of their
acquisition or will achieve sales and profitability that justify the investment
therein. The failure to complete acquisitions and continue its expansion could
have a material adverse effect on School Specialty's financial condition. In
addition, prior to the School Specialty Distribution, School Specialty's
acquisitions were completed with substantial business, legal, and accounting
assistance from U.S. Office Products, and some of the acquisitions were paid for
with U.S. Office Products Common Stock. The pace of School Specialty's
acquisition program may be adversely affected by the absence of U.S. Office
Products' support for the acquisitions. Also, School Specialty intends to use
School Specialty Common Stock to pay for a portion of the consideration for its
acquisitions, and therefore, if the owners of potential acquisition candidates
are not willing to receive, or School Specialty is not able to issue, shares of
School Specialty Common Stock in exchange for their business, School Specialty's
acquisition program could be adversely affected. In addition, School Specialty
is subject to limitations on the number of shares it can issue without
jeopardizing the tax-free treatment of the School Specialty Distribution.
Limitations on School Specialty's ability to issue shares of School Specialty
Common Stock could also adversely affect School Specialty's acquisition
strategy. See "--Possible Limitations on Issuances of Common Stock," "--
Material Amount of Goodwill," and "--Tax Matters" below.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
Section 355(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), which was added in 1997, generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free will
incur U.S. federal income tax liability if 50% or more, by vote or value, of the
capital stock of either the company making the distribution or the spun-off
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that includes the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition occurring two years before or
after the spin-off is pursuant to a plan that includes the spin-off. However,
the presumption may be rebutted by establishing that the spin-off and such
acquisition are not part of a plan or series of related transactions. As a
result of the provisions of Section 355(e), there can be no assurance that
issuances of stock by the Company, including issuances in connection with an
acquisition of another business by the Company, will not create a tax liability
for U.S. Office Products. This limitation could adversely affect the pace of the
Company's acquisitions and its ability to issue Company Common Stock for other
purposes, including equity offerings.
The Company has entered into a Tax Allocation Agreement and a Tax
Indemnification Agreement pursuant to which the Company will be liable to U.S.
Office Products and the other Spin-Off Companies if its actions or omissions
materially contribute to a final determination that the School Specialty
Distribution is taxable. See "--Potential Liability for Taxes Related to the
Distributions" and "The Spin-Offs From U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement."
14
<PAGE>
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations under the pooling-of-interests method. As a result of School
Specialty being a wholly-owned subsidiary of U.S. Office Products prior to the
Distribution, School Specialty will be unable to satisfy this criterion for a
period of two years following the Distribution. Therefore, School Specialty will
be precluded from completing business combinations under the
pooling-of-interests method for a period of two years and any business
combinations completed by School Specialty during such period will be accounted
for under the purchase method resulting in the recording of goodwill. See
"--Material Amount of Goodwill."
RISKS RELATED TO ACQUISITION FINANCING
School Specialty currently intends to finance some of its future
acquisitions by using shares of School Specialty Common Stock, cash, borrowed
funds or a combination thereof. If School Specialty Common Stock does not
maintain a sufficient market value, the price of School Specialty Common Stock
is highly volatile, or potential acquisition candidates are otherwise unwilling
to accept School Specialty Common Stock as part of the consideration for the
sale of their businesses, School Specialty may be required to use more of its
cash resources or more borrowed funds in order to initiate and maintain its
acquisition program. Such limitations also may cause School Specialty to rely
more heavily on cash or borrowed funds to support its acquisition program. If
School Specialty does not have sufficient cash resources, its growth could be
limited unless it is able to obtain additional capital through debt or equity
offerings. The use of equity offerings in connection with the School Specialty
Distribution will also be subject to certain limitations on the number of shares
that School Specialty can issue without jeopardizing the tax-free treatment of
the School Specialty Distribution. See "--Possible Limitations on Issuances of
Common Stock" and "--Tax Matters." Prior to the School Specialty Distribution,
School Specialty was not responsible for obtaining external sources of funding.
The Company intends to enter into credit facilities with one or more lenders to
obtain financing to be used in connection with future acquisitions. There can be
no assurance that School Specialty, as a stand-alone company, will be able to
obtain such financing if and when it is needed or that any such financing will
be available on terms it deems acceptable.
ADDITIONAL DILUTION
School Specialty will have 150 million authorized shares of School Specialty
Common Stock, a portion of which could be available (subject to the rules and
regulations of federal and state securities laws, limitations under U.S. federal
income tax laws and rules, and rules of the Nasdaq Stock Market), to finance
acquisitions without obtaining stockholder approval for such issuances. Existing
stockholders may suffer dilution if School Specialty uses School Specialty
Common Stock as consideration for future acquisitions. Moreover, the issuance of
additional shares of School Specialty Common Stock may have a negative impact on
earnings per share and may negatively impact the market price of School
Specialty Common Stock.
SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
School Specialty's business is subject to seasonal influences, with sales
and profitability substantially higher from May to October due to increased
school orders during these months. As a result of this seasonality,
historically, School Specialty has earned more than 100% of its annual net
income in the first six months of its fiscal year and has historically operated
at a loss in its third fiscal quarter. Also, quarterly results may be materially
affected by the timing of acquisitions and the timing and magnitude of
acquisition assimilation costs. Therefore, operating results for any quarter are
not necessarily indicative of the results that may be achieved for any
subsequent fiscal quarter or full fiscal year. Fluctuations caused by variations
in quarterly results may adversely affect the market price of the School
Specialty Common
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Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of School Specialty" and "Business."
RELIANCE ON KEY PERSONNEL
School Specialty's operations depend on the continued efforts of Daniel P.
Spalding, its Chief Executive Officer, its other executive officers, and the
senior management of certain of its subsidiaries. Furthermore, School
Specialty's operations will likely depend on the senior management of certain of
the companies that may be acquired in the future. If any of these people become
unable to continue in his or her present role, or if School Specialty is unable
to attract and retain other skilled employees, its business could be adversely
affected. School Specialty does have employment contracts with some Named
Officers, as defined herein, but most of the Companies' executive officers and
senior management do not have employment contracts with School Specialty. See
"Management of School Specialty--Director Compensation and Other Arrangements."
School Specialty does not have and does not intend to obtain key man life
insurance covering any of its executive officers or other members of senior
management of its subsidiaries. In addition, Jonathan J. Ledecky will serve as a
director and an employee of School Specialty and is expected to provide services
to School Specialty after the School Specialty Distribution pursuant to an
agreement entered into between Mr. Ledecky and U.S. Office Products which
provides that the Company and the other Spin-Off Companies will succeed to
certain rights of, and obligations under, such agreement following the
Distribution and an expected employment agreement with School Specialty. See
"Management of School Specialty--Director Compensation and Other Arrangements."
Mr. Ledecky will also serve as a director of each of the other Spin-Off
Companies, and is the director or an officer of other public companies. Mr.
Ledecky may be unable to devote substantial time to the activities of School
Specialty.
DEPENDENCE ON SYSTEMS
School Specialty believes that one of the competitive advantages of its
distribution divisions is its information systems, including its proprietary
PC-based customer Order Management System ("OMS"). School Specialty's operations
in each of its converted divisions under School Specialty are generally
dependent on these systems, which are run on a host system located at School
Specialty's headquarters in Appleton, Wisconsin. Each division of School
Specialty is linked to School Specialty's host system and disruption or
unavailability of these links could have a material adverse effect on School
Specialty's business and results of operations.
None of School Specialty's subsidiaries has a redundant computer system or a
redundant dedicated communication line. School Specialty has taken precautions
to protect itself from events that could interrupt its operations.
Notwithstanding these precautions, there can be no assurance that a fire, flood,
or other natural disaster affecting School Specialty's system or its
communication lines would not disable the system or prevent the system from
communicating with School Specialty's divisions or the specialty brand
subsidiaries. The occurrence of any of these events would have a material
adverse effect on School Specialty's operations and financial condition.
School Specialty does not expect that it will incur any material costs and
expenses to meet information standards for Year 2000 compliance; however, there
is no assurance that School Specialty's customers or vendors meet information
standards for Year 2000 compliance, and their failure to meet such standards
could adversely affect School Specialty's revenues and product costs.
RISK OF RAPID GROWTH; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
Since 1991, School Specialty and U.S. Office Products have significantly
expanded the scope of School Specialty's operations by acquiring sixteen
regional distributors of educational supplies in different regions of the United
States and four specialty brand school supply companies. All of School
Specialty's specialty brand acquisitions and eleven of its regional distribution
acquisitions have occurred since June 1996. There
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can be no assurance that School Specialty's management and financial controls,
personnel, computer systems, and other corporate support systems will be
adequate to manage the increased size and scope of School Specialty's operations
as a result of School Specialty's recently completed acquisitions.
Prior to the School Specialty Distribution, certain general and
administrative functions relating to School Specialty's business (including
legal, accounting, purchasing and management information services) were handled
by U.S. Office Products. School Specialty's future performance will depend on
its ability to function as a stand-alone entity, to finance and manage its
expanding operations and to adapt its information systems to changes in its
business. As a result, School Specialty's expenses are likely to be higher than
when it was a part of U.S. Office Products, and School Specialty may experience
disruptions of general and administrative functions that it would not have
encountered as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the results of
operations and financial condition would have been had School Specialty been a
separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of School Specialty.
DEPENDENCE ON KEY SUPPLIERS AND SERVICE PROVIDERS
School Specialty is dependent on (i) a limited number of suppliers for
certain of its product lines, particularly its franchise furniture lines and
(ii) a limited number of service providers, such as delivery service from United
Parcel Service. Any interruption of supply from current vendors or any material
increased costs, particularly in the peak season of June through September,
could cause significant delays in the shipment of such products and could have a
material adverse effect on School Specialty's business, financial condition, and
results of operations. Increases in freight costs charged to School Specialty or
inability to ship products, whether real or perceived, could have a material
adverse effect on School Specialty's business, financial condition, and results
of operations. In addition, as part of its business strategy, School Specialty
strives to reduce its number of suppliers and minimize duplicative lines, which
may have the effect of increasing its dependence on remaining vendors. The
United Parcel Service strike during August 1997 had an adverse effect on School
Specialty due to the perceived inability of School Specialty to ship products.
COMPETITION
The market for school supplies is highly competitive and fragmented. School
Specialty estimates that over 3,400 companies distribute educational materials
to grade pre-K-12 schools as a primary focus of their business. In addition,
School Specialty competes with alternate channel distributors such as office
product contract stationers and superstores, which may continue to broaden their
product lines in school supplies. Some of these competitors have greater
financial resources and buying power than School Specialty. School Specialty
believes that the educational supplies market will consolidate over the next
several years, which may make School Specialty's general and specialty supply
businesses more competitive. In addition, there may be increasing competition
for acquisition candidates and there can be no assurance that acquisitions will
continue to be available to School Specialty on favorable terms, if at all. See
"Business-- Competition."
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
School Specialty currently operates as a wholly-owned subsidiary of U.S.
Office Products. On or before the Distribution Date, School Specialty, the other
Spin-Off Companies and U.S. Office Products will enter into the Distribution
Agreement, the Tax Allocation Agreement and the Employee Benefits Agreement, and
the Spin-Off Companies will enter into a Tax Indemnification Agreement. See "The
Spin-Offs from U.S. Office Products." These agreements are expected to provide,
among other things, for U.S. Office Products and School Specialty to indemnify
each other from tax and other liabilities relating to their respective
businesses prior to and following the School Specialty Distribution.
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Certain indemnification obligations of School Specialty and the other
Spin-Off Companies to U.S. Office Products are joint and several. Therefore, if
one of the other Spin-Off Companies fails to indemnify U.S. Office Products when
such a loss occurs, School Specialty may be required to reimburse U.S. Office
Products for all or a portion of the losses that otherwise would have been
allocated to such other Spin-Off Company. In addition, the agreements will
allocate certain liabilities, including general corporate and securities
liabilities of U.S. Office Products not specifically related to the specific
businesses to be conducted by the Spin-Off Companies and post-Distribution U.S.
Office Products, among U.S. Office Products and each of the Spin-Off Companies.
Adverse developments or material disputes with U.S. Office Products following
the School Specialty Distribution could have a material adverse effect on School
Specialty.
The terms of the agreements that will govern the relationship among School
Specialty, U.S. Office Products, and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the management of
School Specialty and the other Spin-Off Companies prior to the Distributions and
while School Specialty and the other Spin-Off Companies are wholly-owned
subsidiaries of U.S. Office Products. The terms of these agreements, including
the allocation of general corporate and securities liabilities among U.S. Office
Products, School Specialty, and the other Spin-Off Companies may not be the same
as they would be if the agreements were the result of arm's length negotiations.
In addition, the agreements must contain certain terms specified in U.S. Office
Products' agreement with CD&R relating to the Equity Investment and must
otherwise be reasonably acceptable to CD&R. CD&R will not be a stockholder in
any of the Spin-Off Companies and its interests may be adverse to those of the
Spin-Off Companies. See "The Spin-Offs from U.S. Office Products." Accordingly,
there can be no assurance that the terms and conditions of the agreements will
not be more or less favorable to School Specialty than those that might have
been obtained from unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, will receive options for shares of each of the
Spin-Off Companies exercisable for up to 7.5% of the common stock of each
Spin-Off Company. See "Management of School Specialty--Director Compensation and
Other Arrangements". As a result, Mr. Ledecky has interests in the Distributions
that differ in certain respects from, and may conflict with, the interests of
other stockholders of U.S. Office Products and School Specialty.
TAX MATTERS
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions stating that for U.S. federal income tax
purposes, the Distributions (including the School Specialty Distribution) will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e). U.S. Office Products will not complete the School
Specialty Distribution unless it receives the Tax Opinion. The Tax Opinion will
be based on the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Spin-Off Companies and CD&R,
and certain other information, data, documentation and other materials as
Wilmer, Cutler & Pickering has deemed necessary. See "The School Specialty
Distribution--U.S. Federal Income Tax Consequences of the School Specialty
Distribution."
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling has not been, and
will not be, sought from the IRS with respect to the U.S. federal income tax
consequences of the School Specialty Distribution. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Tax
Opinion.
If the School Specialty Distribution fails to qualify under Section 355 as a
tax-free spin-off, each holder of U.S. Office Products Common Stock on the
Record Date will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the Distribution Date) of
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the Company Common Stock distributed to such holder of U.S. Office Products
Common Stock including fractional shares. In addition, U.S. Office Products will
recognize gain equal to the difference between the fair market value of the
Company Common Stock (on the Distribution Date) and U.S. Office Products'
adjusted tax basis in the Company Common Stock (on the Distribution Date). If
U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
If the School Specialty Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements for a tax-free spin-off, U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Company Common Stock (on the Distribution Date) and U.S. Office
Products' adjusted tax basis in the Company Common Stock (on the Distribution
Date). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial. However, no gain or loss
will be recognized by holders of U.S. Office Products Common Stock (except with
respect to cash received in lieu of fractional shares).
MATERIAL AMOUNT OF GOODWILL
Approximately $97.5 million, or 47.7%, of School Specialty's pro forma total
assets as of January 24, 1998 represents intangible assets, the significant
majority of which is goodwill. Goodwill represents the excess of cost over the
fair market value of net assets acquired in business combinations accounted for
under the purchase method. School Specialty generally amortizes goodwill on a
straight line method over a period of 40 years with the amount amortized in a
particular period constituting a non-cash expense that reduces School
Specialty's net income. Amortization of goodwill resulting from certain past
acquisitions, and additional goodwill recorded in certain acquisitions may not
be deductible for tax purposes. In addition, School Specialty will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, School Specialty would be required to
write down the carrying value of the goodwill and incur a related charge to its
income. A reduction in net income resulting from the amortization or write down
of goodwill could have a material and adverse impact upon the market price of
School Specialty Common Stock.
ABSENCE OF PUBLIC MARKET
Prior to the School Specialty Distribution and the Offering there will be no
public market for the Company Common Stock. The initial public offering price of
the Company Common Stock in the Offering will be determined through negotiations
among the Company and the underwriters of the Offering and may not be indicative
of the market price for the Company Common Stock after the Offering and the
School Specialty Distribution. The trading price of the Company Common Stock
also could be subject to wide fluctuations in response to variations in the
Company's quarterly operating results, changes in earnings estimates by
analysts, conditions in the Company's businesses, general market or economic
conditions or other factors. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many companies, often unrelated to
the operating performance of the specific companies. Such market fluctuations
could have a material adverse effect on the market price of the Company Common
Stock. See "-- Potential Volatility of Stock Price; Risks Associated With Shares
Eligible for Immediate Sale."
NO DIVIDENDS
School Specialty does not expect to pay cash dividends on School Specialty
Common Stock in the foreseeable future. In addition, School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements. See "Dividend Policy".
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THE SCHOOL SPECIALTY DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
the close of business on June 9, 1998 (the "Record Date"), will receive one
share of School Specialty Common Stock for every nine shares of U.S. Office
Products Common Stock held on the Record Date. School Specialty Common Stock
will be distributed on behalf of U.S. Office Products by American Stock Transfer
& Trust Company as the Distribution Agent. No certificates or scrip representing
fractional shares of School Specialty Common Stock will be issued. Following the
announcement of the proration results of the Tender Offer, fractional share
interests will be aggregated and sold by the Distribution Agent at such time or
times as it shall determine in open market transactions effected through
broker-dealers selected by it. The cash proceeds will be distributed to those
stockholders entitled to a fractional interest with the distribution of payment
for the tendered shares or as soon thereafter as practicable. Certificates
representing shares of School Specialty Common Stock are expected to be
distributed as soon as practicable after the Distribution Date.
School Specialty is a newly formed subsidiary of U.S. Office Products that
will, as of the Distribution Date, hold substantially all of the businesses and
assets of, and will be responsible for substantially all of the liabilities
associated with, U.S. Office Products' Educational Supplies and Products
Division. See "The Spin-Offs from U.S. Office Products--Distribution Agreement."
School Specialty will include the businesses of the following wholly-owned
subsidiaries of U.S. Office Products: School Specialty, Inc., a Wisconsin
corporation and predecessor to School Specialty, The Re-Print Corporation,
American Academic Suppliers, Inc., Childcraft Education Corp., Sax Arts &
Crafts, Inc. and Don Gresswell, Ltd. Immediately prior to the School Specialty
Distribution, U.S. Office Products will hold all the issued and outstanding
shares of School Specialty Common Stock. Approximately 12,299,593 shares of
School Specialty Common Stock will be distributed to stockholders of U.S. Office
Products in the School Specialty Distribution. This amount is calculated as
follows: (a) approximately 110,700,000 shares of U.S. Office Products Common
Stock expected to be outstanding at the date of the School Specialty
Distribution (which is equal to (i) approximately 133,800,000 shares of U.S.
Office Products Common Stock outstanding on April 25, 1998, plus (ii)
approximately 8,900,000 Shares of U.S. Office Products Common Stock to be issued
on conversion of the 2001 Notes, plus (iii) approximately 5,000,000 Shares of
U.S. Office Products Common Stock assumed to be issued on exercise of stock
options accepted in the Tender Offer less (iv) 37,037,037 shares (including
shares that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) to be repurchased in the Tender Offer) divided by
(b) the Distribution Ratio of one share of Company Common Stock distributed for
every nine shares of U.S. Office Products Common Stock. The number of shares to
be distributed could be greater if additional shares of U.S. Office Products
Common Stock are issued prior to the School Specialty Distribution pursuant to
outstanding convertible debt securities or stock options of U.S. Office
Products.
THE STRATEGIC RESTRUCTURING PLAN
The School Specialty Distribution is part of the Strategic Restructuring
Plan. The principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products is offering to purchase
37,037,037 shares of U.S. Office Products Common Stock (including shares
that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) at $27.00 per share (or in the case of stock
options, at $27.00 minus the exercise price of the options) and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office
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Products stockholder will receive such stockholder's pro rata share of the
stock of each Spin-Off Company.
- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group, (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations, and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products' print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
In conjunction with the Strategic Restructuring Plan, U.S. Office Products
plans to undertake the following transactions:
- Pursuant to the 2003 Note Tender, U.S. Office Products will purchase any
or all of its 2003 Notes for a purchase price of 94.5% of the principal
amount and accrued interest.
- Pursuant to the 2001 Note Offer, U.S. Office Products will exchange any or
all of its 2001 Notes for U.S. Office Products Common Stock at an exchange
rate of 61.483 shares per $1,000 principal amount, which effectively
reduces the conversion price on the 2001 Notes from $19.00 to $16.71 while
the offer is open.
- Pursuant to a commitment letter from a group of lenders, U.S. Office
Products plans to enter into a new $1.225 billion senior credit facility.
- U.S. Office Products plans to issue and sell at least $400.0 million in
Senior Subordinated Notes in a private placement.
REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products has approved the Strategic
Restructuring Plan, including the Distributions. The U.S. Office Products Board
of Directors determined that separation of the businesses of the Spin-Off
Companies and the continuing business of U.S. Office Products as part of the
Strategic Restructuring Plan would have advantages for the Spin-Off Companies
and U.S. Office Products. The Distributions will allow U.S. Office Products and
the Spin-Off Companies to adopt strategies and pursue objectives that are more
appropriate to their respective industries and geographic territories. After the
Distributions, U.S. Office Products will be focused on a more narrow group of
businesses that involve primarily the distribution of office products and
business services. School Specialty and each of the other Spin-Off Companies
will be focused primarily on their individual businesses.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the school supplies business using
U.S. Office Products Common Stock. Sellers were thus required to accept stock in
a business that included office products, corporate travel services, technology
solutions and print management businesses, as well as other businesses.
Following the School Specialty Distribution, School Specialty will be able to
offer stock in its own business, which will be substantially the same as the
businesses School Specialty expects to acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
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The Distributions will also allow U.S. Office Products and the Spin-Off
Companies to offer their employees more focused incentive compensation packages.
The incentive compensation packages (which are expected to consist primarily of
stock options) will offer the officers and other key employees of each Spin-Off
Company equity interests in a company whose performance is tied directly to the
business for which they work. The Company's ability to issue stock options (as
well as other equity) will be subject to certain limitations in order to avoid
triggering certain adverse federal income tax consequences. See "U.S. Federal
Income Tax Consequences of the School Specialty Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as completion of the Tender Offer). U.S. Office Products'
Board of Directors recognized that U.S. Office Products was making a transition
from an acquisition-oriented company to a business more focused on growth
through improvement and expansion of existing operations. U.S. Office Products'
Board of Directors concluded that the investment by CD&R in U.S. Office
Products, and support of the management of U.S. Office Products by CD&R, Inc.,
would contribute to U.S. Office Products' development. CD&R, Inc. has
substantial experience in providing companies in which its affiliates invest
with financial and managerial advisory services aimed at building value and
improving operational, marketing, and financial performance. CD&R Inc. is also
experienced in advising and assisting companies in managing high levels of debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products is
offering to repurchase 37,037,037 shares (including shares that may be issued on
exercise of vested and unvested stock options of U.S. Office Products Common
Stock) at a price of $27.00 per share (or, in the case of stock options, at
$27.00 minus the exercise price of the options). Acceptance of and payment for
shares of U.S. Office Products Common Stock under the Tender Offer will be
subject to a number of conditions. These conditions include: (i) a minimum of
37,037,037 shares (including shares that may be issued on exercise of vested and
unvested Stock Options) of U.S. Office Products Common Stock being validly
tendered and not withdrawn; (ii) U.S. Office Products having obtained financing
sufficient to fund the Tender Offer; (iii) all conditions to the completion of
the Equity Investment having been satisfied or waived, except for completion of
the Tender Offer and the Distributions; (iv) registration statements relating to
the Distributions having become effective; and (v) all other conditions to the
completion of the Distributions, including U.S. Office Products having received
an opinion of Wilmer, Cutler & Pickering regarding the tax treatment of the
Distributions, having been satisfied, except for completion of the Tender Offer.
If all eligible shares of U.S. Office Products Common Stock (including
shares that may be issued on exercise of vested and unvested options for U.S.
Office Products Common Stock) are validly tendered by stockholders and option
holders in the Tender Offer, the proration percentage (that is, the percentage
of validly tendered shares of U.S. Office Products Common Stock that would be
purchased in the Tender Offer) would be approximately 22.5%. This percentage
assumes that all 2001 Notes are exchanged for shares of U.S. Office Products
Common Stock in the 2001 Note Offer, and all such shares are tendered in the
Tender Offer, and all 2003 Notes are tendered and accepted for purchase in the
2003 Note Tender.
U.S. Office Products expects to finance the aggregate tender price through a
combination of a new senior credit facility for $1.225 billion (the "USOP Credit
Facility"), the net proceeds of the Equity Investment and issuance of $400.0
million of senior subordinated debt securities in a private placement. U.S.
Office Products anticipates that the foregoing borrowings will increase its
outstanding debt by approximately $441.0 million. Approximately $362.0 million
was outstanding under U.S. Office Products' existing bank credit facility as of
March 20, 1998. U.S. Office Products has entered into a commitment for the USOP
Credit Facility.
The Record Date for the Distributions will occur after acceptance of shares
in the Tender Offer. Accordingly, U.S. Office Products stockholders who tender
their shares of U.S. Office Products Common Stock in the Tender Offer will not
receive the Distributions to the extent their U.S. Office Products shares
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are accepted in the Tender Offer. Because the Tender Offer is for only
37,037,037 shares (including shares that may be issued on exercise of vested and
unvested stock options of U.S. Office Products Common Stock), only a portion of
the shares tendered by any U.S. Office Products stockholder is likely to be
accepted. U.S. Office Products stockholders who tender their shares are
therefore likely to receive the Distributions with respect to a portion of their
shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible debentures of
U.S. Office Products and of shares of U.S. Office Products Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements; and (c) warrants ("Common Stock Warrants") representing the right to
purchase one share of U.S. Office Products Common Stock for each share of U.S.
Office Products Common Stock purchased by CD&R at the date of the closing under
the Investment Agreement (the "Closing Date") and for each share of U.S. Office
Products Common Stock into which the Special Warrants become exercisable. The
Special Warrants are exercisable from and after the Closing Date until the 12th
anniversary thereof, subject to certain limitations, and the Common Stock
Warrants are exercisable from and after the second anniversary of the Closing
Date until such 12th anniversary. The aggregate exercise price of the Common
Stock Warrants is $405.0 million.
CD&R has contracted to purchase a 24.9% equity interest in U.S. Office
Products, including the shares issued to CD&R (the "Initial CD&R Acquisition").
CD&R's percentage ownership of U.S. Office Products will not increase or
decrease depending on the actual number of shares of U.S. Office Products Common
Stock outstanding on the closing date of the Initial CD&R Acquisition. The
Special Warrants will be issued to allow CD&R to maintain its 24.9% ownership
interest if (i) any 2001 Notes that remain outstanding after the 2001 Note
exchange offer were converted into U.S. Office Products Common Stock at the
conversion price in effect after adjusting for the Tender Offer and the
Distributions, or (ii) additional shares are issued under contracts for
acquisitions completed by U.S. Office Products.
Assuming (i) exercise of all currently exercisable outstanding options, and
(ii) no 2003 Notes were repurchased in the 2003 Note Tender and all such 2003
Notes were converted in accordance with their existing terms, in each case,
without any adjustment for the restructuring transactions, and (a) exercise of
the Special Warrants in full, and (b) exercise of the Common Stock Warrants in
full, CD&R could own approximately 34.7% of outstanding U.S. Office Products
Common Stock on a fully-diluted basis. U.S. Office Products expects to make
adjustments to the number and exercise price of outstanding options, and the
conversion price of the 2001 Notes and 2003 Notes remaining after the 2001 Note
Offer and the 2003 Note Tender, on account of the restructuring transactions,
and these adjustments will result in a greater number of shares that may be
issued upon exercise of the options and conversion of such notes. Although the
amount of these adjustments will not be known until after the completion of the
Strategic Restructuring Plan, the effect of these adjustments will be to reduce
CD&R's fully diluted ownership interest in U.S. Office Products from the amounts
set forth above. If no currently exercisable outstanding options are exercised,
exercise of the Special Warrants and Common Stock Warrants could give CD&R
approximately 39.9% of outstanding U.S. Office Products Common Stock after
implementation of the Strategic Restructuring Plan (assuming all of the 2001
Notes are exchanged in the 2001 Note Offer and all of the 2003 Notes are
tendered in the 2003 Note Tender).
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<PAGE>
Because the Record Date for the Distributions will be immediately before the
closing of the Equity Investment, CD&R will not receive any shares of the
Spin-Off Companies in the Distributions.
Prior to the closing of the Initial CD&R Acquisition, the Board of Directors
of U.S. Office Products will consist of nine persons, including the chief
executive officer of U.S. Office Products, three designees of CD&R, three
designees the U.S. Office Products' Board and two persons who are satisfactory
to both CD&R and the U.S. Office Products' Board. After the closing of the
Initial CD&R Acquisition, the existing members of the U.S. Office Products Board
will have the right to nominate six directors, which will include the chief
executive officer. CD&R will have the right to nominate three directors. So long
as CD&R has the right to nominate two or more directors, one of CD&R's nominees
will serve as Chairman of the Board. CD&R can nominate one additional person to
the U.S. Office Products' Board, if the directors of U.S. Office Products do not
nominate its chief executive officer to the Board.
In addition, three-fourths of the directors of U.S. Office Products must
approve the following transactions: (i) the sale by U.S. Office Products of
equity securities, other than (A) a specified amount made available under
employee benefit plans, such as option plans, or (B) a specified amount issued
to acquire companies or issued in public offerings; (ii) any merger, tender
offer involving U.S. Office Products' equity securities or sale, lease or
disposition of all or substantially all of U.S. Office Products assets or other
business combination involving U.S. Office Products, unless the consideration
for such sale is all cash or is freely tradeable common stock of a public
company with a specified level of market capitalization; (iii) any major
recapitalization; (iv) certain amendments to stockholder rights plans; (v) any
dissolution or partial liquidation of U.S. Office Products; or (vi) any
modification to U.S. Office Products' organization documents or by-laws that is
inconsistent with CD&R's rights under the Investment Agreement or any other
agreements between U.S. Office Products and CD&R. The effect of this provision
is so long as CD&R can nominate three directors, at least one of them must vote
in favor of any of the above actions for it to be approved.
The following table summarizes the right of CD&R to nominate directors of
U.S. Office Products and shows when the three-fourths super-majority voting
requirement will apply:
<TABLE>
<CAPTION>
NUMBER OF DIRECTORS
PERCENTAGE OF SHARES OF U.S. CD&R IS ENTITLED TO RIGHT TO THREE-FOURTHS BOARD
OFFICE PRODUCTS COMMON NOMINATE (OUT OF DESIGNATE APPROVAL FOR
STOCK RETAINED BY CD&R(1)(2) NINE)(3)(4) CHAIRMAN CERTAIN TRANSACTIONS(2)
- --------------------------------------------------- --------------------------- ------------- -------------------------
<S> <C> <C> <C>
66 2/3% to 100%.................................... Three Yes Yes
33 1/3% to 66 2/3%................................. Two Yes Yes
Less than 33 1/3% (but CD&R holds at least 5% of
U.S. Office Products' then voting stock........... One No No
Less than 5% of the then outstanding U.S. Office
Products voting stock............................. None No No
</TABLE>
- ------------------------------
(1) Includes shares acquired by CD&R in the Initial CD&R Acquisition and Shares
CD&R can acquire by exercising the Special Warrants.
(2) All of CD&R's corporate governance rights will expire on the earlier of the
fifth anniversary of the closing of the Initial CD&R Acquisition or if CD&R
ever acquires more than 50% of the voting power represented by U.S. Office
Products' then outstanding voting securities.
(3) CD&R can approve one additional nominee if the Chief Executive Officer of
U.S. Office Products is not a member of the Board or is not a Board nominee.
(4) The size of the Board can be increased up to a total of 12 members, in which
case the number of directors that CD&R has the right to nominate will
increase proportionately.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
accuracy of U.S. Office Products' representations and
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<PAGE>
warranties and compliance by U.S. Office Products' with its obligations under
the Investment Agreement; (ii) receipt of necessary antitrust and other
regulatory clearance; (iii) absence of material litigation; (iv) U.S. Office
Products stockholder approval of the issuance of shares in the Equity
Investment; (v) consummation of the Distributions in accordance with the
Distribution Agreements containing certain terms specified in the Investment
Agreement and otherwise as reasonably approved by CD&R; (vi) execution and
delivery of the Tax Allocation Agreement containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by CD&R; (vii)
execution of documents relating to financing of the Tender Offer satisfactory in
form and substance to CD&R; (viii) consummation of the Tender Offer; (ix)
execution of a consulting agreement with CD&R Inc. providing for payment of an
annual consulting fee of $500,000 and registration rights agreement with CD&R;
(x) absence of any development since October 25, 1997 that would have a material
adverse effect on U.S. Office Products after giving effect to the distributions;
(xi) no person or group (other than CD&R or its affiliates) having entered into
an agreement with U.S. Office Products with respect to a tender or exchange
offer for any shares of U.S. Office Products Common Stock, or a merger,
consolidation, or other business combination with or involving the Company; and
(xii) U.S. Office Products' debt immediately following completion of the
transactions contemplated by the Strategic Restructuring Plan shall not exceed
$1.4 billion (assuming conversion of certain convertible debt) and outstanding
debt of the Spin-Off Companies shall be at least $130.0 million plus
expenditures by such entities for acquisitions after the date of the Investment
Agreement. See "The Spin-Offs from U.S. Office Products--Distribution Agreement"
and "--Tax Allocation Agreement." If U.S. Office Products does not proceed with
the Distributions, or if the Equity Investment does not occur for certain other
reasons, CD&R can terminate the Investment Agreement and CD&R would receive a
termination fee of $25.0 million plus CD&R's reasonable fees and expenses. If
the Equity Investment is completed, CD&R, Inc. will receive a transaction fee of
$15.0 million and reimbursement for expenses it incurred in connection with the
transaction. For additional information concerning the Equity Investment,
investors should refer to U.S. Office Products' proxy statement for its special
meeting to be held to consider issuance of shares in the Equity Investment. See
"Additional Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will resign as
Chairman of the Board of U.S. Office Products upon completion of the
Distributions. In connection with the adoption of the Strategic Restructuring
Plan, U.S. Office Products' Board of Directors and Mr. Ledecky concluded that it
was important to the achievement of the objectives of the plan that the Spin-Off
Companies obtain the benefit of Mr. Ledecky's skills and experience.
Accordingly, U.S. Office Products entered into a services agreement with Mr.
Ledecky (the "Ledecky Services Agreement"). It is expected that the Company will
enter into an employment agreement with Mr. Ledecky to implement its assigned
portion of the Ledecky Services Agreement. The Ledecky Services Agreement
provides for non-competition and non-solicitation restrictions that will
continue for four years after the School Specialty Distribution has been
completed. U.S. Office Products will assign to School Specialty the ability to
enforce the non-competition provisions described above as to its own business,
which will then constitute part of Mr. Ledecky's employment agreement with the
Company. School Specialty will have the right to enforce the non-competition
provision with respect to its respective business. In consideration of this
agreement by Mr. Ledecky and his serving as a director and an employee of School
Specialty and each of the other Spin-Off Companies following the Distribution,
the Ledecky Services Agreement provides that he will receive options to purchase
up to 7.5% of the outstanding common stock of each Spin-Off Company as of the
Distribution Date without regard to the Offering. For additional information on
the terms of the Ledecky Services Agreement and the options to be granted by
School Specialty to Mr. Ledecky, see "Management of School Specialty--Director
Compensation and Other Arrangements."
School Specialty has filed a Registration Statement with the Commission for
the issuance of shares of School Specialty Common Stock in the Offering that is
expected to close prior to or concurrent with the School Specialty Distribution.
As a result of certain U.S. federal income tax limitations under Section 355 of
the Code on the number of shares that School Specialty can issue in connection
with the School
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<PAGE>
Specialty Distribution without jeopardizing the tax-free treatment of the School
Specialty Distribution, the amount of School Specialty capital stock issued in
such a public offering, when aggregated with any other School Specialty capital
stock that will be issued in such a public offering has not been determined and
may be limited by the factors discussed in "Risk Factors--Tax Matters,"
"--Limitation on Equity Offerings and the Use of Company Common Stock in
Acquisitions" and "--U.S. Federal Income Tax Consequences of the School
Specialty Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SCHOOL SPECIALTY DISTRIBUTION
Wilmer, Cutler & Pickering expects to deliver an opinion (the "Tax Opinion")
at the time of the Distributions on the material U.S. federal income tax
consequences of the School Specialty Distribution to U.S. Office Products and
holders of U.S. Office Products Common Stock on the Record Date. The Tax Opinion
will be based on the Code, and regulations, rulings, and judicial decisions as
of the date thereof, all of which may be repealed, revoked, or modified so as to
result in U.S. federal income tax consequences different from those described
below. Such changes could be applied retroactively in a manner that could
adversely affect a holder of U.S. Office Products Common Stock. In addition, the
authorities on which the Tax Opinion will be based are subject to various
interpretations. It is therefore possible that the U.S. federal income tax
treatment of the School Specialty Distribution and of the holding, and
disposition of the School Specialty Common Stock may differ from the treatment
described below.
The Tax Opinion will apply only to holders of U.S. Office Products Common
Stock who are U. S. persons and who hold U.S. Office Products Common Stock as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. A U.S. person is the beneficial owner of U.S. Office
Products Common Stock that is (i) for U.S. federal income tax purposes a citizen
or resident of the United States (including certain former citizens and former
long-term residents), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust with respect to
the administration of which a court within the United States is able to exercise
primary supervision and one or more U.S. persons have the authority to control
all substantial decisions of the trust. The Tax Opinion will not address tax
considerations applicable to a holder of U.S. Office Products Common Stock's
particular circumstances or to a holder that may be subject to special tax rules
(such as holders subject to the alternative minimum tax) or other special
situations, such as those of dealers in securities or currencies, financial
institutions, insurance companies, persons holding U.S. Office Products Common
Stock as part of a hedging or conversion transaction or a straddle, persons
whose "functional currency" is not the U.S. dollar, and certain U.S.
expatriates.
The Tax Opinion will not address all aspects of U.S. federal income taxation
that may be relevant to holders of U.S. Office Products Common Stock in light of
their particular circumstances, nor will it address any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction. Holders of
U.S. Office Products Common Stock should consult their tax advisors about the
particular U.S. federal income tax consequences to them of the School Specialty
Distribution, or the holding and disposition of the School Specialty Common
Stock, as well as any tax consequences arising under the laws of any state,
local, or foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. Subject to the foregoing, the Tax Opinion will state Wilmer, Cutler &
Pickering's opinion that for U.S. federal income tax purposes the Distributions
(including the School Specialty Distribution) will qualify as tax-free spin-offs
under Section 355 of the Code, and will not be taxable under Section 355(e) of
the Code. U.S. Office Products will not complete the School Specialty
Distribution unless it receives the Tax Opinion. The Tax Opinion will be based
on the accuracy as of the time of the Distributions of factual representations
made by U.S. Office Products, School Specialty, the Spin-Off Companies and CD&R
and certain other information, data, documentation and other materials that
Wilmer, Cutler & Pickering has deemed necessary.
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<PAGE>
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the School Specialty
Distribution.
Assuming the School Specialty Distribution qualifies as a tax-free spin-off
under Section 355 and is not taxable under to Section 355(e) of the Code:
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of School Specialty
Common Stock in the School Specialty Distribution. Holders of U.S. Office
Products Common Stock will recognize gain or loss on the receipt of cash in
lieu of fractional shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the School Specialty Distribution.
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the School Specialty Distribution will be
allocated among the U.S. Office Products Common Stock and the Spin-Off
Companies Common Stock (including any fractional shares) received with
respect to such U.S. Office Products Common Stock in proportion to their
relative fair market values on the Distribution Date of School Specialty.
Such allocation must be calculated separately for each block of U.S. Office
Products Common Stock (shares purchased at the same time and at the same
cost) with respect to which the Spin-Off Companies' common stock is
received.
4. The holding period of the School Specialty Common Stock (including
any fractional shares) received in the School Specialty Distribution will
include the holding period of the U.S. Office Products Common Stock with
respect to which it was distributed.
Treasury regulations governing Section 355 require that each holder of U.S.
Office Products Common Stock who receives shares of School Specialty Common
Stock pursuant to the School Specialty Distribution attach a statement to the
U.S. federal income tax return that will be filed by such stockholder for the
taxable year in which the stockholder receives School Specialty Common Stock in
the School Specialty Distribution. The regulations require that the statement
show the applicability of Section 355 to the School Specialty Distribution. U.S.
Office Products will provide each U.S. Office Products stockholder of record on
the record date with information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION As noted
above, the Tax Opinion is not binding on the IRS or the courts. Holders of U.S.
Office Products Common Stock should be aware that the requirements of Section
355 pertaining to business purpose, active trade or business, and absence of a
device of distribution of earnings and profits, as well as the requirements of
Section 355(e) pertaining to a plan or series of related transactions to acquire
50% or more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the School Specialty Distribution. Accordingly, the IRS
and/or a court reach a conclusion that differs from the conclusions in the Tax
Opinion.
BUSINESS PURPOSE. In order for the School Specialty Distribution to qualify
as a tax-free spin-off under Section 355, it must be motivated, in whole or
substantial part, by one or more corporate business purposes. U.S. Office
Products will represent that the School Specialty Distribution was motivated, in
whole or substantial part, to allow U.S. Office Products and the Company to
adopt strategies and pursue objectives that are more appropriate to their
respective industries and stages of growth; to allow the Company to pursue an
independent acquisition program with a more focused use of resources and, where
stock is used as consideration, to allow the Company to provide stock of a
public company that is in the same industry as the business being acquired; to
allow U.S. Office Products and the Company to offer their respective employees
more focused compensation packages; and to make possible the Equity Investment,
27
<PAGE>
which the Board of Directors of U.S. Office Products concluded would contribute
to U.S. Office Products' development, based on the skills and experience of
CD&R, Inc. Based on these representations and certain other information, data,
documentation and other materials, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of the Distributions that the School Specialty
Distribution satisfies the business purpose requirement of Section 355 of the
Code. However, although similar rationales have been accepted by the IRS in
other circumstances as sufficient to meet the business purpose requirement of
Code Section 355, there can be no assurances that the IRS will not assert that
the business purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the School Specialty Distribution to
qualify as a tax-free spin-off under Section 355, both the Company and U.S.
Office Products must be engaged in an active trade or business that has been
actively conducted for the five-year period preceding the School Specialty
Distribution, taking into account only businesses that have been acquired in
transactions in which no gain or loss was recognized. Whether current and
historical business activity constitutes an active trade or business, and
whether any gain or loss should have been recognized in an acquisition
structured and reported as a nontaxable transaction, turn in some instances on
the application of subjective legal standards and on factual determinations,
such as intentions of the parties involved. Based on the representations of U.S.
Office Products and the Company, Wilmer, Cutler & Pickering expects to deliver
an opinion at the time of the Distributions that the School Specialty
Distribution will satisfy the active trade or business requirement. However,
because of the inherently subjective nature of important elements of the active
trade or business requirement, and because the IRS may challenge the
representations upon which Wilmer, Cutler & Pickering relies, there can be no
assurance that the IRS will not assert that the active trade or business
requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. The School
Specialty Distribution will not qualify as a tax-free spin-off under Section 355
if the School Specialty Distribution was used principally as a device for the
distribution of the earnings and profits of U.S. Office Products or the Company.
Treasury regulations provide that this test is applied based on all the facts
and circumstances, including the presence or absence of factors described in the
Regulations as "device factors" and "nondevice factors." Application of this
test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office Products and the Company, Wilmer, Cutler &
Pickering expects to deliver an opinion at the time of the Distributions that
the School Specialty Distribution is not a transaction used principally as a
device for the distribution of earnings and profits of either U.S. Office
Products or the Company. However, because of the inherently subjective nature of
the device test (including the subjectivity involved in assigning weight to
various factors), and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will assert that the School Specialty Distribution is a transaction used
principally as a device for the distribution of earnings and profits of U.S.
Office Products or the Company.
If the School Specialty Distribution fails to qualify as a tax-free spin-off
under Section 355:
1. U.S. Office Products will recognize gain equal to the difference
between the fair market value of the School Specialty Common Stock on the
Distribution Date and U.S. Office Products adjusted tax basis in the School
Specialty Common Stock on the Distribution Date. If U.S. Office Products
were to recognize gain on the School Specialty Distribution, such gain would
likely be substantial.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the School Specialty Common
Stock distributed to such stockholder, including fractional shares. 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
28
<PAGE>
exceeds such U.S. Office Products stockholder's pro rata share of U.S.
Office Products' accumulated and current earnings and profits, such excess
would be treated first as a basis-reducing, tax-free return of capital to
the extent of the stockholder's tax basis in his or her U.S. Office Products
Common Stock and then as capital gain, provided that the U.S. Office
Products Stock is held as a capital asset. For corporate stockholders, the
portion of the taxable distribution that constitutes a dividend would be
eligible for the dividends-received deduction (subject to certain
limitations in the Code) and could be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in a
corporate stockholder's basis in its U.S. Office Products Common Stock to
the extent of such deduction and the recognition of gain to the extent the
deduction exceeds the corporate stockholder's tax basis in the U.S. Office
Products Common Stock.
3. Each U.S. Office Products stockholder's tax basis in the School
Specialty Common Stock would equal the fair market value on the Distribution
Date of the School Specialty Common Stock (including fractional shares)
distributed to such stockholder.
4. The holding period of the School Specialty Common Stock (including
fractional shares) received in the School Specialty Distribution would begin
with, and include, the day after the Distribution Date.
Whether or not the School Specialty Distribution is taxable, cash received
by a holder of U.S. Office Products Common Stock in lieu of a fractional share
of School Specialty Common Stock will be treated as received in exchange for
such fractional share and the stockholder will recognize gain or loss for U.S.
federal income tax purposes measured by the difference between the amount of
cash received and the stockholder's tax basis in the fractional share. Such gain
or loss will be capital gain or loss to the stockholder.
EFFECT OF POST-DISTRIBUTION TRANSACTION. Section 355(e) which was added in
1997, generally provides that a company that distributes shares of a subsidiary
in a spin-off that is otherwise tax-free will incur U.S. federal income tax
liability if 50% or more, by vote or value, of the capital stock of either the
company making the distribution or the subsidiary is acquired by one or more
persons acting pursuant to a plan or series of related transactions that
includes the spin-off. Stock acquired by certain related persons is aggregated
in determining whether this 50% test is met. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary occurring two years before or after the spin-off is
pursuant to a plan that includes the spin-off. However, the presumption may be
rebutted by establishing that the spin-off and the acquisition are not part of a
plan or series of related transactions. Based on the representations of U.S.
Office Products, the Company and CD&R, and the assumption that the School
Specialty Distribution is not part of a plan that is outside the knowledge of
U.S. Office Products and the Company pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of U.S. Office Products or the Company, Wilmer, Cutler & Pickering's expects to
deliver an opinion at the time of the Distributions that the School Specialty
Distribution will not be Section 355(e). However, there can be no assurance that
the IRS will not assert that the School Specialty Distribution is taxable under
Section 355(e).
If the School Specialty Distribution is taxable under Section 355(e) of the
Code, U.S. Office Products will recognize gain, equal to the difference between
the fair market value of the School Specialty Common Stock on the Distribution
Date and U.S. Office Products' adjusted tax basis in the School Specialty Common
Stock on the Distribution Date. If U.S. Office Products were to recognize gain
on the School Specialty Distribution, such gain would likely be substantial.
However, no gain or loss will be recognized by holders of U.S. Office Products
Common Stock (except with respect to cash received in lieu of fractional
shares). If U.S. Office Products were to recognize gain on the School Specialty
Distribution, such gain would likely be substantial.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
School Specialty and the other Spin-Off Companies will jointly and severally
indemnify U.S. Office Products for any Distribution Taxes
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<PAGE>
assessed against U.S. Office Products if an Adverse Tax Act of any of the
Spin-Off Companies materially contributes to a final determination that any or
all of the Distributions are taxable. School Specialty will also enter into the
Tax Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, School Specialty will be liable for any
Distribution Taxes resulting from any adverse Tax Act by School Specialty and
liable (subject to indemnification by the other Spin-Off Companies) for any
Distribution Taxes resulting from an Adverse Tax Act by the other Spin-Off
Companies. Additionally, U.S. Office Products and each of the Spin-Off Companies
will be liable for its pro rata portion of any Distribution Taxes, based on the
value of each company's common stock after the Distributions, if it is
determined that there has not been Adverse Tax Act by either U.S. Office
Products or any of the other Spin-Off Companies. As a result, the Company could
become liable for a pro rata portion of any Distribution Taxes with respect not
only to the School Specialty Distribution, but also to any of the other
Distributions. See "The Spin-Offs from U.S. Office Products--Tax Allocation
Agreement and Tax Indemnification Agreement" for a detailed discussion of the
Tax Allocation Agreement and Tax Indemnification Agreement.
WILMER, CUTLER & PICKERING'S OPINION OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK DOES NOT PURPORT TO
COVER ALL U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER
OF U.S. OFFICE PRODUCTS COMMON STOCK. ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S.
FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE SCHOOL SPECIALTY
DISTRIBUTION TO THEM.
EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY SCHOOL SPECIALTY
EMPLOYEES
School Specialty expects that all or substantially all vested and unvested
options ("U.S. Office Products Options") to acquire U.S. Office Products Common
Stock that are held by School Specialty employees on the Distribution Date will
be replaced with options ("School Specialty Options") to acquire shares of
School Specialty Common Stock. School Specialty anticipates that the replacement
options will be issued under a stock option plan to be adopted on or prior to
the Distribution Date. As of the Distribution Date, approximately 492,833 U.S.
Office Products Options will be held by employees of School Specialty. The
number of School Specialty Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products Common
Stock around the time of the Distributions and the public offering price of the
Company Common Stock in the Offering. For those reasons, the number of School
Specialty Options into which the U.S. Office Products Options will convert is
not yet determinable. The exercise price for U.S. Office Products Options will
be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price of
School Specialty Common Stock in the Offering___________________________________
Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Share (New) = Option Shares (Old) XTrading Price of U.S. Office Products
Common Stock Pre-School Specialty Distribution__________________________________
Initial Public Offering Price of School Specialty
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days preceding
the Distributions or (b) the number of business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
foregoing formula adjustments are intended to preserve for the holder of U.S.
Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products Common
Stock at the time of the School Specialty Distribution and the exercise price of
such option. The intrinsic value of
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the School Specialty Options will be no greater than the intrinsic value of the
U.S. Office Products Options immediately before the Distributions, and the ratio
of exercise price to market price will not be less than the ratio immediately
before the Distributions.
Management anticipates that the replacement options will be issued under a
stock option plan to be adopted on or prior to the Distribution Date. It is
anticipated that all other terms of the School Specialty Options will be the
same as the terms of the U.S. Office Products options they replace. As a result
of the adjustment of the U.S. Office Products Options described above, the
options held by the School Specialty employees after the School Specialty
Distribution would represent a greater percentage interest in School Specialty
than the percentage interest in U.S. Office Products that such options
represented before the Distributions.
RESTRICTIONS ON TRANSFER
Shares of School Specialty Common Stock distributed to the U.S. Office
Products Stockholders pursuant to School Specialty Distribution will be freely
transferable under the Securities Act, except for shares received by any persons
who may be deemed to be "affiliates" of School Specialty as that term is defined
in Rule 144 promulgated under the Securities Act. Persons who may be deemed to
be affiliates of School Specialty after School Specialty Distribution generally
include individuals or entities that control, are controlled by, or are under
common control with, School Specialty and may include certain officers and
directors of School Specialty as well as principal stockholders of School
Specialty. Persons who are affiliates of School Specialty will be permitted to
sell their shares of School Specialty Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions provided
for private transactions or Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that the direct legal, financial advisory,
investment banking, financing, accounting, printing, mailing and other expenses
(including the fees of U.S. Office Products' and the Spin-Off Companies'
transfer agents) of the Strategic Restructuring Plan (including CD&R's fees and
expenses), including the Distributions, will total approximately $75.0 million.
Upon request, U.S. Office Products will pay the reasonable expenses of brokerage
firms, custodians, nominees and fiduciaries who are record holders of U.S.
Office Products Common Stock for forwarding this Information Statement/
Prospectus to the beneficial owners of such shares. The foregoing expenses will
be allocated among U.S. Office Products and the Spin-Off Companies pursuant to a
formula to be determined. See "The Spin-Offs from U.S. Office
Products--Distribution Agreement."
31
<PAGE>
THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
Following the School Specialty Distribution, U.S. Office Products and School
Specialty will operate independently, and (except for interests U.S. Office
Products may retain pursuant to certain pledge agreements) neither will have any
stock ownership, beneficial or otherwise, in the other. For the purposes of
governing certain of the ongoing relationships among U.S. Office Products,
School Specialty and the Other Spin-Off Companies after the Distributions, and
to provide mechanisms for an orderly transition, on or before the Distribution
Date, U.S. Office Products, School Specialty and the Other Spin-Off Companies
will enter into the Distribution Agreement, the Tax Allocation Agreement, and
the Employee Benefits Agreement and the Spin-Off Companies will enter into the
Tax Indemnification Agreement. The terms of the Distribution Agreement, the Tax
Allocation Agreement, the Tax Indemnification Agreement and the Employee
Benefits Agreement have 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 those
agreements and provides that they are subject to CD&R's reasonable approval.
Therefore, they will not be the result of arm's-length negotiations between
independent parties.
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 will
provide for the transfer from U.S. Office Products to School Specialty of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of School Specialty as well as the
transfer, in certain instances, of other assets related to the business of
School Specialty. It also will provide that the recovery on any claims under
applicable acquisition agreements that U.S. Office Products may have against the
persons who sold businesses to U.S. Office Products that will become part of
School Specialty in connection with the Distributions (the "School Specialty
Acquisition Indemnity Claims") will be shared between U.S. Office Products and
School Specialty. In addition, to the extent that the School Specialty
Acquisition Indemnity Claims are currently secured by the pledge of stock of
U.S. Office Products, the pledged shares will be used, subject to the final
resolution of the claim, to reimburse U.S. Office Products and School Specialty
for their respective damages and expenses in accordance with an agreed upon
allocation of recovery rights, which will be determined prior to the School
Specialty Distribution.
DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires each Spin-Off Company, on or prior to the Distribution, to
obtain credit facilities, to borrow funds under such facilities and to use the
proceeds of such borrowings to pay off the U.S. Office Products' debt so
allocated plus any additional debt incurred by U.S. Office Products after
January 12, 1998 (the date of the Investment Agreement) in connection with the
acquisition of an entity that has become or will become a subsidiary of such
Spin-Off Company. Under the Distribution Agreement, $80 million of U.S. Office
Products' debt has been allocated to School Specialty, and since January 12,
1998, U.S. Office Products has incurred an additional $3.3 million of debt in
connection with School Specialty's acquisition of Education Access. Prior to the
Distribution, School Specialty will enter into the credit facility described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations of School Specialty--Liquidity and Financial Resources" and will
borrow $83.3 million under the facility to pay off debt of U.S. Office Products.
32
<PAGE>
School Specialty's historical balance sheets reflect payables to U.S. Office
Products, which arose primarily as a result of U.S. Office Products' funding of
the cash portions of acquisitions, paying the acquisition costs and repaying
outstanding debt of acquired companies, as well as an allocation of U.S. Office
Products' corporate expenses. The amount of such payables to U.S. Office
Products at January 24, 1998 in excess of the $80 million of U.S. Office
Products' debt allocated to School Specialty under the Distribution Agreement
was forgiven by U.S. Office Products. Accordingly, School Specialty's historical
balance sheet as of January 24, 1998 includes aggregate payables to U.S. Office
Products of $80 million and a capital contribution by U.S. Office Products equal
to such excess. School Specialty's pro forma balance sheet as of January 24,
1998 reflects the $3.3 million of debt incurred by U.S. Office Products in
School Specialty's acquisition of Education Access as an additional payable to
U.S. Office Products and the refinancing of the payable to U.S. Office Products
with the proceeds of the $83.3 million borrowing under the new credit facility.
LIABILITIES. Under the Distribution Agreement, School Specialty will be
liable for (i) any liabilities arising out of or in connection with the business
conducted by it or its subsidiaries, (ii) its liabilities under the Employee
Benefits Agreement, Tax Allocation Agreement and related agreements described
below, (iii) the U.S. Office Products debt that has been allocated to the
Company as described above, (iv) liabilities under the securities laws relating
to the Prospectus in respect of the Offering and portions of this Information
Statement/Prospectus distributed to stockholders of U.S. Office Products in
connection with the School Specialty Distribution, as well as other securities
law liabilities related to the School Specialty business that arise from
information supplied to U.S. Office Products (or that should have been supplied,
but was not) by School Specialty, (v) U.S. Office Products' liabilities for
earn-outs from acquisitions in respect of School Specialty and its subsidiaries,
(vi) School Specialty's costs and expenses related to the Offering and its new
credit facility, and (vii) $1.0 million of the transaction costs (including
legal, accounting, investment banking and financial advisory) and other fees
incurred by U.S. Office Products in connection with its Strategic Restructuring
Plan. Each of the other Spin-Off Companies will be similarly obligated to U.S.
Office Products. School Specialty and the other Spin-Off Companies have also
agreed to bear a pro rata portion of U.S. Office Products' liabilities under the
securities laws (other than claims relating solely to a specific Spin-Off
Company or relating specifically to the continuing businesses of U.S. Office
Products) and U.S. Office Products' general corporate liabilities (other than
debt, except for that specifically allocated to the Spin-Off Companies) incurred
prior to the Distributions (i.e., liabilities not related to the conduct of a
particular distributed or retained subsidiary's business) (the "Shared
Liabilities"). If one of the Spin-Off Companies defaults on an obligation owed
to U.S. Office Products, the non-defaulting Spin-Off Companies will be obligated
on a pro rata basis to pay such obligation ("Default Liability"). The aggregate
of the Shared Liabilities and Default Liability for which any Spin-Off Company
may be liable is, however, limited to $1.75 million.
The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and (b) their operating income
relative to that of U.S. Office Products; the residual will be U.S. Office
Products' pro rata share. Based upon financial data for the nine-month period
ended January 24, 1998, the Company's pro rata share of Shared Liabilities would
have been 11.9%, the other Spin-Off Companies' pro rata share would have
aggregated 22.5%, and U.S. Office Products' pro rata share would have been
65.6%. As to any Default Liability, each non-defaulting company's pro rata share
will be increased to include a portion of the defaulting Spin-Off Company's pro
rata share.
The Distribution Agreement will provide that each party will indemnify and
hold all of the other parties harmless from any and all liabilities for which
the former assumed liability under the Distribution Agreement. All indemnity
payments will be subject to adjustment upward or downward to take account of tax
costs or tax benefits as well as insurance proceeds. If there are any claims
made under U.S. Office Products' existing insurance policies, the amount of any
deductible or retention will be allocated by U.S. Office Products among the
claimants in a fair and reasonable manner.
33
<PAGE>
OTHER PROVISIONS. The Distribution Agreement will have other customary
provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. School Specialty will also
enter into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible for the Adverse Tax Act
will indemnify the other Spin-Off Companies for any liability to U.S. Office
Products under the Tax Allocation Agreement. As a consequence, School Specialty
will be liable for any Distribution Taxes resulting from any Adverse Tax Act by
School Specialty and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
each of U.S. Office Products and the Spin-Off Companies will be liable for its
pro rata portion of such Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, School Specialty could become
liable for a pro rata portion of Distribution Taxes with respect not only to the
School Specialty Distribution but also any of the other Distributions. The
liabilities of School Specialty under the Tax Allocation Agreement and the Tax
Indemnification Agreement are not subject to any limits.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products will enter into
the Employee Benefits Agreement with School Specialty and the other Spin-Off
Companies to provide for an orderly transition of benefits coverage between U.S.
Office Products and the Spin-off Companies. Pursuant to this agreement, the
respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distribution subsidiaries will retain or assume
responsibility for their current and previous employees. The proposed Employee
Benefits Agreement reflects U.S. Office Products' expectation that each of the
Spin-Off Companies will establish 401(k) plans for their respective employees
effective as of, or shortly after, the Distribution Date and that U.S. Office
Products will transfer 401(k) accounts to those plans as soon as practicable.
The agreement will provide for spinning off portions of the U.S. Office
Products' cafeteria plan that relate to employees of the Spin-Off Companies (and
their subsidiaries) and having those spun-off plans assume responsibilities for
claims submitted on or after the Distribution.
DIVIDEND POLICY
School Specialty does not anticipate declaring and paying cash dividends on
School Specialty Common Stock in the foreseeable future. The decision whether to
apply any legally available funds to the payment of dividends on School
Specialty Common Stock will be made by the Board of Directors of School
Specialty (the "School Specialty Board") from time to time in the exercise of
its business judgment, taking into account School Specialty's financial
condition, results of operations, existing and proposed commitments for use of
School Specialty's funds and other relevant factors. School Specialty's ability
to pay dividends may be restricted from time to time by financial covenants in
its credit agreements.
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of School Specialty at
January 24, 1998 (i) on a historical basis, (ii) on a pro forma basis to reflect
the refinancing of all amounts payable to U.S. Office Products, the purchase
acquisition completed subsequent to January 24, 1998 and the Distribution and
(iii) on such pro forma basis as adjusted to give effect to the Offering, the
direct sale by the Company of 250,000 shares of Common Stock to Messrs.
Spalding, Vander Zanden and Pate and the application of the net proceeds
therefrom to the payment of debt (assuming an inital public offering price of
$15.00 per share and no exercise of the Underwriter's overallotment option,
after deducting the estimated offering expenses). This table should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations of School Specialty," the historical
consolidated financial statements and the pro forma combined financial
statements of School Specialty, and the related notes to each thereof, included
elsewhere in this Information Statement/Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
----------------------- PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................................................ $ 272 $ 272 $ 272
Short-term payable to U.S. Office Products................................. 16,873
---------- ----------- -------------
Total short-term debt................................................ $ 17,145 $ 272 $ 272
---------- ----------- -------------
---------- ----------- -------------
Long-term debt............................................................. $ 385 $ 82,978 $ 51,347
Long-term payable to U.S. Office Products.................................. 62,470
Stockholder's equity:
Preferred stock (1,000,000 shares authorized; no shares outstanding).....
Common stock, $0.001 par value (150,000,000 shares authorized; 12,299,593
shares outstanding pro forma; 14,674,593 shares outstanding pro forma,
as adjusted)(1)........................................................ 13 15
Additional paid-in capital............................................... 93,300 124,929
Divisional equity........................................................ 93,313
Retained earnings........................................................ 5,179 5,179 5,179
---------- ----------- -------------
Total stockholder's equity........................................... 98,492 98,492 130,123
---------- ----------- -------------
Total capitalization................................................. $ 161,347 $ 181,470 $ 181,470
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
- ------------------------
(1) Outstanding shares do not include shares authorized for issuance upon
exercise of stock options granted or to be granted. See "Management of
School Specialty--Replacement of Outstanding U.S. Office Products' Options"
and "--1998 Stock Incentive Plan". The approximately 12.3 million shares of
Common Stock outstanding on a pro forma basis was calculated by dividing the
approximately 110.7 million shares of U.S. Office Products common stock
expected to be outstanding on the Distribution Date by nine, which is the
Distribution Ratio. The approximately 14.7 million shares of Common Stock
outstanding on a pro forma basis, as adjusted, was calculated by adding to
the approximately 12.3 million shares (a) the 2,125,000 shares offered
hereby and (b) the 250,000 shares to be sold to Messrs. Spalding, Vander
Zanden and Pate.
35
<PAGE>
SELECTED FINANCIAL DATA
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
School Specialty", all of which appear elsewhere in this Information
Statement/Prospectus.
The historical Selected Financial Data for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996 and the fiscal year ended April
26, 1997 (except pro forma amounts) have been derived from School Specialty's
consolidated financial statements that have been audited and are included
elsewhere in the Prospectus/Information Statement. The historical Selected
Financial Data for the years ended December 31, 1992 and 1993 have been derived
from unaudited consolidated financial statements and are not included elsewhere
in this Information Statement/Prospectus. The Selected Financial Data for the
nine months ended January 25, 1997 and January 24, 1998 (except pro forma
amounts) have been derived from unaudited consolidated financial statements that
appear elsewhere in this Information Statement/Prospectus. These unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results of operations for the periods presented.
The pro forma income statement data, which have been derived from School
Specialty's unaudited pro forma financial statements included elsewhere in this
Prospectus, give effect, as applicable, to the refinancing of all amounts
payable to U.S. Office Products and the acquisitions completed by the Company
since May 1, 1996 as if all such transactions had been consummated by May 1,
1996. The unaudited pro forma combined financial data discussed herein do not
purport to represent the results that the Company would have obtained had the
transactions which are the subject of the pro forma adjustments occurred at the
beginning of the applicable periods, as assumed, or the future results of the
Company. See additional disclosure regarding pro forma results in the Financial
Statements section.
36
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL(1)
---------------------------------------------------------------------
FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ APRIL 30, FISCAL YEAR ENDED
1992 1993 1994 1995 1996 APRIL 26, 1997(2)
------- ------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $65,042 $76,926 $119,510 $150,482 $28,616 $ 191,746
Cost of revenues...................... 48,111 56,280 87,750 105,757 20,201 136,577
------- ------- -------- -------- ----------- --------
Gross profit.......................... 16,931 20,646 31,760 44,725 8,415 55,169
Selling, general and administrative
expenses............................ 17,729 18,294 27,281 39,869 10,307 43,462
Non-recurring acquisition costs....... 1,048 1,122 1,792
Restructuring costs................... 2,532 194
------- ------- -------- -------- ----------- --------
Operating income (loss)............... (1,846) 2,352 4,479 2,324 (3,014) 9,721
Interest expense...................... 1,660 1,845 3,007 5,536 1,461 4,197
Interest income....................... (6)
Other (income) expense................ 99 228 (86) (18) 67 )(196
------- ------- -------- -------- ----------- --------
Income (loss) before provision for
(benefit from) income taxes......... (3,605) 279 1,558 (3,194) (4,536) 5,720
Provision for (benefit from) income
taxes(3)............................ 216 199 218 173 139 (2,412)
------- ------- -------- -------- ----------- --------
Net income (loss)..................... $(3,821) $ 80 $ 1,340 $ (3,367) $(4,675) $ 8,132
------- ------- -------- -------- ----------- --------
------- ------- -------- -------- ----------- --------
Net income (loss) per share(4):.......
Basic............................. $ (0.78) $ 0.00 $ 0.26 $ (0.51) $ (0.54) $ 0.81
Diluted........................... $ (0.78) $ 0.00 $ 0.26 $ (0.50) $ (0.53) $ 0.80
Weighted average shares
outstanding(4):.....................
Basic............................. 4,918 4,918 5,062 6,562 8,611 10,003
Diluted........................... 4,918 4,918 5,078 6,669 8,789 10,196
<CAPTION>
PRO FORMA (2)
------------------------------------
NINE MONTHS ENDED NINE MONTHS
----------------------------------- ENDED
JANUARY 25, JANUARY 24, FISCAL YEAR ENDED ----------------
1997(2) 1998(2) APRIL 26, 1997 JANUARY 25, 1997
---------------- ---------------- ----------------- ----------------
<S> <C>
STATEMENT OF INCOME DATA:
Revenues.............................. $159,977 $247,880 $ 350,760 $292,244
Cost of revenues...................... 114,380 176,501 244,396 203,705
-------- -------- -------- --------
Gross profit.......................... 45,597 71,379 106,364 88,539
Selling, general and administrative
expenses............................ 33,396 50,999 85,430 66,926
Non-recurring acquisition costs....... 1,792 1,792 1,792
Restructuring costs................... 194
-------- -------- -------- --------
Operating income (loss)............... 10,409 20,380 18,948 19,821
Interest expense...................... 3,358 4,100 7,300 5,535
Interest income....................... (101) (109)
Other (income) expense................ (204) 441 )(158 (174)
-------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes......... 7,356 15,948 11,806 14,460
Provision for (benefit from) income
taxes(3)............................ 3,750 7,113 92 6,651
-------- -------- -------- --------
Net income (loss)..................... $ 3,606 $ 8,835 $ 11,714 $ 7,809
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share(4):.......
Basic............................. $ 0.38 $ 0.69 $ 0.95 $ 0.63
Diluted........................... $ 0.37 $ 0.68 $ 0.95 $ 0.63
Weighted average shares
outstanding(4):.....................
Basic............................. 9,553 12,751 12,300 12,300
Diluted........................... 9,758 13,020 12,300 12,300
<CAPTION>
JANUARY 24, 1998
----------------
STATEMENT OF INCOME DATA:
Revenues.............................. $318,667
Cost of revenues...................... 227,485
--------
Gross profit.......................... 91,182
Selling, general and administrative
expenses............................ 66,623
Non-recurring acquisition costs.......
Restructuring costs...................
--------
Operating income (loss)............... 24,559
Interest expense...................... 5,535
Interest income.......................
Other (income) expense................ 522
--------
Income (loss) before provision for
(benefit from) income taxes......... 18,502
Provision for (benefit from) income
taxes(3)............................ 8,511
--------
Net income (loss)..................... $ 9,991
--------
--------
Net income (loss) per share(4):.......
Basic............................. $ 0.81
Diluted........................... $ 0.81
Weighted average shares
outstanding(4):.....................
Basic............................. 12,300
Diluted........................... 12,300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1992
---------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (51)
Total assets......................................................................................................... 21,905
Long-term debt, less current portion................................................................................. 8,205
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (365)
<CAPTION>
1993
---------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 1,140
Total assets......................................................................................................... 23,190
Long-term debt, less current portion................................................................................. 7,175
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 545
<CAPTION>
1994
---------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 3,512
Total assets......................................................................................................... 44,267
Long-term debt, less current portion................................................................................. 11,675
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 1,827
<CAPTION>
1995
---------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (1,052)
Total assets......................................................................................................... 54,040
Long-term debt, less current portion................................................................................. 15,294
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (620)
<CAPTION>
APRIL 30,
1996
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ (3,663)
Total assets......................................................................................................... 54,573
Long-term debt, less current portion................................................................................. 15,031
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... (4,267)
<CAPTION>
APRIL 26,
1997
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 14,460
Total assets......................................................................................................... 87,685
Long-term debt, less current portion................................................................................. 566
Long-term payable to U.S. Office Products............................................................................ 33,226
Stockholder's (deficit) equity....................................................................................... 16,329
<CAPTION>
JANUARY
24, 1998
----------
ACTUAL
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 43,613
Total assets......................................................................................................... 201,207
Long-term debt, less current portion................................................................................. 385
Long-term payable to U.S. Office Products............................................................................ 62,470
Stockholder's (deficit) equity....................................................................................... 98,492
<CAPTION>
PRO
FORMA (5)
----------
BALANCE SHEET DATA:
Working capital (deficit)............................................................................................ $ 60,586
Total assets......................................................................................................... 204,457
Long-term debt, less current portion................................................................................. 82,978
Long-term payable to U.S. Office Products............................................................................
Stockholder's (deficit) equity....................................................................................... 98,492
</TABLE>
37
<PAGE>
- ------------------------
(1) The historical financial information of the Pooled Companies have been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions.
(2) The pro forma financial data give effect to the refinancing of all amounts
payable to U.S. Office Products and the purchase acquisitions completed by
School Specialty since May 1, 1996 as if all such transactions had occurred
on May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(3) Results for the fiscal year ended April 26, 1997 and the 12 months ended
January 24, 1998 (historical and pro forma) include benefit from income
taxes of $2.4 million primarily arising from the reversal of a $5.3 million
valuation allowance in the quarter ended April 26, 1997. The valuation
allowance had been established in fiscal 1995 to offset the tax benefit from
net operating loss carryforwards included in the Company's deferred tax
assets, because at the time it was not likely that such tax benefit would be
realized. The valuation allowance was reversed subsequent to the Company's
being acquired by U.S. Office Products, because it was deemed "more likely
than not", based on improved results, that such tax benefit would be
realized.
(4) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the nine months ended January 24,
1998 and January 25, 1997, see Note (k) of Notes to Pro Forma Combined
Financial Statements included herein. The pro forma weighted average shares
outstanding (basic and diluted), as further adjusted to give effect to the
sales of shares to Messrs. Spalding, Vander Zanden and Pate, and in the
Offering, would have been 14.7 million shares for all periods for which pro
forma data are given, and the pro forma net income per share, as so adjusted
further and to give effect to the use of proceeds from such sales to reduce
debt, would have been:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED -----------------
APRIL 26, 1997 JANUARY 25, 1997
----------------- -----------------
<S> <C> <C>
Pro forma net income per share, as adjusted:
Basic.................................................................................. $ 0.90 $ 0.61
Diluted................................................................................ $ 0.90 $ 0.61
<CAPTION>
JANUARY 24, 1998
-----------------
<S> <C>
Pro forma net income per share, as adjusted:
Basic.................................................................................. $ 0.76
Diluted................................................................................ $ 0.76
</TABLE>
(5) The pro forma balance sheet data give effect to (i) the refinancing of all
amounts payable to U.S. Office Products, (ii) the purchase acquisition of
Education Access, the only acquisition completed by School Specialty
subsequent to January 24, 1998, and (iii) the Distribution as if such
transactions had occurred on January 24, 1998. The pro forma balance sheet
data are not necessarily indicative of the financial position that would
have been achieved had these events actually then occurred and should not be
construed as representative of future financial position.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SCHOOL SPECIALTY
OVERVIEW
School Specialty is the largest U.S. distributor focusing on non-textbook
educational supplies and furniture for grades pre-K-12. The Company provides a
comprehensive offering of high quality educational supplies and furniture to
school districts, school administrators and teachers through the broad
distribution of its catalogs. Specialty brands, which target specific curriculum
disciplines, include Childcraft, which sells to the early childhood market; Sax
Arts & Crafts, which distributes a broad line of art supplies and materials; and
Gresswell, which distributes library-related products in the United Kingdom.
Revenues have increased from $65.0 million in the fiscal year ended December
31, 1992 to $279.6 million for the twelve months ended January 24, 1998. This
increase resulted primarily from 15 acquisitions, 13 of which occurred during
fiscal 1997 and the first nine months of fiscal 1998, as well as internally
generated growth.
School Specialty's gross profit margins have improved by achieving increased
buying power and by acquiring specialty companies which usually have higher
gross margins than the Company's general products divisions. The Company expects
gross profit margins to be further enhanced by acquiring additional specialty
companies and continuing to improve its purchasing power.
School Specialty's operating margin has improved significantly over the last
several years. This improvement reflects the Company's acquisition of specialty
companies which have higher operating margins than the Company's general
products divisions. In addition, operating margins have increased as the Company
has reduced selling, general and administrative expenses of acquired companies
by eliminating redundant administrative functions. Currently, nine of the ten
general school supply companies acquired since May 1996 have been integrated.
However, the Company believes that the full benefit of the integrations has not
yet been realized as there continue to be opportunities for the Company to
eliminate redundant costs.
The benefit from income taxes in Fiscal 1997 of $2.4 million reflects the
reversal of a $5.3 million deferred tax valuation allowance in the fourth
quarter. The Company believes the effective income tax rate of 46%, which is
reflected in the pro forma financial statements for the most recent interim
period, is more representative of future effective income tax rates. See
"--Consolidated Historical Results of Operations".
School Specialty's business and working capital needs are highly seasonal
with peak sales levels occurring from May through October. During this period,
the Company receives, ships and bills the majority of its orders so that schools
and teachers receive their merchandise by the start of each school year. School
Specialty's inventory levels increase in April through July in anticipation of
the peak selling season. The majority of cash receipts are collected from
September through December.
In the past, the Company has recorded restructuring costs associated with
consolidation of warehouse facilities. These costs typically include: costs to
exit the facility, such as rent under remaining lease terms, occupancy,
relocation costs and facility restoration; employee costs, such as severance;
and asset impairment costs. The Company expects to incur such costs in the
future as it continues to integrate acquired companies. Based on the additional
time and resources expected to be involved in the development, review and
approval of any such restructuring plans, the Company cannot presently predict
the timing or overall magnitude of such a charge.
The Company anticipates recording in the fourth quarter of fiscal 1998 $2.0
to $2.5 million of one-time non-recurring costs, primarily consisting of a
write-down of deferred catalog costs and employee severance and asset impairment
costs and $1.0 million of the transaction costs allocated to the Company under
the Distribution Agreement. In the first quarter of fiscal 1999, the Company
will record a
39
<PAGE>
compensation charge of approximately $263,000, representing the difference
between the amount which Messrs. Spalding, Vander Zanden and Pate will pay for
the 250,000 shares of Common Stock to be purchased directly from the Company and
the amount which they would have paid for such shares if the purchase price per
share had been the initial public offering price of the shares offered in the
Offering.
School Speciality is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products, which
acquired School Specialty, Inc., a Wisconsin corporation ("Old School"), in May
1996 and Re-Print in July 1996. The Company's consolidated financial statements
give retroactive effect to these two business combinations under the
pooling-of-interests method (Old School and Re-Print are referred to as the
"Pooled Companies") and include the results of companies acquired in business
combinations accounted for under the purchase method from their respective dates
of acquisition. Prior to their respective dates of acquisition by U.S. Office
Products, the Pooled Companies reported results on years ending on December 31.
Upon acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and pro forma
financial statements and related notes thereto appearing elsewhere in this
Information Statement/Prospectus.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues on
a historical basis for the years ended December 31, 1994 and 1995, fiscal 1997
and for the nine months ended January 25, 1997 and January 24, 1998, and on a
pro forma basis for fiscal 1997 and for the nine months ended January 25, 1997
and January 24, 1998, reflecting the refinancing of the amounts payable to U.S.
Office Products and the results of the companies acquired since May 1, 1996 in
business combinations accounted for under the purchase method as if such
transactions had occurred on May 1, 1996.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL -------------
-----------------------------------------------------------------------------
FISCAL YEAR FISCAL YEAR
FOR THE YEAR ENDED ENDED NINE MONTHS ENDED ENDED
-------------------------------- ------------- ---------------------------- -------------
DECEMBER 31, DECEMBER 31, APRIL 26, JANUARY 25, JANUARY 24, APRIL 26,
1994 1995 1997 1997 1998 1997
--------------- --------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......... 73.4 70.3 71.2 71.5 71.2 69.7
------ ------ ------ ------ ------ ------
Gross profit........... 26.6 29.7 28.8 28.5 28.8 30.3
Selling, general and
administrative
expenses............... 22.9 26.5 22.7 20.9 20.6 24.4
Non-recurring acquisition
costs.................. 0.9 1.1 0.5
Restructuring costs...... 1.7 0.1
------ ------ ------ ------ ------ ------
Operating income....... 3.7 1.5 5.1 6.5 8.2 5.4
Interest expense, net.... 2.5 3.6 2.1 2.2 1.6 2.1
Other (income) expense... (0.1) (0.1) (0.1) 0.2
------ ------ ------ ------ ------ ------
Income (Loss) before
provision for income
taxes.................. 1.3 (2.1) 3.0 4.5 6.4 3.3
Provision for (benefit
from) income taxes..... 0.2 0.1 (1.3) 2.3 2.9 0.0
------ ------ ------ ------ ------ ------
Net income (Loss)........ 1.1% (2.2)% 4.3% 2.2% 3.5% 3.3%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<CAPTION>
NINE MONTHS ENDED
----------------------------
JANUARY 25, JANUARY 24,
1997 1998
------------- -------------
<S> <C> <C>
Revenues................. 100.0% 100.0%
Cost of revenues......... 69.7 71.4
------ ------
Gross profit........... 30.3 28.6
Selling, general and
administrative
expenses............... 22.9 20.9
Non-recurring acquisition
costs.................. 0.6
Restructuring costs......
------ ------
Operating income....... 6.8 7.7
Interest expense, net.... 1.9 1.7
Other (income) expense... (0.1) .2
------ ------
Income (Loss) before
provision for income
taxes.................. 5.0 5.8
Provision for (benefit
from) income taxes..... 2.3 2.7
------ ------
Net income (Loss)........ 2.7% 3.1%
------ ------
------ ------
</TABLE>
40
<PAGE>
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 54.9%, from $160.0 million for the nine
months ended January 25, 1997, to $247.9 million for the nine months ended
January 24, 1998. This increase was primarily due to the inclusion of revenues
from the seven companies acquired in business combinations accounted for under
the purchase method during the nine months ended January 24, 1998 (the "Fiscal
1998 Purchased Companies") from their respective dates of acquisition and
revenues from the six companies acquired during fiscal 1997 in business
combinations accounted for under the purchase method ("the Fiscal 1997 Purchased
Companies") for the entire nine month period. Revenues also increased due to
sales to new accounts, increased sales to existing customers and higher pricing
on certain products in response to increased product costs. Product cost is the
most significant element in cost of revenues. Inbound freight, occupancy and
delivery charges are also included in cost of revenues.
Gross profit increased 56.5%, from $45.6 million, or 28.5% of revenues, for
the nine months ended January 25, 1997 to $71.4 million, or 28.8% of revenues,
for the nine months ended January 24, 1998. The increase in gross profit as a
percentage of revenues was due primarily to an increase in revenues from higher
margin products, primarily as a result of the purchase acquisitions of three
companies selling higher margin specialty product lines during the nine months
ended January 24, 1998, and as a result of improved purchasing power and rebate
programs negotiated with vendors. These factors were partly offset by an
increase in the cost of revenues as a result of the increased freight costs
caused by the UPS strike in the summer of 1997 and an increase in the portion of
revenues represented by lower margin bid revenues.
Selling, general and administrative expenses include selling expenses (the
most significant component of which is sales wages and commissions), catalog
costs, general administrative overhead (which includes information systems and
customer service), and accounting, legal, human resources and purchasing
expenses. Selling, general and administrative expenses increased 52.7%, from
$33.4 million, or 20.9% of revenues, for the nine months ended January 25, 1997
to $51.0 million, or 20.6% of revenues, for the nine months ended January 24,
1998. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to efficiencies generated from the
elimination of certain redundant administrative functions, including purchasing,
accounting, finance and information systems, of the Fiscal 1997 Purchased
Companies and the consolidation of two warehouses into one regional facility in
the Northeastern U.S during the third quarter of fiscal 1997. School Specialty
has established a 24-month integration process in which a transition team is
assigned to (i) sell or discontinue incompatible business units, (ii) reduce the
number of SKUs, (iii) eliminate redundant administrative functions, (iv)
integrate the acquired entity's MIS system, and (v) improve buying power.
However, the length of time it takes the Company to fully implement its strategy
for assimilating an acquired company can vary depending on the nature of the
company acquired and the season in which it is acquired.
The Company incurred non-recurring acquisition costs of $1.8 million for the
nine months ended January 25, 1997, in conjunction with the acquisition of the
Pooled Companies. These non-recurring acquisition costs included accounting,
legal, investment-banking fees, real estate and environmental assessments and
appraisals and various regulatory fees. Generally accepted accounting principles
("GAAP") require the Company to expense all acquisition costs (both those paid
by the Company and those paid by the sellers of the acquired companies) related
to business combinations accounted for under the pooling-of-interests method of
accounting. In accordance with GAAP, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of two
years following the completion of the Strategic Restructuring Plan. During this
period, the Company will not reflect any non-recurring acquisition costs in its
results of operations, as all costs incurred of this nature would be related to
acquisitions accounted for under the purchase method and would, therefore, be
capitalized as a portion of the purchase consideration. See "Risk Factors--Risks
Related to Inability to Use Pooling-of-Interests Method to Account for Future
Acquisitions".
41
<PAGE>
Since U.S. Office Products' acquisition of its Pooled Companies, interest
has been allocated to the Company based upon the Company's average outstanding
payable balance with U.S. Office Products at U.S. Office Products' weighted
average interest rate during such period. Interest expense, net of interest
income, increased 22.5%, from $3.3 million for the nine months ended January 25,
1997 to $4.0 million for the nine months ended January 24, 1998. The increase is
due primarily to higher amounts payable to U.S. Office Products incurred as a
result of the acquisition of the seven companies acquired in fiscal year 1998.
Provision for income taxes increased from $3.8 million for the nine months
ended January 25, 1997 to $7.1 million for the nine months ended January 24,
1998, reflecting effective income tax rates of 51.0% and 44.6%, respectively.
The high effective income tax rates for the nine months ended January 25, 1997
and January 24, 1998, compared to the federal statutory rate of 35.0%, was
primarily due to state income taxes and non-deductible goodwill amortization.
YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 27.4%, from $150.5 million in 1995, to
$191.7 million in fiscal 1997. This increase was primarily due to the inclusion,
for fiscal 1997, of revenues from the Fiscal 1997 Purchased Companies from their
respective dates of acquisition, sales to new accounts, increased sales to
existing customers and higher pricing on certain products in response to
increased product costs.
Gross profit increased 23.4%, from $44.7 million, or 29.7% of revenues, in
1995 to $55.2 million, or 28.8% of revenues, in fiscal 1997. The decrease in
gross profit as a percentage of revenues was due primarily to a shift in revenue
mix, resulting from the acquisition of the Fiscal 1997 Purchased Companies,
which traditionally had lower gross profits as a percentage of revenues. This
decrease was partially offset by improved purchasing and rebate programs
negotiated with vendors and the Company's ability to take advantage of term
discounts due to improved cash flows.
Selling, general and administrative expenses increased 9.0%, from $39.9
million, or 26.5% of revenues, in 1995 to $43.5 million, or 22.7% of revenues,
in fiscal 1997. The decrease in selling, general and administrative expenses as
a percentage of revenues was due primarily to the consolidation of two
warehouses into one regional facility in the Northeastern U.S. during third
quarter of fiscal 1997, the elimination of certain redundant administrative
functions of a company acquired during 1995 in a business combination accounted
for under the purchase method (the "1995 Purchased Company") and reduced
executive compensation expense at one of the Pooled Companies after being
acquired by U.S. Office Products in July 1996.
The Company has historically utilized grants of employee stock options as a
method of incentivizing employees by increasing their ownership interests in the
Company, which also has the effect of more closely aligning their interests with
the interests of stockholders of the Company. As a result, if the Company had
recorded compensation expense based upon the fair market value of the stock
options on the dates of grant under the methodology prescribed by SFAS 123, the
Company's income from continuing operations for the fiscal year ended April 26,
1997 would have been reduced by approximately $0.7 million or 7.7%.
The Company incurred non-recurring acquisition costs of $1.8 million in
fiscal 1997, in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal, investment-banking fees, real estate and environmental
assessments and appraisals and various regulatory fees.
The Company incurred restructuring costs of $2.5 million and $194,000 during
1995 and fiscal 1997, respectively. These costs represent the external costs and
liabilities to close redundant Company facilities, severance costs related to
the Company's employees and other costs associated with the Company's
restructuring plans. The Company expects to incur similar costs in the future as
the Company continues to
42
<PAGE>
review its operations, with the intention of continuing to eliminate redundant
facilities. See "Business--Cost Reduction and Other Efficiencies".
Interest expense, net of interest income, decreased 24.2%, from $5.5 million
in 1995 to $4.2 million in fiscal 1997. The decrease was due primarily to the
repayment of substantially all of the Company's debt in conjunction with the
acquisition of the Pooled Companies by U.S. Office Products and lower interest
rates being charged on the Company's short-term and long-term debt with U.S.
Office Products.
Provision for income taxes decreased from a tax expense of $173,000 in 1995
to a tax benefit of $2.4 million in fiscal 1997. The Company incurred a tax
expense in 1995, notwithstanding the fact that it reported a pre-tax loss,
because one of the Pooled Companies' earnings were not offset by the other
Pooled Companies' loss. In 1995, the Company recorded a full valuation allowance
of $5.3 million on the deferred tax asset resulting from the net operating loss
carryforwards created during 1995. The valuation allowance had been established
by one of the Pooled Companies prior to its acquisition by U.S. Office Products
to offset the tax benefit from such loss carryforwards, because at the time it
was not likely that such tax benefit would be realized. The benefit from income
taxes in Fiscal 1997 of $2.4 million arose from the reversal of the $5.3 million
deferred tax asset valuation allowance in the fourth quarter. The valuation
allowance was reversed subsequent to the Company's being acquired by U.S. Office
Products, because it was deemed "more likely than not", based on improved
results, that the tax benefit from such operating loss carryforwards would be
realized. The Company believes that the effective income tax rate of 46%
reflected in the pro forma interim financial statements is more representative
of future effective income tax rates.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues increased 25.9%, from $119.5 million in 1994, to
$150.5 million in 1995. This increase was primarily due to the inclusion in 1995
of the 1995 Purchased Company from its date of acquisition and revenues from one
company acquired in a business combination accounted for under the purchase
method of accounting during 1994 (the "1994 Purchased Company") for the entire
year.
Gross profit increased 40.8%, from $31.8 million, or 26.6% of revenues, in
1994 to $44.7 million, or 29.7% of revenues, in 1995. The increase in gross
profit as a percentage of revenues was due primarily to a shift in revenue mix,
primarily attributed to the acquisition of the 1995 Purchased Company, which had
a higher gross profit as a percentage of revenues and a reduction in lower
margin bid revenues.
Selling, general and administrative expenses increased 46.1%, from $27.3
million, or 22.8% of revenues, in 1994 to $39.9 million, or 26.5% of revenues,
in 1995. The increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the 1994 and 1995 Purchased
Companies, which operated with higher levels of selling, general and
administrative expenses as a percentage of revenues.
Interest expense, net of interest income, increased 84.1%, from $3.0 million
in 1994 to $5.5 million in 1995. The increase was due primarily to additional
borrowings to finance the acquisition of the 1995 Purchased Company, a full year
of interest expense on debt incurred to finance the acquisition of the 1994
Purchased Company and higher average borrowings on the Company's revolving
credit facility resulting from financing the operations of the 1994 and 1995
Purchased Companies.
Provision for income taxes decreased from $218,000 in 1994 to $173,000 in
1995. The Company incurred a tax expense in 1995, notwithstanding the fact that
it reported a pre-tax loss, because one of the Pooled Companies' earnings were
not offset by the other Pooled Companies' loss. The low effective income tax
rate of 14% in 1994 is due to the Company's utilization of a net operating loss
carryforward the benefit of which had not been reflected as income in prior
years.
43
<PAGE>
CONSOLIDATED PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma combined financial data does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred May 1, 1996, as assumed,
and are not necessarily representative of the Company's results of operations in
any future period.
NINE MONTHS ENDED JANUARY 25, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 24,
1998
Pro forma revenues increased 9.0%, from $292.2 million for the nine months
ended January 25, 1997, to $318.7 million for the nine months ended January 24,
1998. This increase was primarily due to sales to new accounts, increased sales
to existing customers, and higher pricing on certain products in response to
increased product costs.
Gross profit increased 3.0%, from $88.5 million, or 30.3% of revenues, for
the nine months ended January 25, 1997 to $91.2 million, or 28.6% of revenues,
for the nine months ended January 24, 1998. The decrease in gross profit as a
percentage of revenues was primarily due to higher freight costs as a result of
the UPS strike in the summer of 1997 and an increase in the portion of revenues
represented by lower margin bid revenues and the discontinuation of higher
margin retail operations at some of the Fiscal 1997 Purchased Companies.
Selling, general and administrative expenses were $65.0 million, or 22.2% of
revenues, for the nine months ended January 25, 1997 and $64.7 million, or 20.3%
of revenues, for the nine months ended January 24, 1998. The decrease in
selling, general and administrative expenses as a percentage of revenues
reflects the elimination of certain redundant administrative functions,
including purchasing, accounting, finance and information systems of the Fiscal
1997 Purchased Companies and the consolidation of two warehouses into one
regional facility in the Northeastern U.S. during the third quarter of fiscal
1997. The Company has a 24-month integration strategy to consolidate operations
of purchased businesses; however, the length of time it takes for the Company to
fully implement its strategy for assimilating an acquired company can vary
depending on the nature of the company acquired and the season in which it is
acquired. See "Business--Company Strengths--Ability to Integrate Acquisitions."
The decrease in selling, general and administrative expense as a percentage of
revenues was partly offset by the inclusion of the pro forma results of
Education Access, which the Company acquired out of a bankruptcy proceeding in
March 1998.
Provision for income taxes increased 28.0% from $6.7 million for the nine
months ended January 25, 1997 to $8.5 million for the nine months ended January
24, 1998, reflecting an effective income tax rate of 46.0% in both periods. The
high effective income tax rate, compared to the federal statutory rate of 35.0%,
was primarily due to state income taxes and non-deductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the acquisition by U.S. Office Products of the Pooled
Companies and prior to the Distribution, U.S. Office Products funded the cash
portions of School Specialty's acquisitions, paid the acquisition costs, repaid
outstanding debt of acquired companies, allocated a portion of U.S. Office
Products' corporate expenses to School Specialty and made daily advances or
sweeps of cash to keep School Specialty's cash balance at or near zero on a
daily basis. The net amount of such transactions was recorded as a payable from
School Specialty to U.S. Office Products. At January 24, 1998, the Company had
working capital of $43.6 million. The Company's capitalization, defined as the
sum of long-term debt, long-term payable to U.S. Office Products and
stockholders' equity, at January 24, 1998 was $161.3 million. On a pro forma
basis at January 24, 1998, the Company had working capital of $60.6 million and
capitalization of $181.5 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $15.4 million. Net cash used in investing activities
was $96.5 million, including $92.1 million for acquisitions
44
<PAGE>
and $4.1 million for additions to property and equipment. Net cash provided by
financing activities was $81.1 million, including $89.2 million provided by U.S.
Office Products to fund the cash portion of the purchase price and the repayment
of debt assumed with the acquisition of the fiscal 1998 Purchased Companies,
$69.8 million of which was considered a contribution of capital by U.S. Office
Products, partially offset by $8.0 million used to repay indebtedness.
During the nine months ended January 25, 1997, net cash provided by
operating activities was $4.2 million. Net cash used in investing activities was
$14.7 million, including $7.6 million for acquisitions, $5.3 million for
additions to property and equipment and $1.7 million to pay non-recurring
acquisition costs. Net cash provided by financing activities was $11.2 million,
including $55.0 million provided by U.S. Office Products to fund the cash
portion of the purchase price and the repayment of debt associated with 1997
Purchased Companies acquired during the nine months ended January 25, 1997,
partially offset by $46.9 million used for the repayment of indebtedness,
primarily at the 1997 Purchased Companies acquired during the nine months ended
January 25, 1997.
During fiscal 1997, net cash provided by operating activities was $918,000.
Net cash used in investing activities was $16.7 million, including $7.7 million
for acquisitions, $7.2 million for additions to property and equipment and $1.8
million to pay non-recurring acquisition costs. Net cash provided by financing
activities was $15.8 million, including $59.9 million provided by U.S. Office
Products to fund the cash portion of the purchase price and the repayment of
debt associated with the fiscal 1997 Purchased Companies and the payment of debt
of the Pooled Companies, partially offset by $46.9 million used for the net
repayment of indebtedness, primarily at the fiscal 1997 Purchased Companies.
During 1995, net cash provided by operating activities was $4.8 million. Net
cash used in investing activities was $6.0 million, including $5.4 million for
acquisitions and $881,000 for additions to property and equipment. Net cash
provided by financing activities was $1.2 million, including net proceeds from
the issuance of debt of $2.4 million and $500,000 received from the issuance of
common stock partially offset by payments of indebtedness of $1.5 million.
During 1994, net cash used in operating activities was $268,000. Net cash
used in investing activities was $2.9 million, including $2.1 million for
acquisitions and $630,000 for additions to property and equipment. Net cash
provided by financing activities was $3.2 million, consisting of proceeds from
the issuance of debt of $5.1 million, partially offset by payments of
indebtedness of $2.0 million.
The Company's anticipated capital expenditures budget for the next twelve
months is approximately $3.0 million. The largest items include operational and
financial reporting software, computer hardware and warehouse equipment.
Under the Distribution Agreement, the Company is required, on or prior to
the Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off $83.3 million of
U.S. Office Products' debt, as described under "The Spin-Offs from U.S. Office
Products--Distribution Agreement--Debt". The Company has received a committment
letter for a secured $250.0 million revolving credit facility from NationsBank,
N.A. as administrative agent. NationsBanc Montgomery Securities LLC, one of the
Underwriters and an affiliate of NationsBank, N.A., is the Arranger and
Syndication Agent. The credit facility will terminate five years from the
Distribution Date. Interest on borrowings under the credit facility will accrue
interest at a rate of, at the Company's option, either LIBOR plus 1.00% or the
lender's base rate, plus a margin of 0% to .25% for up to the first 6 months
under the agreement. Thereafter, interest will accrue at a rate of (i) LIBOR
plus a range of .625% to 1.625%, or (ii) the lender's base rate plus a range of
.125% to .250% (depending on the Company's leverage ratio of funded debt to
EBITDA). Indebtedness will be secured by substantially all of the assets of the
Company. The credit facility will be subject to terms and conditions typical of
facilities of such size and will include certain financial covenants. The
Company will borrow under the credit facility to repay the U.S. Office Products'
debt which it is obligated under the Distribution Agreement to repay. The
balance of
45
<PAGE>
the credit facility will be available for working capital, capital expenditures
and acquisitions, subject to the maintenance of required covenants.
School Specialty intends to use the net proceeds from the Offering and the
sale of 250,000 shares of Common Stock to Messrs. Spalding, Vander Zanden and
Pate to repay a portion of the $83.3 million to be borrowed under a $250 million
credit facility to refinance all amounts payable to U.S. Office Products. After
such repayment, approximately $200 million will be available under the credit
facility (subject to compliance with the financial covenants), which may be used
for general corporate purposes, including working capital, and for acquisitions.
On March 6, 1998, School Specialty filed a Registration Statement with the
SEC for the issuance of School Specialty Common Stock in an underwritten public
offering that is expected to close prior to or concurrent with the School
Distribution. The public offering is expected to close prior to or concurrent
with the School Specialty Distribution. The public offering is expected to be
for 2,125,000 shares (plus 318,750 shares subject to the underwriters' option to
purchase shares to cover overallotments). A preliminary prospectus dated May 15,
1998 estimated that the initial public offering price will be between $14.00 and
$16.00 per share. The Company anticipates that its current cash on hand, cash
flow from operations, the net proceeds from the Offering and additional
financing under the bank line of credit will be sufficient to meet the Company's
liquidity requirements for its operation for the next 12 months. However, the
Company intends to pursue acquisitions, which are expected to be funded through
cash, stock or a combination thereof. There can be no assurance that additional
sources of financing will not be required during the next 12 months or
thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been dramatically higher in the first
two quarters of its fiscal year (May-October) primarily due to increased
shipments to customers coinciding with the start of each school year.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired by the Company may differ substantially from those
of the Company, which could contribute to the further fluctuation in its
quarterly operating results. Therefore, results for any quarter are not
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
The following table sets forth certain unaudited consolidated quarterly
financial data for the year ended December 31, 1995, fiscal 1997 and the first
three quarters of fiscal 1998 (in thousands). The information has been derived
from unaudited consolidated financial statements that in the opinion of
management reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of such quarterly information. This
quarterly information is not comparative because of the high degree of
seasonability in School Specialty's business. Revenues and profitability are
significantly higher in the months of May through October, with the most
significant portion of revenue and profit occurring in the months of July
through September. On a fiscal year basis (years ending in April) this six-month
(May through October) period falls in the first two quarters of the fiscal year.
On a calendar year basis, the most profitable three months (July through
September) fall in the third quarter.
46
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
Revenues..................................... $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit................................. 4,960 11,130 20,795 7,840 44,725
Operating income (loss)...................... (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)............................ (3,711) (252) 4,309 (3,713) (3,367)
<CAPTION>
YEAR ENDED APRIL 26, 1997
-----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit................................. 18,110 19,823 7,664 9,572 55,169
Operating income (loss)...................... 5,197 6,732 (1,520) (688) 9,721
Net income (loss)............................ 1,981 2,692 (1,067) 4,526(1) 8,132
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 24, 1998
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD TOTAL
--------- --------- --------- ---------
Revenues.............................................. $ 87,029 $ 111,460 $ 49,391 $ 247,880
Gross profit.......................................... 26,090 33,619 11,670 71,379
Operating income (loss)............................... 11,872 12,155 (3,647) 20,380
Net income (loss)..................................... 5,804 5,965 (2,934) 8,835
</TABLE>
(1) For the year ended April 26,1997, fourth quarter net income was
increased by $5.3 million due to the reversal of a deferred tax asset valuation
allowance. See Note 3 to "Selected Financial Data".
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the years ended December 31, 1994 and 1995 or the
fiscal year ended April 26, 1997.
NEW ACCOUNTING PRONOUNCEMENT
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company intends to
adopt SFAS No. 130 in fiscal 1999.
47
<PAGE>
INDUSTRY OVERVIEW
The school supply market consists of the sale of non-textbook school
supplies, furniture and equipment to school districts, individual schools,
teachers and curriculum specialists who purchase products for school and
classroom use. The Company believes that sales of educational supplies and
equipment (which is defined as educational products sold by dealers for use by
educational institutions or as a supplement to learning outside of the
classroom) to the school supply market is approximately $6.1 billion, with over
$3.6 billion sold to institutions and $2.5 billion sold to consumers.
According to the U.S. Department of Education, in all 50 states, there are
15,996 school districts, 108,577 public and private elementary and secondary
schools, and 3.1 million teachers. School supply procurement decisions are made
at the school district level by administrators and curriculum specialists, at
the school level by principals and at the classroom level by teachers. Some
school supplies are purchased directly from manufacturers while others are
purchased through distributors. The Company believes that there are over 3,400
distributors of school supplies. The majority of these distributors are family-
or employee-owned companies with revenues under $20 million that operate in a
single region. In addition to School Specialty, only two other companies have a
measurable presence in the market, with annual revenues in excess of $130
million. School Specialty believes the demand for timely order fulfillment at
competitive prices, combined with the need to invest in automated inventory
management systems and electronic ordering systems, is accelerating the trend
toward consolidation in the industry.
The volume of school supplies is directly influenced by the size of the
student population. According to the U.S. Department of Education, student
enrollment in grades K-12 began growing in 1986, reaching an all-time peak in
1996 with 51.5 million students (1997 data not yet available). Current
projections by the U.S. Department of Education indicate that student enrollment
will continue to grow to 54.3 million by the year 2006. As a result of these
trends, the U.S. Department of Education projects that expenditures in public
elementary and secondary schools will rise through the year 2007. In current
dollars, expenditures of $272.4 billion in 1997 are projected to increase to
$340.7 billion by the year 2001. These projected increases in expenditures
include a projected increase in total per pupil spending in current dollars from
$5,961 per pupil in 1997 to $7,179 by the year 2001.
48
<PAGE>
BUSINESS
School Specialty is a Delaware corporation formed in February 1998 to hold
the Educational Supplies and Products Division of U.S. Office Products. School
Specialty, Inc., a Wisconsin corporation ("Old School") formed in October 1959,
was acquired by U.S. Office Products in May 1996. U.S. Office Products'
Educational Supplies and Products Division also includes Re-Print, which it
acquired in July 1996, and which has been in operation since 1921. The specialty
product lines, Childcraft, Sax Arts & Crafts and Gresswell, were all acquired by
U.S. Office Products in 1997, and have been in operation since 1946, 1945, and
1938, respectively. School Specialty has 1,322 employees in the United States
and the United Kingdom, providing service to all 50 states and the United
Kingdom. School Specialty's principal offices are located at 1000 North
Bluemound Drive, Appleton, Wisconsin 54914, and its telephone number is (920)
734-2756. School Specialty's world wide website is located at
http:\\www.schoolspecialty.com. Information contained in this website is not
deemed to be a part of this Information Statement/Prospectus.
COMPANY STRENGTHS
School Specialty attributes its strong competitive position to the following
key strengths:
LEADING MARKET POSITION. The Company has developed its leading market
position over its 38 year history by emphasizing high quality products, superior
order fulfillment and exceptional customer service. School Specialty has
developed a group of strong brand names including School Specialty, Re-Print,
Childcraft, Sax Arts & Crafts and Gresswell. The Company believes its annual
revenues exceed those of its next two largest competitors combined and that its
large size and brand recognition have resulted in significant buying power,
economies of scale and customer loyalty.
BROAD PRODUCT LINE. School Specialty's strategy is to provide a full range
of high quality products to meet the complete supply needs of pre-K-12 schools
and, as a result, the Company currently offers over 32,000 SKUs ranging from
classroom supplies to playground equipment. The Company's specialty brands
enrich its general product offering and create opportunities to cross
merchandise its specialty school supplies to the customers of its general lines.
Specialty brands include Childcraft, which sells materials, classroom furniture
and equipment such as library shelving, cubbies, easels, desks and play vehicles
to the early childhood market; Sax Arts & Crafts, which distributes art supplies
such as paint, brushes, paper, ceramics, leather and wood crafts; and Gresswell,
which distributes library-related products including supplies, furniture and
media display and storage in the United Kingdom. School Specialty offers
customers one source for virtually all of their school supply and furniture
needs.
INNOVATIVE TWO-PRONGED DISTRIBUTION. School supply procurement decisions
are made at the district and school levels by administrators and principals, and
at the classroom level by curriculum specialists and teachers. The Company
targets both of these groups, addressing administrative decision makers with a
"top down" approach through its 290 person sales force and School Specialty
Catalog, and targeting teachers and curriculum specialists with a "bottom up"
approach primarily through the 6.3 million Re-Print general supply, Childcraft,
Sax Arts & Crafts and Gresswell specialty catalogs mailed each year. School
Specialty utilizes its customer database across its family of catalogs to
maximize their effectiveness and increase the Company's marketing reach.
ABILITY TO INTEGRATE ACQUISITIONS. School Specialty has successfully
completed the acquisition of 20 companies since 1991, 15 of which have been
acquired since May 1996. School Specialty has established a 24-month integration
process in which a transition team is assigned to (i) sell or discontinue
incompatible business units, (ii) reduce the number of SKUs, (iii) eliminate
redundant administrative functions, (iv) integrate the acquired entity's MIS
system, and (v) improve buying power. To date, the Company's integration efforts
have focused on acquired general products companies. The Company intends to
consolidate certain administrative functions at its specialty divisions. The
Company believes that through these processes it can generate significant
economies of scale and rapidly improve the margins of acquired
49
<PAGE>
entities, as well as increase sales by channeling acquired entities' products
through its broad distribution network.
USE OF TECHNOLOGY. The Company believes that through the utilization of
technology in areas such as (i) purchasing and inventory management, (ii)
customer order fulfillment, and (iii) database management, School Specialty is
able to turn inventory more quickly than competitors, offer customers more
convenient and cost effective product ordering methods and conduct more
precisely targeted sales and marketing campaigns.
EXPERIENCED MANAGEMENT. School Specialty's management team provides depth
and continuity of experience. Management's interests are aligned with those of
its shareholders as management's incentive-based compensation is tied to School
Specialty's operating profitability.
COMPANY GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the Company
has a limited presence, and (ii) specialty companies focusing on disciplines
such as physical education, science, technology and music. School Specialty
believes it can improve the margins of acquired entities through its efficient
integration process to achieve economies of scale. Although the Company is the
largest distributor in the industry, its share of the $6.1 billion school supply
market is less than 6%, giving the Company substantial growth opportunities.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
3.7% in 1994 to 7.0% for the twelve months ended January 24, 1998. School
Specialty believes that there are substantial opportunities to further improve
margins by (i) increasing the efficiency of recent acquisitions, (ii) expanding
purchasing power and (iii) improving warehousing and distribution.
PENETRATE NEW MARKETS AND EXPAND CUSTOMER BASE IN EXISTING MARKETS. School
Specialty believes that it can increase sales by adding sales representatives in
geographic markets in which the Company does not have a significant presence. In
addition, the Company believes that it can further increase sales by cross
merchandising its specialty supplies to its general supplies customers. Lastly,
the Company intends to increase international sales in English-speaking
countries.
PRODUCT LINES
SCHOOL SPECIALTY. The School Specialty Catalog offers a comprehensive
selection of classroom supplies, instructional materials, educational games, art
supplies, school forms (such as reports, planners and academic calendars),
physical education equipment, audio-visual equipment, school furniture, and
indoor and outdoor equipment and is targeted to administrative decision makers.
School Specialty believes it is the largest school furniture resale source in
the United States. School Specialty has been granted exclusive franchises for
certain furniture lines in specific territories and School Specialty enjoys
significant purchasing power in open furniture lines.
The Company's specialty brands offer product lines for specific educational
disciplines.
RE-PRINT. Re-Print offers its customers substantially the same products as
the School Specialty Catalog but focuses on reaching teachers and curriculum
specialists directly through its mail-order catalogs.
50
<PAGE>
CHILDCRAFT. Childcraft distributes early childhood education products and
materials. Childcraft also distributes over 1,000 proprietary or exclusive
products manufactured by its Bird-in-Hand Woodworks subsidiary, including wood
classroom furniture and equipment such as library shelving, cubbies, easels,
desks and play vehicles.
SAX ARTS & CRAFTS. Sax Arts & Crafts is a leading distributor of art
supplies and art instruction materials, including paints, brushes, paper,
ceramics, art metals and glass, leather and wood crafts. Sax Arts & Crafts
offers customers a toll free "Art Savvy Hotline" staffed with 15 professional
artists to respond to customer questions.
GRESSWELL. Gresswell distributes library-related products in the U.K.
including furniture, and media display and storage. Gresswell's dedicated sales
and design team helps customers plan, design and install library projects using
Computer Assisted Design equipment.
EDUCATION ACCESS. Education Access is a catalog reseller of technology
solutions for the K-12 education market. This product line offers curriculum
software, productivity software, peripherals, networking products, and other
related products. Education Access publishes a 110-page catalog twice a year and
mails interim Technology Flash Updates to the K-12 education market in the
United States.
School Specialty employs merchandising managers who continually review and
update the product lines for each operating division. The merchandising managers
convene customer focus groups and advisory panels to ascertain whether current
offerings are well-received and to anticipate future demand. The merchandising
managers also travel to product fairs and conventions seeking out new product
lines.
This annual review process results in an organic reshaping and expansion of the
educational materials being offered by School Specialty.
OPERATIONS
SALES AND MARKETING
School Specialty believes it has developed a substantially different sales
and marketing model from that of traditional school supply and school
furnishings distribution companies in the United States. School Specialty's
strategy is to use its position of owning two distribution platforms with which
it can approach the school market. School Specialty's 290 sales representatives
focus on "top down" selling (through districts, school purchasing authorities
and schools), while School Specialty's Re-Print Division uses the "bottom up"
approach through its direct mail catalog selling directly to teachers. To
further strengthen its position in the market, School Specialty also owns
premier specialty education brands (Childcraft, Sax Arts & Crafts, and
Gresswell) that have the potential to enrich the general product offering
through cross-merchandising.
School Specialty has a broad customer base and no single customer accounted
for more than 2% of sales during fiscal 1997. Schools typically purchase school
supplies and furniture based on an established relationship with relatively few
suppliers. School Specialty establishes and maintains its relationship with its
customers by assigning accounts within a specific geographic territory to a
local area sales representative. Additionally, each account is assigned its
designated inside customer service representative.
School Specialty's customer service representatives call on existing
customers frequently to ascertain and fulfill their school supply needs. The
representatives maintain contact with customers throughout the order cycle and
assist in processing orders.
School Specialty's primary compensation program for sales representatives is
based on commissions as a percentage of gross profit on sales. For new and
transitioning sales representatives, School Specialty offers salary and expense
reimbursement until the representative is moved to a full commission
compensation structure.
51
<PAGE>
School Specialty utilizes direct mail catalogs to reach its broader customer
base. School Specialty distributes five major catalogs, one for each of its
School Specialty general supply, Re-Print, Childcraft, Gresswell, and Sax Arts &
Crafts lines. The catalog distribution calendar is generally the same across all
product lines. A major catalog containing all product offerings is distributed
toward the end of the calendar year so that it is available for school buyers at
the beginning of the year. During the year, various catalog supplements are
distributed to coincide with the peak school buying season in June through
September and following the return of students to school in the fall.
The approximate number of catalogs distributed for School Specialty,
Re-Print, Childcraft, Gresswell and Sax Arts & Crafts for each of the past three
calendar years and projected catalog distribution for 1998 is set out below. The
figures set forth below include all books of over 32 pages sent out (or, with
respect to 1998, expected to be sent out) during the calendar year but do not
include catalogs that were distributed by discontinued operations.
<TABLE>
<CAPTION>
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
School Specialty Catalog............................... 115,000 296,750 450,750 600,000
Re-Print............................................... 998,000 1,175,000 2,275,000 3,400,000
Childcraft............................................. 1,583,000 1,308,000 1,360,000 1,728,000
Gresswell.............................................. 100,000 180,000(1) 130,000 150,000
Sax Arts & Crafts...................................... 750,000 823,000 1,043,500 1,064,000
--------- --------- --------- ---------
Total.............................................. 3,546,000 3,782,750 5,259,250 6,942,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes an extra catalog published against a competitive launch.
Pricing for School Specialty's general and specialty product offerings
varies by product and channel of distribution. The Company generally offers a
negotiated discount from catalog prices for supplies and responds to quote and
bid requests for furniture and equipment. In addition, local sales
representatives work with the Company's corporate sales force and school supply
buyers to achieve an acceptable pricing structure based upon the mix of products
being procured.
School Specialty distributes products through its distribution centers as
well as placing customer orders directly with School Specialty's suppliers.
Furniture is generally shipped directly from the manufacturer to the user,
bypassing School Specialty's distribution centers.
PURCHASING AND INVENTORY MANAGEMENT
School Specialty manages its inventory by continually reviewing daily
inventory levels compared to a running 90-day inventory for the previous year,
adjusted for incoming orders. School Specialty constantly refines the focus of
inventory products through its automated inventory management system to pursue
the optimum level of scope and depth of product offered. Every item in each of
the various distribution regions is forecasted on a daily basis to account for
the anticipated demand curve, current order activity, and available stock as
well as the expected lead time from the supplier. The forecast allows inventory
purchases to respond quickly to the high seasonal demand while keeping
off-season inventory to a minimum. The information systems for all of School
Specialty's distribution centers are interconnected to allow transfer of
inventory between facilities to fill regional demand. In addition, all orders
can be redirected to the distribution center which is the primary stocking
location for a product. School Specialty's inventory management results in
inventory turnover that management believes is higher than industry turnover
rates and reduces the level of discontinued, excess and obsolete inventory
compared to businesses acquired by School Specialty.
School Specialty believes its large size enhances its purchasing power with
suppliers and results in lower product costs than most of the Company's
competitors. Further, School Specialty believes it can
52
<PAGE>
leverage this purchasing power to acquired companies in the future to improve
the operating margins for both general supply and specialty businesses. The
Company also believes its purchasing power for general supplies should result in
improved margins for its specialty businesses.
Market surveys by Krebs and Company have shown that the primary determinants
of customer satisfaction in the educational supply industry are the completeness
and accuracy of shipments received and the timeliness of delivery. School
Specialty continues to invest in sophisticated computer systems to automate the
order taking, inventory allocation and management, and order shipment processes.
As a result, School Specialty has been able to provide superior order
fulfillment to its customers. In addition, School Specialty has developed OMS,
which allows schools to customize their orders and enter them electronically
with School Specialty and provides historical usage reports to schools useful
for their budgeting process. During the academic year, School Specialty seeks to
fill orders within twenty-four hours of receipt of the order at a 95.0% fill
rate and a 99.5% order accuracy rate. During the summer months, School Specialty
shifts to a production environment and schedules shipments to coincide with the
start of the school year. During the summer months, School Specialty's
objectives are to meet a 100% fill rate at a 99.5% order accuracy rate. In the
aggregate, School Specialty's order fill rate for June, July and August 1997
exceeded 97.0%. The Company defines "fill rate" as the percentage of line items
in a customer's order that are initially shipped to the customer in response to
the order by the requested ship date.
During the peak shipping season between June 1 and September 30, each of
School Specialty's distribution centers contracts with local common carriers to
deliver its product to schools and school warehouses. Re-Print and Sax Arts &
Craft rely on carriers such as Roadway Package Service, United Parcel Service
and the U.S. Postal Service for distribution to customers.
INFORMATION SYSTEMS
The Company believes that through the utilization of technology in areas
such as (i) purchasing and inventory management, (ii) customer order fulfillment
and (iii) database management, School Specialty is able to turn inventory more
quickly than competitors, offer customers more convenient and cost effective
product ordering methods and conduct more precisely targeted sales and marketing
campaigns. School Specialty uses two principal information systems, one for its
general distribution and another for its specialty market distribution. In
general school supply distribution, School Specialty utilizes a specialized
distribution software package used primarily by office products and paper
distributors. The software offers a fully integrated process from sales order
entry through customer invoicing, and inventory requirements planning through
accounts payable. School Specialty's system provides information through daily
automatic posting to the general ledger and integrated inventory control. School
Specialty has made numerous enhancements to this process that allow greater
flexibility in addressing seasonal requirements of the industry and meeting
specific customer needs.
The specialty divisions are moving towards a common mail order system
provided by Smith-Gardner & Associates. The Mail-order and Catalog System
("MACS") meets the unique needs of the direct marketing approach with extensive
list management and tracking of multiple marketing efforts. The system provides
complete and integrated order processing, inventory control, warehouse
management, and financial applications.
Although School Specialty has two principal information systems, these
systems integrate general ledger, purchasing and inventory management functions.
The software and hardware allow for continued incremental growth as well as the
opportunity to integrate new client-server and other technologies into the
information systems. Currently, all acquired School Specialty general
distribution companies (except one acquired in December 1997) are on the same
computer system. The specialty businesses and Re-Print operate on different
systems but intend to implement the common MACS system. School Specialty intends
to continue to use two principal information systems in its business.
53
<PAGE>
YEAR 2000 COMPLIANCE
School Specialty's current information systems, as well as those being
considered for acquisition by School Specialty's mail order and specialty
distribution divisions, currently meet information standards for Year 2000
compliance. School Specialty does not expect that it will incur any material
costs and expenses related to bringing its information systems to Year 2000
compliance. See "Risk Factors--Dependence on Systems".
COMPETITION
School Specialty operates in a highly competitive environment. The Company's
principal competitors are other national and regional school supply distribution
companies. School Specialty is also faced with increasing competition from
non-traditional alternate channel competitors, such as office products contract
stationers and superstores. Among traditional school supply distributors, School
Specialty believes that there are only two other companies with sales in excess
of $130 million: Beckley-Cardy and the J.L. Hammett Co. School Specialty
believes that it competes favorably with these companies on the basis of service
and price.
The market is highly competitive on a regional basis, but School Specialty
believes its heaviest competition is coming from alternate channel competitors
such as office product contract stationers and superstores. Their primary
advantages over School Specialty are size, location, greater financial resources
and buying power. Their primary disadvantage is that their product mix covers
only 15% to 20% of the school's needs (measured by volume). In addition, the
Company's competitors do not offer special order fulfillment software, which
School Specialty believes is increasingly important to adequately service school
needs. School Specialty believes it competes favorably with these companies on
the basis of service and product offering.
EMPLOYEES
As of December 31, 1997, School Specialty had 1,322 full-time employees, 266
of whom were employed primarily in management and administration, 430 in
regional warehouse and distribution operations, and 626 in marketing, sales,
order processing, and customer service. To meet the seasonal demands of its
customers, School Specialty employs many seasonal employees during the late
spring and summer seasons. Historically, School Specialty has been able to meet
its requirements for seasonal employment. As of January 12, 1998, approximately
27 of School Specialty's employees were members of the Teamsters Labor Union at
Sax Arts & Crafts' New Berlin, Wisconsin facility. School Specialty considers
its relations with its employees to be very good.
FACILITIES
School Specialty's corporate headquarters are located at 1000 North
Bluemound Drive, Appleton, Wisconsin, a combined office and warehouse facility
of approximately 120,000 square feet. School
54
<PAGE>
Specialty's lease on the Appleton headquarters expires on December 31, 2001.
School Specialty leases or owns the following distribution facilities:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/ LEASE
LOCATIONS FOOTAGE LEASED EXPIRATION
- -------------------------------------------------- ------------- ----------- -----------------
<S> <C> <C> <C>
Agawam, Massachusetts............................. 163,300 Owned --
Bethlehem, Pennsylvania........................... 25,600 Leased February 28, 1999
Birmingham, Alabama............................... 180,365 Leased November 20, 2006
Bowling Green, Kentucky........................... 42,000 Leased June 30, 2001
Cary, Illinois.................................... 75,767 Owned --
Enfield, London, England.......................... 8,000 Owned --
Fresno, California................................ 18,480 Leased December 31, 2001
Hoddesdon, London, England........................ 10,000 Leased September 1999
Hoddesdon, London, England........................ 10,000 Leased September 2015
Lancaster, Pennsylvania........................... 75,434 Leased December 31, 2002
Lancaster, Pennsylvania........................... 165,750 Leased February 28, 1999
Mt. Laurel, New Jersey............................ 48,000 Leased May 31, 2001
New Berlin, Wisconsin............................. 97,500 Leased March 31, 2002
Oklahoma City, Oklahoma........................... 37,340 Leased July 16, 2001
Pollocksville, North Carolina..................... 84,071 Owned --
Portland, Oregon.................................. 30,456 Leased May 31, 2001
Salina, Kansas.................................... 123,000 Owned --
</TABLE>
The Lancaster, Pennsylvania facility is used for manufacturing and the
Salina, Kansas facility is used for production of school forms. In addition,
School Specialty has ten sales offices throughout the United States.
School Specialty believes that its properties are adequate to support its
operations for the foreseeable future. School Specialty reviews on a regular
basis the consolidation of its facilities.
55
<PAGE>
MANAGEMENT OF SCHOOL SPECIALTY
DIRECTORS AND EXECUTIVE OFFICERS
Following the School Specialty Distribution, it is anticipated that the
directors and executive officers of School Specialty will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Daniel P. Spalding........................ 43 Chairman of the Board and Chief Executive
Officer
David J. Vander Zanden.................... 43 President, Chief Operating Officer, and
Director*
Donald J. Noskowiak....................... 40 Executive Vice President and Chief
Financial Officer
Douglas Moskonas.......................... 53 Executive Vice President for School
Specialty Divisions
Melvin D. Hilbrown........................ 49 Executive Vice President for Gresswell
Richard H. Nagel.......................... 57 Executive Vice President for Sax Arts &
Crafts
Donald Ray Pate, Jr....................... 35 Executive Vice President for Re-Print
Ronald E. Suchodolski..................... 51 Executive Vice President for Childcraft
Michael J. Killoren....................... 41 Vice President for School Specialty
Divisions
Lillian R. Kellogg........................ 45 President for Education Access Division
Jonathan J. Ledecky....................... 40 Director*
Leo C. McKenna............................ 64 Director*
Rochelle Lamm Wallach..................... 48 Director*
</TABLE>
- ------------------------
* Messrs. Vander Zanden, Ledecky and McKenna and Ms. Wallach will join the Board
of Directors of School Specialty immediately prior to the issuance of the shares
offered in the Offering.
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. Mr. Spalding has served as President of
the Educational Supplies and Products Division of U.S. Office Products since
1996. Prior to that time, he served as President, Chief Executive Officer, and a
director of Old School since 1988. Prior to 1988, Mr. Spalding was an officer of
JanSport, a manufacturer of sports apparel and backpacking equipment. Mr.
Spalding was a co-founder of JanSport, and served as President and Chief
Executive Officer from 1977 to 1984. Mr. Spalding has been a director of the
National School Supply and Equipment Association since 1992 and completed his
term as the association's Chairman in November 1997. Mr. Spalding is Michael J.
Killoren's cousin.
DAVID J. VANDER ZANDEN became the Chief Operating Officer of School
Specialty in March 1998. Prior to that time, he served as President of Ariens
Company since 1992, a manufacturer of outdoor lawn and garden equipment.
DONALD J. NOSKOWIAK has served as Chief Financial Officer of School
Specialty since 1997. In February 1998, Mr. Noskowiak became an Executive Vice
President of School Specialty. He was Vice President, Treasurer and Principal
Financial Officer of Old School since 1994. From 1992 through 1994 he was the
Corporate Controller of Old School.
DOUGLAS MOSKONAS joined Old School in 1993 as Vice President of Sales for
the Valley Division. Since that time he has served as General Manager for the
Valley Division from 1994 through 1996 and was appointed President of School
Specialty Distribution in 1997. Prior to joining School Specialty, Mr. Moskonas
served as Vice President of Sales for Emmons-Napp Office Products from 1979
through 1993. As of the School Specialty Distribution, Mr. Moskonas is expected
to be elected an Executive Vice President of School Specialty for School
Specialty Divisions.
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MELVIN D. HILBROWN joined School Specialty as Managing Director of Gresswell
with School Specialty's acquisition of Don Gresswell, Ltd. in 1997. He has been
Managing Director of Gresswell since 1989. As of the School Specialty
Distribution, Mr. Hilbrown is expected to be elected an Executive Vice President
of School Specialty for Greswell.
RICHARD H. NAGEL joined School Specialty with the acquisition of Sax Arts &
Crafts in 1997 and serves as President of Sax Arts & Crafts. Mr. Nagel has been
with Sax Arts & Crafts since 1975 when he was hired as Assistant General
Manager. He was named President of Sax Arts & Crafts in 1990. As of the School
Specialty Distribution, Mr. Nagel is expected to be elected an Executive Vice
President of School Specialty for Sax Arts & Crafts.
DONALD RAY PATE, JR. joined School Specialty with the acquisition of
Re-Print in 1996 and serves as President of Re-Print. Mr. Pate has served as
President of Re-Print since he acquired it in 1988. As of the School Specialty
Distribution, Mr. Pate is expected to be elected an Executive Vice President of
School Specialty for Re-Print.
RONALD E. SUCHODOLSKI joined School Specialty with the acquisition of
Childcraft in 1997 and serves as President of Childcraft. Mr. Suchodolski has
been President of Childcraft since 1995 and was Director of Childcraft's School
Division from 1984 through 1989. From 1989 to 1993, Mr. Suchodolski was
President of the Judy/Instructo Division of Paramount, and from 1993 through
1995 Mr. Suchodolski served as Senior Vice President of Sales and Marketing for
Paramount Publishing's Supplementary Materials Division. As of the School
Specialty Distribution, Mr. Suchodolski is expected to be elected an Executive
Vice President of School Specialty for Childcraft.
MICHAEL J. KILLOREN has served as Chief Operating Officer of School
Specialty Distribution since 1997. From 1992 to 1997, he was Vice
President/Operations of School Specialty. Mr. Killoren is Daniel P. Spalding's
cousin. As of the School Specialty Distribution, Mr. Killoren is expected to be
elected an Vice President of School Specialty for School Speciality Divisions.
LILLIAN R. KELLOGG joined the Company with the acquisition of Education
Access in March 1998 and serves as President of the Company's Education Access
Division. Ms. Kellogg previously served as Executive Vice President of Education
Access, Inc. from March 1997 to March 1998 and as President of Computer Plus,
Inc. from March 1984 to March 1997. On January 19, 1998, Education Access, Inc.
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. The Company acquired substantially all of the assets of its catalog
division on March 20, 1998.
JONATHAN J. LEDECKY will serve as a Director and an employee of School
Specialty 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 a director of UniCapital Corporation since October 1997. Mr. Ledecky
served from 1989 to 1991 as the President of The Legacy Fund, Inc., and from
1991 to September 1994 as President and Chief Executive Officer of Legacy Dealer
Capital Fund, Inc., a wholly-owned subsidiary of Steelcase Inc. Prior to his
tenure at The Legacy Fund, Inc., Mr. Ledecky was a partner at Adler and Company
and a Senior Vice President at Allied Capital Corporation, an investment
management company.
LEO C. MCKENNA is a self-employed financial consultant working with personal
asset management, corporate planning, acquisitions, merger studies, and
negotiations. Mr. McKenna is currently a Member of the Board of Life Insurance
Company of Boston and New York (Subsidiary of Boston Mutual Life). He is founder
and a director of Ledyard National Bank, where he also serves on the Audit
Committee. He is also a director of Rosenthal, A.G. USA. He is a director and
member of the John Brown Cook Foundation and
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an overseer and Chairman of the Finance Committee for the Catholic Student
Center at Dartmouth College.
ROCHELLE LAMM WALLACH was associated with Strong Advisory Services, a
division of Strong Capital Management, as its President from 1995 to March,
1998. Prior to that time, she was Chief Operating Officer of AAL Capital
Management, a mutual fund manager which she founded in 1986.
The Company intends to name two additional independent directors after the
completion of the Offering.
COMMITTEES OF THE BOARD
The School Specialty Board will create an Audit Committee effective
immediately prior to the issuance of shares in the Offering. The Audit Committee
is charged with reviewing School Specialty's annual audit and meeting with
School Specialty's independent accountants to review School Specialty's internal
controls and financial management practices.
The School Specialty Board will create a Compensation Committee effective
immediately prior to the issuance of shares in the Offering. The Compensation
Committee is charged with determining the compensation of executive officers of
School Specialty and administering any stock option plan School Specialty may
adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by School Specialty for services rendered during the year ended April 25,
1998 to the Chief Executive Officer and to each of the four other most highly
compensated officers of School Specialty (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG TERM
--------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(1) COMPENSATION
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding.................................. 1997 $ 178,846 -- -- --
Chairman of the Board, CEO and Director 1998 212,104 $ 34,200 150,000 --
Ronald E. Suchodolski(2)............................ 1997 $ 141,535 $ 30,000 -- --
President, Childcraft 1998 157,646 62,633 20,000 --
Richard H. Nagel(2)(3).............................. 1997 $ 118,000 $ 29,500 -- $ 32,000
President, Sax Arts & Crafts 1998 130,660 29,500 20,000 --
Donald Ray Pate, Jr.(2)............................. 1997 $ 220,901 -- -- --
President, Re-Print 1998 117,000 -- --
Douglas Moskonas.................................... 1997 $ 97,266 $ 44,500 15,000 --
President, School Specialty Division 1998 139,525 -- 20,000 --
</TABLE>
- ------------------------
(1) The number of U.S. Office Products Options will be adjusted as described
under "--Replacement of Outstanding U.S. Office Products' Options."
(2) Mr. Suchodolski, Mr. Nagel and Mr. Pate joined School Specialty in May 1997,
July 1997 and July 1996, respectively. The compensation information included
in this table reflects the compensation received when employed by
predecessor companies.
(3) Other compensation refers to Mr. Nagel's automobile allowance and stay-bonus
compensation received by his prior employer.
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<PAGE>
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 25, 1998. All options were granted by U.S. Office Products
as options to acquire U.S. Office Products Common Stock and are expected to be
replaced with options to acquire School Specialty Common Stock in connection
with the School Specialty Distribution. See "--Replacement of Outstanding U.S.
Office Products' Options." Upon consummation of the School Specialty
Distribution, the number of School Specialty Options granted to officers,
directors and employees of the Company in respect of U.S. Office Products
Options and their exercise price will be determined according to the formula set
by U.S. Office Products.
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 25, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(1)(2) FISCAL YEAR(3) PRICE(2) DATE 5% 10%
- -------------------------------------- ------------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding.................... 150,000 52.7% $ 15.17 4/28/07 $1,431,049 $3,626,561
Ronald E. Suchodolski................. 20,000 7.0% 18.00 12/12/07 226,400 573,600
Richard H. Nagel...................... 20,000 7.0% 18.00 12/12/07 226,400 573,600
Donald Ray Pate, Jr................... -- -- -- -- -- --
Douglas Moskonas...................... 20,000 7.0% 18.00 12/12/07 226,400 573,600
</TABLE>
- ------------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant, beginning one year from the date
of grant in cumulative yearly amounts of 25% of the shares and expire ten
years from the date of grant. The options become fully exercisable upon a
change in control, as defined in the Incentive Plan.
(2) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of School Specialty Common Stock in the Offering
Trading Price of U.S. Office Products' Common
Stock Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
Initial Public Offering Price of
School Specialty Common Stock in
the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events, such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products Common Stock at the time of the School Specialty
Distribution and the exercise price of such option. The intrinsic value of
the School Specialty Options will be no greater than the intrinsic value of
the U.S. Office Products Options before the Distributions, and the ratio of
exercise price to market price will be not less than the ratio before the
Distributions.
(3) Total options granted refers to options to acquire U.S. Office Products
Common Stock given to all employees of the Educational Supplies and Products
Division of U.S. Office Products during fiscal 1998.
(4) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998 AND FISCAL YEAR
END 1998 OPTION VALUES.
The following table sets forth certain information regarding unexercised
options held by the Named Officers at April 25, 1998. All options were granted
by U.S. Office Products as options to acquire U.S. Office Products Common Stock
and are expected to be replaced with options to acquire shares of School
Specialty Common Stock in connection with the Distribution. See "--Replacement
of Outstanding U.S.
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<PAGE>
Office Products Options." Upon consummation of the School Specialty
Distribution, the number of School Specialty Options granted to officers,
directors and employees of the Company in respect of U.S. Office Products
Options and their exercise prices will be determined according to the formula
set by U.S. Office Products.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998
AND FISCAL YEAR ENDED 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER UNEXERCISED
OPTIONS VALUE OF UNEXERCISED IN-THE-
HELD AT APRIL 25, 1998(#)(1) MONEY (3) OPTIONS AT FISCAL
SHARES YEAR END($)(1)(3)(4)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#)(1) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding................... -- $ -- -- 150,000 $ -- $ 63,938
Ronald E. Suchodolski................ -- -- -- 20,000 -- --
Richard H. Nagel..................... -- -- -- 20,000 -- --
Donald Ray Pate, Jr.................. -- -- -- -- -- --
Douglas Moskonas..................... -- -- -- 35,000 -- --
</TABLE>
- ------------------------
(1) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of School Specialty Common Stock in the Offering
Trading Price of U.S. Office Products' Common
Stock Pre-School Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
Initial Public Offering Price of
School Specialty Common Stock in
the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Workflow Distribution" will be the average closing price of U.S. Office
Products Common Stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of the business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
exercise price and number of options will be adjusted solely for the
Distributions and not for other events such as the Tender Offer. The
foregoing formula adjustments are intended to preserve for the holder of
U.S. Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products
Common Stock at the time of the School Specialty Distribution and the
exercise price of such option. The intrinsic value of the adjusted options
will be no greater than the intrinsic value of the options before the
Distributions and the ratio of exercise price to market price will be not
less than the ratio before the Distributions.
(2) The value of exercised options represents the difference between the
exercise price of such options and the closing market price of U.S. Office
Products Common Stock on the date of exercise.
(3) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(4) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products' Common Stock at April 24, 1998.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS' OPTIONS
All or substantially all vested and unvested options ("U.S. Office Products
Options") to acquire U.S. Office Products' Options that are held by School
Specialty employees on the Distribution Date will be replaced with School
Specialty Options. As of the Distribution Date, 492,833 U.S. Office Products
Options were held by employees of School Specialty. The exercise price and
number of School Specialty Options that will be outstanding after the
Distributions will depend on the trading prices of U.S. Office Products' common
stock around the time of the Distributions and the public offering price of the
Company Common Stock in the Offering. For those reasons, the number of School
Specialty Options into which the U.S. Office Products Options will convert is
not yet determinable. The following formulas will be used to adjust the number
and exercise price of U.S. Office Products Options. Such formulas will adjust
solely for the
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<PAGE>
Distributions and not for other events such as the Tender Offer. The formulas
will not affect when the options vest or when employees can exercise the
options.
The exercise price of U.S. Office Products Options will be adjusted by
applying the following formulas:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price of
School Specialty Common Stock in
the Offering
Trading Price of U.S. Office
Products' Common Stock Pre-School
Specialty Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products'
Common Stock Pre-School Specialty
Distribution
Initial Public Offering Price of
School Specialty Common Stock in the
Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products' common stock for the lesser of (a) ten business days preceding
the Distributions, or (b) the business days falling between the expiration of
the Tender Offer and the completion of the Distributions. The foregoing formula
adjustments are intended to preserve for the holder of U.S. Office Products
Options the intrinsic value per option, measured as the difference between the
market value of one share of U.S. Office Products Common Stock at the time of
the School Special Distribution and the exercise price of such option. The
intrinsic value of the adjusted options will be no greater than the intrinsic
value of the options immediately before the Distribution and the ratio of
exercise price to market price will be not less than the ratio immediately
before the Distributions.
1998 STOCK INCENTIVE PLAN
The Company expects to adopt the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company to attract, retain and reward highly motivated and qualified
employees. The maximum percentage of shares of Company Common Stock that may be
issued with respect to awards granted under the Plan is 20% of the outstanding
Common Stock of the Company determined immediately after the grant of the award.
The maximum number of shares that may be issued with respect to awards granted
under the Plan to an individual in a calendar year may not exceed 1.2 million
shares. The Plan will be administered by the Compensation Committee of the Board
of Directors. All employees of the Company and its subsidiaries, as well as
non-employee directors of the Company, are eligible to receive awards under the
Plan. The Plan authorizes the Compensation Committee to make awards of stock
options, restricted stock, and other stock-based awards. The Compensation
Committee will determine the prices (which may not be less than the fair market
value on the date of award), vesting schedules, expiration dates and other
material conditions under which such awards may be exercised.
Mr. Ledecky will receive a stock option for Company Common Stock from School
Specialty, pursuant to the Plan, as of the Distribution Date. The option is
intended to compensate Mr. Ledecky for his services to School Specialty as an
employee. The option will cover 7.5% of the outstanding Company Common Stock
determined as of the Distribution Date, without regard to the Offering. The
option will have a per share exercise price equal to the initial public offering
price of the Company Common Stock. The estimated value of this option depends
upon the initial public offering price of the School Specialty Common Stock.
Based on an assumed initial public offering price of $15 (which is equal to the
mid-point of the price range set forth in the preliminary prospectus for the
Offering) at an assumed trading volatility of 35.0%, the estimated value of the
option is $2.5 million. It is expected that Mr. Ledecky's option will become
fully vested when granted but will not be exercisable until the 12-month
anniversary of the Distribution Date. Mr. Ledecky's option from the Company will
be exercisable immediately if Mr. Ledecky dies before the option expires or, if
and to the extent that, School Specialty accelerates the exercise schedule of
options for substantially all management option. All unexercised portions of the
option will
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<PAGE>
expire ten years after its date of grant or, if applicable, as of the date Mr.
Ledecky violates his non-competition agreement with School Specialty.
The Company expects that Daniel P. Spalding will also receive an option (the
"Spalding Option") pursuant to the Plan for 1.9% of the outstanding Common Stock
as of the Distribution Date. The Spalding Option is anticipated to have the same
terms as Mr. Ledecky's option, including an exercise price equal to the initial
public offering price of the Common Stock. The estimated value of this option
depends upon the initial public offering price of the School Specialty Common
Stock. Based on an assumed initial public offering price of $15 (which is equal
to the mid-point of the price range set forth in the preliminary prospectus for
the Offering) at an assumed trading volatility of 35.0%, the estimated value of
the option is $0.6 million. In addition, management currently expects to
recommend option grants to certain executive officers of the Company for
approximately 5.6% of the Common Stock concurrent with or following the Offering
and the School Specialty Distribution, also at an exercise price equal to the
initial public offering price.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
School Specialty expects to grant non-employee directors 15,000 options to
purchase School Specialty Common Stock upon their initial election as members of
the Board of Directors and thereafter and options to acquire 5,000 shares for
each additional year of service. Non-employee directors will be paid $1,000 for
each meeting attended and will also be reimbursed for all out-of-pocket expenses
related to their service as directors.
Jonathan J. Ledecky entered into a services agreement, as amended (the
"Ledecky Services Agreement") with U.S. Office Products on January 13, 1998, to
become effective on the Distribution Date and contingent on the consummation of
the Distributions. The Ledecky Services Agreement will expire on September 30,
1998 if none of the Distributions has occurred by that date. If the Ledecky
Services Agreement becomes effective, it will replace his employment agreement
with U.S. Office Products, as amended November 4, 1997. The principal terms of
this agreement, as it is expected to be amended, are summarized here.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products' Board and will provide high-level
acquisition negotiation services and strategic business advice. Under the
agreement, Mr. Ledecky will remain an employee of U.S. Office Products, at an
annual salary of $48,000 through June 30, 2001. As a continuing employee of U.S.
Office Products, Mr. Ledecky will also retain his existing U.S. Office Products'
Options despite his reduction in services to U.S. Office Products. U.S. Office
Products can terminate Mr. Ledecky's employment only for "cause" where cause
consists of (i) his conviction of or guilty or nolo contendere plea to a felony,
(ii) his engaging, despite notice, in conduct demonstrably and materially
injurious to U.S. Office Products, or (iii) his violation of the noncompetition
agreement as it relates to U.S. Office Products. If Mr. Ledecky resigns or is
terminated, he will cease to vest in his U.S. Office Products Options and will
have 90 days to exercise any vested options.
It is expected that the Company will enter into an employment agreement with
Mr. Ledecky to implement its assigned portion of the Ledecky Services Agreement.
Under the employment agreement, Mr. Ledecky will report to the Board of
Directors and senior management of the Company. In such capacity, Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice. The Company can require Mr. Ledecky's performance of such services,
consistent with his other contractual obligations to Consolidation Capital
Corporation, U.S. Office Products and the other Spin-Off Companies. As an
employee, Mr. Ledecky will also be subject to the generally applicable personnel
policies of the Company and will be eligible for such benefit plans in
accordance with their terms. The Company will pay Mr. Ledecky an annual salary
of $48,000, for up to two years. The Company may terminate Mr. Ledecky's
employment with or without "cause" (as defined as in the Ledecky Services
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Agreement). If without cause, the termination would entitle Mr. Ledecky to
severance equal to his salary for the lesser of 12 months or the remainder of
the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the School
Specialty Distribution has been completed. These provisions generally restrict
Mr. Ledecky from, among other things, investing in or working for or on behalf
of any business selling any products or services in direct competition with U.S.
Office Products or the Spin-Off Companies (collectively, the "U.S. Office
Products Companies"), within 100 miles of any location where any U.S. Office
Products Company conducts the competing business. (For this purpose, "products
or services" are those that U.S. Office Products offered on January 13, 1998.)
Notwithstanding this prohibition, Mr. Ledecky may serve in a policy making role
(but not engage in direct personal competition) with respect to the following
businesses: (i) certain businesses potentially competitive with Aztec Technology
Partners, Inc. if those businesses (A) are acquired by electrical contracting
and services businesses, (B) had revenues of no more than $15 million in the
prior year and no more than 30% of the revenues of the acquiring business, and
(C) have their principal place of business in the same metropolitan area as that
of the acquiring business; (ii) businesses selling, supplying, or distributing
janitorial or sanitary products or services; (iii) businesses managing or
servicing office equipment (other than computers); (iv) businesses providing
internet access services; or (v) UniCapital Corporation's leasing businesses
(which include equipment leasing). The Ledecky Services Agreement prohibits Mr.
Ledecky from trying to hire away managerial employees of the U.S. Office
Products Companies or from calling upon customers of the U.S. Office Products
Companies to solicit or sell products or services in direct competition with the
U.S. Office Products Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by the U.S. Office Products Companies. U.S. Office Products will assign
to the Company the ability to enforce the non-competition provisions described
above as to its own business without regard to the offering, which will then
constitute part of Mr. Ledecky's employment agreement with the Company.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
School Specialty has entered into employment agreements with the following
three of its Named Officers that will continue after the School Specialty
Distribution: Daniel P. Spalding (Chairman and Chief Executive Officer), Donald
Ray Pate, Jr. (Executive Vice President and President of Re-Print), and Richard
H. Nagel (Executive Vice President and President of Sax Arts & Crafts). After
the School Specialty Distribution, the Company intends to enter into an
employment agreement with David J. Vander Zanden who became President and Chief
Operating Officer of the Company in March 1998.
Daniel P. Spalding, Chief Executive Officer of School Specialty, entered
into an employment contract with Old School on April 29, 1996. The contract has
an initial term of four years but, unless terminated, is automatically extended
at the end of each of the last three years of the initial term for another year.
Mr. Spalding receives a base salary of at least $180,000 and participates in an
incentive bonus plan which provides for an annual bonus up to 100% of base
salary upon the attainment of profit and revenue objectives. Following the
termination of his employment for any reason, Mr. Spalding has agreed not to
compete with School Specialty for a period equal to the longer of two years or,
in the case of early termination, the years remaining on his contract. If Mr.
Spalding is terminated without cause, as defined in the contract, he is entitled
to his entire base salary for the years remaining on the contract. In addition,
Mr. Spalding may terminate his contract for good cause (e.g., a material adverse
change in his position or responsibilities or any material breach on the part of
School Specialty) or within five days of a change in control of School
Specialty. The contract defines a change of control to mean: (i) the acquisition
of beneficial ownership of 50% or more of voting securities of School Specialty
by any person other than U.S. Office Products; (ii) a loss of majority status by
the combination of members of U.S. Office Products' Board at the time of its
initial public offering and any Board members installed by a two-thirds vote of
the then-present initial Directors or any Directors subsequently installed by
them; (iii) any reorganization of
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<PAGE>
U.S. Office Products unless 75% of the beneficial ownership of U.S. Office
Products voting securities remains in the same hands; or (iv) U.S. Office
Products or more than 49% of its assets are liquidated. Following the completion
of the Offering, the Company expects to enter into an amendment to Mr.
Spalding's agreement in respect of the change of control provisions to reflect
the Company's public status.
Donald Ray Pate, Jr., serves as President of Re-Print and entered into an
employment contract with Re-Print on July 26, 1996 to serve as its President.
The contract runs for four years but provides for two automatic one-year
extensions unless Re-Print gives 60 days written notice of its intent not to
renew. Mr. Pate's annual base salary is $125,000, and he participates in an
executive compensation program developed by U.S. Office Products. Following the
termination of his employment for any reason, Mr. Pate has agreed not to compete
with Re-Print for the longer of two years or until the end of the contractual
term. If Mr. Pate is terminated without cause, he is entitled to receive his
base salary for three months or until the end of the initial contractual term,
whichever period is greater.
Richard H. Nagel, President of Sax Arts & Crafts, entered into a four-year
employment contract with Sax Arts & Crafts on June 27, 1997 to serve as its
President. Mr. Nagel's annual base salary is at least $125,000, and he
participates in School Specialty's management bonus program. Following the
termination of his employment for any reason, Mr. Nagel has agreed not to
compete with Sax Arts & Crafts for one year. If Mr. Nagel is terminated without
cause, he is entitled to receive his base salary for one year or until the end
of the contractual term, whichever period is lesser.
David J. Vander Zanden became President and Chief Operating Officer in March
1998. After the School Specialty Distribution, School Specialty expects to enter
into an employment contract with Mr. Vander Zanden with an initial term of two
years, with automatic two-year extensions unless School Specialty or Mr. Vander
Zanden gives 90 days written notice of either party's intent not to renew.
School Specialty expects that Mr. Vander Zanden's employment contract will
provide for a base salary of $225,000 and participation in an incentive bonus
plan based upon the attainment of profit and revenue objectives. School
Specialty also expects that Mr. Vander Zanden's employment contract will contain
a covenant not to compete upon termination of the agreement, and provide Mr.
Vander Zanden the right to terminate the agreement upon a change of control in
School Specialty, with change of control to be defined in the agreement. School
Specialty also expects to grant options to Mr. Vander Zanden on or shortly after
the Distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The School Specialty Board will create a Compensation Committee immediately
following the Offering. The Compensation Committee will be charged with
determining the compensation of all executive officers. Until the Compensation
Committee of the School Specialty Board is created, decisions regarding
compensation of the executive officers will be made by the School Specialty
Board. No member of the School Specialty Board has ever been an officer of
School Specialty or any of its subsidiaries, except that Mr. Spalding is the
Chief Executive Officer of School Specialty. In addition, Mr. Ledecky was the
Chief Executive Officer of U.S. Office Products until November 5, 1997 and will
be the Chairman of U.S. Office Products until the Distribution Date.
64
<PAGE>
CERTAIN TRANSACTIONS
On April 29, 1996, U.S. Office Products acquired Old School in a business
combination accounted for under the pooling-of-interests method in which
2,307,693 shares of U.S. Office Products Common Stock were issued as
consideration. Current officers of School Specialty who received shares of U.S.
Office Products Common Stock in the transaction include Daniel P. Spalding
(309,766 shares, and an additional 30,018 through an IRA for his benefit),
Michael J. Killoren (27,018 shares), and Donald J. Noskowiak (27,018 shares). In
addition, John S. Spalding (Daniel P. Spalding's father) received 661 shares and
an additional 60,034 through an IRA for his benefit, the Patricia M. Spalding
Revocable Trust received 70,923 shares, Joanne Lee Killoren received 60,304
shares, Donald Killoren (Michael J. Killoren's father) received 60,778 shares
and Leo C. McKenna received 278,005 shares. The other parties to the foregoing
transactions had no relationship to the Company or U.S. Office Products Company
at the time such transactions were entered into, and accordingly, the Company
believes that these transactions are as favorable as could be negotiated with
third parties.
U.S. Office Products acquired Re-Print on July 26, 1996 in a business
combination accounted for under the pooling-of-interests method in which it
issued 1,950,000 shares of U.S. Office Products Common Stock as consideration.
In that transaction, Donald Ray Pate, Jr., President of Re-Print, received
1,076,028 shares of U.S. Office Products Common Stock for his interest in
Re-Print. Other shareholders related to Mr. Pate who received shares of U.S.
Office Products Common Stock in the merger were Celita Pate Carmichael (30,240
shares), Phillip S. Pate (85,351 shares), Richard K. Pate (73,921 shares), and
Mary K. Pate (116,505 shares). The other parties to the foregoing transactions
had no relationship to the Company or U.S. Office Products Company at the time
such transactions were entered into, and accordingly, the Company believes that
these transactions are as favorable as could be negotiated with third parties.
On March 20, 1998, School Specialty acquired substantially all of the assets
of the catalog division of Education Access, Inc., a debtor in possession under
Chapter 11 of the United States Bankruptcy Code. In this transaction, the
secured creditors of Education Access received all of the consideration paid by
School Specialty. Lillian R. Kellogg, President of School Specialty's Education
Access Division, owns approximately 40% of the capital stock of Education
Access. This transaction was the subject of arm's length negotiation between
School Specialty and the secured creditors of Education Access, Inc.
School Specialty's main office and warehouse facility, a 120,000 square foot
building located in Appleton, Wisconsin, is leased from Bluemound Corporation.
John S. Spalding, a former member of the Board of Old School and the father of
Daniel P. Spalding, Chairman of the Board and Chief Executive Officer of School
Specialty, holds a one-third stake in Bluemound. Donald Killoren, father of
Michael J. Killoren, an officer of School Specialty, also holds a one-third
stake in Bluemound. The lease provides for annual payments of $196,000 through
December 31, 2001. The Company believes that the terms of this transaction are
as favorable as could be negotiated with third parties.
For a discussion of matters related to the spin-off of the Company from U.S.
Office Products, see "The School Specialty Distribution".
For a discussion of transactions between the Company and Mr. Ledecky, see
"Management of School Specialty--Director Compensation and Other Arrangements".
65
<PAGE>
PRINCIPAL STOCKHOLDERS OF SCHOOL SPECIALTY
The following table sets forth the number and percentage of School Specialty
Common Stock beneficially owned by the following persons, after giving effect to
the School Specialty Distribution, the Offering and the sale of 250,000 shares
of School Specialty Common Stock to Messrs. Spalding, Vander Zanden and Pate,
based on their beneficial ownership of U.S. Office Products common stock on
April 1, 1998 (assuming that each person (other than Mr. Pate) tendered his pro
rata share of the 37,037,037 shares of U.S. Office Products common stock
tendered for as part of its Strategic Restructuring Plan and that the
Underwriters' overallotment option is not exercised): (i) all persons known by
School Specialty to own beneficially more than 5% of U.S. Office Products Common
Stock, (ii) each director and each Named Officer who is a stockholder, and (iii)
all directors and executive officers as a group. All persons listed below have
sole voting and investment power with respect to their shares, unless otherwise
indicated. Except as otherwise indicated, the business address of each of the
following is 1000 North Bluemound Drive, Appleton, Wisconsin 54914.
<TABLE>
<CAPTION>
PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------------ ------------------------------
PERCENT OF PERCENT OF
NUMBER OF SHARES NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
- -------------------------------------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Daniel P. Spalding...................................... 17,248(1) * 150,581 1.0%
Ronald Suchodolski......................................
Jonathan J. Ledecky..................................... 209,089(2) 1.7% 209,089 1.4
Richard H. Nagel........................................
Donald Ray Pate, Jr..................................... 92,657(3) * 159,324 1.1
Douglas Moskonas........................................ 646(1) * 646 *
Leo C. McKenna.......................................... 1,127 * 1,127 *
All current executive officers
and directors as a group (13 persons)................. 323,444 2.6 573,444 2.5
5% STOCKHOLDERS
FMR Corp.(4)............................................ 1,356,629 11.0 1,356,629 9.2
82 Devonshire Street
Boston, MA 02109
Massachusetts Financial Services Company(4)............. 711,526 5.8 111,526 4.9
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------------
* Less than 1%.
(1) Does not include shares underlying U.S. Office Products Options which are
exercisable within 60 days following the School Specialty Distribution. The
number of such shares will be adjusted as described under "Management of
School Specialty--Replacement of U.S. Office Products' Options."
(2) Does not include shares underlying Mr. Ledecky's options described under
"Management of School Specialty--Director Compensation and Other
Arrangements," none of which are exercisable within the next twelve months.
(3) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of his shares of U.S. Office Products common stock.
(4) Based upon a Schedule 13G filed for U.S Office Products with the Securities
and Exchange Commission.
66
<PAGE>
(5) In respect of U.S. Office Products Options, the option exercise price will
be adjusted by applying the following formula:
<TABLE>
<S> <C> <C>
Initial Public Offering Price of School Specialty Common Stock in the
Exercise Price (New) = Exercise Price X Offering
(Old) Trading Price of U.S. Office Products' Common Stock Pre-School Specialty
Distribution
</TABLE>
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
<TABLE>
<C> <C> <S>
Trading Price of U.S. Office Products' Common Stock Pre-School Specialty
Distribution
Option Shares (New) = Option Shares (Old) X Initial Public Offering Price of School Specialty Common Stock in the
Offering
</TABLE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-School Specialty Distribution" will be the average closing price of U.S.
Office Products Common Stock for the lesser of (a) ten business days
preceding the Distributions, or (b) the number of business days falling
between the expiration of the Tender Offer and the completion of the
Distributions. The exercise price and number of options will be adjusted
solely for the Distributions and not for other events such as the Tender
Offer. The foregoing formula adjustments are intended to preserve for the
holder of U.S. Office Products Options the intrinsic value per option,
measured as the difference between the market value of one share of U.S.
Office Products common stock and the exercise price of such option. The
intrinsic value of the School Specialty Options will be no greater than the
intrinsic value of the U.S. Office Products Options before the
Distributions, and the ratio of exercise price to market price will be not
less than the ratio before the Distributions.
67
<PAGE>
DESCRIPTION OF SCHOOL SPECIALTY CAPITAL STOCK
GENERAL
Set forth below is a summary of the terms of School Specialty's Capital
Stock. At the time of the Distribution and the Offering, School Specialty's
authorized capital stock will consist of 150,000,000 shares of School Specialty
Common Stock, par value $.001 per share, and 1,000,000 shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). At the time of the
Distribution and the Offering, School Specialty is expected to have outstanding
approximately 12,299,593 shares of School Specialty Common Stock and no shares
of Preferred Stock.
COMMON STOCK
The holders of School Specialty Common Stock are entitled to one vote for
each share on all matters voted upon by stockholders, including the election of
directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of School Specialty Common Stock are entitled to such dividends as may
be declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." The holders of School Specialty
Common Stock are entitled to share ratably in the net assets of School Specialty
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any Preferred Stock then outstanding. The
holders of School Specialty Common Stock have no preemptive rights to purchase
shares of stock of School Specialty. Shares of School Specialty Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of School Specialty. All of the shares of School Specialty Common
Stock to be distributed pursuant to the Distribution will be fully paid and
nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the School Specialty
Board of Directors as shares of one or more classes or series. Subject to the
provisions of School Specialty's Certificate of Incorporation and limitations
prescribed by law, the School Specialty Board of Directors is expressly
authorized to adopt resolutions to issue the shares, to fix the number of shares
and to change the number of shares constituting any series, and to provide for
or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of the Preferred Stock, in each case
without any further action or vote by the stockholders. School Specialty has no
current plans to issue any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
School Specialty Board of Directors to render more difficult or to discourage an
attempt to obtain control of School Specialty by means of a tender offer, proxy
contest, merger or otherwise, and thereby to protect the continuity of School
Specialty's management. The issuance of shares of the Preferred Stock pursuant
to the School Specialty Board of Directors' authority described above may
adversely affect the rights of the holders of School Specialty Common Stock. For
example, Preferred Stock issued by School Specialty may rank prior to School
Specialty Common Stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
School Specialty Common Stock. Accordingly, the issuance of shares of Preferred
Stock may discourage bids for School Specialty Common Stock or may otherwise
adversely affect the market price of School Specialty Common Stock.
68
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
School Specialty is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. School Specialty has not adopted such an
amendment to its Certificate of Incorporation or By-laws. Under the Company's
Certificate of Incorporation, the affirmative vote of a majority of the
directors is required to approve an interested stockholder transaction except
for certain statutory business combinations governed by Section 203, which
require the affirmative vote of 66 2/3% of the directors to approve such
transactions.
PROVISIONS OF SCHOOL SPECIALTY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AFFECTING CHANGE OF CONTROL
The Board of Directors of School Specialty is contemplating adoption of
certain amendments to the Certificate of Incorporation or Bylaws that may, if
adopted, provide the School Specialty Board with more negotiating leverage by
delaying or making more difficult unsolicited acquisitions or changes of control
of School Specialty. It is believed that such provisions will enable School
Specialty to develop its business in a manner that will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by the
School Specialty Board to be in the best interests of School Specialty and its
stockholders. Such provisions could have the effect of discouraging third
parties from making proposals involving an unsolicited acquisition or change of
control of School Specialty, although such proposals, if made, might be
considered desirable by a majority of School Specialty's stockholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the management of School Specialty without
concurrence of the School Specialty Board. These provisions include: (i) the
availability of capital stock for issuance from time to time at the discretion
of the School Specialty Board (see "--Preferred Stock" above); (ii) the
classification of the School Specialty Board into three classes, each of which
serves for a term of three years; (iii) limitation on stockholders calling a
special meeting of stockholders; (iv) prohibition on stockholders acting by
written consent in lieu of a meeting; (v) requirements for advance notice for
raising business or making nominations at stockholders' meetings; and (vi) the
requirement of a supermajority vote to amend School Specialty's Bylaws.
69
<PAGE>
CLASSIFIED BOARD
School Specialty's Certificate of Incorporation may include provisions
dividing the School Specialty Board's membership into three classes, each of
which serves until the third succeeding annual meeting with one class being
elected at each annual meeting of stockholders. Under Delaware law, each class
will be as nearly equal in number as possible. As a result, at least two annual
meetings of stockholders may be required for School Specialty's stockholders to
change a majority of the members of the School Specialty Board. School Specialty
believes that a classified board of directors will assure continuity and
stability of School Specialty's management and policies, without diminishing
accountability to stockholders. School Specialty's classified Board will ensure
that a majority of directors at any given time will have experience in the
business and competitive affairs of School Specialty.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation and Bylaws may provide that stockholder
action can be taken only at an annual or special meeting and cannot be taken by
written consent in lieu of a meeting. The Certificate of Incorporation and
Bylaws also provide that special meetings of the stockholders can be called only
by the Chairman of the Board, or by holders of at least 33 1/3% of the
outstanding shares of School Specialty stock entitled to vote generally for the
election of directors.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The Bylaws may establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders and for
nominations by stockholders of candidates for election as directors at an annual
or special meeting at which directors are to be elected. Only such business may
be conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the School Specialty Board, or by a
stockholder who has given to the Secretary of School Specialty timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. The chairman of such meeting has the authority to make the
determination of whether business has been properly brought before such meeting.
Only persons who are nominated by, or at the direction of, the School Specialty
Board, or who are nominated by a stockholder who has given timely written
notice, in proper form, to the Secretary prior to a meeting at which directors
are to be elected will be eligible for election as directors of School
Specialty. These provisions are intended to establish orderly procedures for the
conduct of School Specialty's business and to allow the Board of Directors
adequate time to evaluate and respond to stockholder initiatives. They may have
the effect of impeding the ability of a stockholder to present proposals or make
limitations in a change of control context if the requisite notice provision
cannot be satisfied.
AMENDMENT OF BYLAWS
The Certificate of Incorporation may require a vote of at least 66 2/3% of
the outstanding School Specialty common Stock for the stockholders to amend the
Bylaws. This super-majority requirement could make it more difficult for
stockholders to compel Board action by the School Specialty Board by amending
the Bylaws to require actions not presently permitted by the Bylaws.
RIGHTS PLAN
School Specialty may consider adoption of a shareholder rights plan or
"poison pill." As with the Certificate of Incorporation and Bylaw provisions
discussed above, if such a plan is adopted, it could render more difficult or
discourage an attempt to obtain control of School Specialty. However, such a
plan might also provide the School Specialty Board with more negotiating
leverage by delaying or making more difficult unsolicited acquisition of changes
of control of School Specialty.
70
<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to School Specialty's Certificate of Incorporation and under
Delaware law, directors of School Specialty are not liable to School Specialty
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company's By-laws provide that the Company will, to the
fullest extent permitted under Delaware law, indemnify its officers and
directors against any damages arising out of their actions as officers or
directors of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the School Specialty Common Stock will
be American Stock Transfer & Trust Company.
71
<PAGE>
EXPERTS
The consolidated financial statements of School Specialty as of April 30,
1996 and April 26, 1997, for the four months ended April 30, 1996, and for the
year ended April 30, 1997, included in this Prospectus, have been so included in
reliance on the January 13, 1998 (except for Note 1 and the last paragraph of
Note 3, which are as of May 14, 1998) report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of School Specialty for the years
ended December 31, 1995 and December 31, 1994 included in this Prospectus,
except as they relate to The Re-Print Corporation for the years ended December
31, 1995 and December 31, 1994, have been audited by Ernst & Young, independent
accountants, and insofar as they relate to The Re-Print Corporation for such
periods, by BDO Seidman, LLP, independent accountants, whose report dated
February 8, 1996 thereon appears herein. Such consolidated financial statements
have been so included in reliance on the reports of such independent accountants
given on the authority of such firms as experts in auditing and accounting.
The consolidated financial statements of American Academic Suppliers Holding
Corporation and Subsidiary as of December 31, 1995 and December 31, 1996 and for
the years then ended included in this Prospectus have been so included in
reliance on the February 24, 1997 report of Altschuler, Melvoin and Glasser LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Sax Arts and Crafts, Inc. as of
December 16, 1995 and December 25, 1996, and for the three years in the period
ended December 25, 1996, included in this Prospectus, have been so included in
reliance on the February 3, 1998 report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of shares of School Specialty Common Stock and certain tax
matters relating to the Distributions will be passed upon on behalf of School
Specialty and U.S. Office Products by Wilmer, Cutler & Pickering, Washington,
D.C.
72
<PAGE>
SCHOOL SPECIALTY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SCHOOL SPECIALTY, INC.
Historical Financial Statements
Report of Price Waterhouse LLP, Independent Accountants................................................ F-2
Report of Ernst & Young LLP, Independent Auditors...................................................... F-3
Report of BDO Seidman, LLP, Independent Auditors....................................................... F-4
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24, 1998 (unaudited)....... F-5
Consolidated Statement of Operations for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited).......................................................... F-6
Consolidated Statement of Stockholder's (Deficit) Equity for the years ended December 31, 1994 and
1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months
ended January 24, 1998 (unaudited).................................................................... F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996, the fiscal year ended April 26, 1997 and the nine months ended January 25, 1997
(unaudited) and January 24, 1998 (unaudited).......................................................... F-8
Notes to Consolidated Financial Statements............................................................. F-10
Pro Forma Financial Statements
Introduction to Pro Forma Financial Information........................................................ F-26
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited).................................... F-28
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998 (unaudited).......... F-29
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997 (unaudited).......... F-30
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997 (unaudited)............ F-31
Notes to Pro Forma Combined Financial Statements....................................................... F-32
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY
Report of Altschuler, Melvoin and Glasser LLP, Independent Accountants................................... F-34
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited).......... F-35
Consolidated Statement of Operations for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited).............................................. F-36
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997 (unaudited)............................................... F-37
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited).............................................. F-38
Notes to the Consolidated Financial Statements........................................................... F-39
SAX ARTS & CRAFTS, INC.
Report of Price Waterhouse LLP, Independent Accountants.................................................. F-44
Balance Sheets as of December 16, 1995, and December 25, 1996 and June 29, 1997 (unaudited).............. F-45
Statements of Operations for the years ended December 17, 1994, December 16, 1995 and December 25, 1996
and the six months ended June 30, 1996 (unaudited) and June 29, 1997 (unaudited)....................... F-46
Statements of Shareholders' Equity for the years ended December 17, 1994, December 16, 1995 and December
25, 1996 and the six months ended June 29, 1997 (unaudited)............................................ F-47
Statements of Cash Flows for the years ended December 17, 1994, December 16, 1995 and December 25, 1996
and the six months ended June 30, 1996 (unaudited) and June 29, 1997 (unaudited)....................... F-48
Notes to Financial Statements............................................................................ F-49
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF SCHOOL SPECIALTY, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of School
Specialty, Inc. (the "Company") and its subsidiaries at April 30, 1996 and April
26, 1997, and the results of their operations and their cash flows for the four
months ended April 30, 1996 and the fiscal year ended April 26, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
January 13, 1998, except for Note 1 and the last
paragraph of Note 3, which are as of May 14, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
SCHOOL SPECIALTY, INC.
We have audited the accompanying consolidated statements of operations,
consolidated statement of stockholder's (deficit) equity and cash flows of
School Specialty, Inc. (the Company) for the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Re-Print Corporation, a wholly owned subsidiary, which statements reflect total
revenues of $30,798,000 and $24,140,000 for the years ended December 31, 1995
and 1994, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for Re-Print Corporation, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the results of the Company's operations and its cash flows for the years
December 31, 1995 and 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheets of The Re-Print Corporation
as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity, and cash flows for the years then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Re-Print Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Atlanta, Georgia
February 8, 1996
F-4
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 46 $ $
Accounts receivable, less allowance for doubtful accounts of $202, $471 and
$724, respectively......................................................... 13,129 17,232 41,530
Inventories.................................................................. 20,276 24,461 32,946
Prepaid expenses and other current assets.................................... 5,556 10,331 8,997
--------- --------- -----------
Total current assets..................................................... 39,007 52,024 83,473
Property and equipment, net.................................................... 7,647 14,478 20,489
Intangible assets, net......................................................... 7,142 20,824 94,651
Other assets................................................................... 777 359 2,594
--------- --------- -----------
Total assets............................................................. $ 54,573 $ 87,685 $ 201,207
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Short-term debt.............................................................. $ 25,887 $ 262 $ 272
Short-term payable to U.S. Office Products................................... 26,692 16,873
Accounts payable............................................................. 11,933 9,091 11,951
Accrued compensation......................................................... 785 860 5,502
Other accrued liabilities.................................................... 4,065 659 5,262
--------- --------- -----------
Total current liabilities................................................ 42,670 37,564 39,860
Long-term debt................................................................. 15,031 566 385
Long-term payable to U.S. Office Products...................................... 33,226 62,470
Deferred income taxes.......................................................... 1,139
--------- --------- -----------
Total liabilities........................................................ 58,840 71,356 102,715
--------- --------- -----------
Commitments and contingencies
Stockholder's (deficit) equity:
Divisional equity............................................................ 7,487 19,985 93,313
Retained (deficit) earnings.................................................. (11,754) (3,656) 5,179
--------- --------- -----------
Total stockholder's (deficit) equity..................................... (4,267) 16,329 98,492
--------- --------- -----------
Total liabilities and stockholder's (deficit) equity..................... $ 54,573 $ 87,685 $ 201,207
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOUR FISCAL FOR THE NINE
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------------------- ------------- ------------- ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................ $ 119,510 $ 150,482 $ 28,616 $ 191,746 $ 159,977 $ 247,880
Cost of revenues.................... 87,750 105,757 20,201 136,577 114,380 176,501
------------ ------------ ------------- ------------- ----------- -----------
Gross profit.................. 31,760 44,725 8,415 55,169 45,597 71,379
Selling, general and administrative
expenses.......................... 27,281 39,869 10,307 43,462 33,396 50,999
Non-recurring acquisition costs..... 1,122 1,792 1,792
Restructuring costs................. 2,532 194
------------ ------------ ------------- ------------- ----------- -----------
Operating income (loss)....... 4,479 2,324 (3,014) 9,721 10,409 20,380
Other (income) expense:
Interest expense................ 3,007 5,536 1,461 4,197 3,358 4,100
Interest income................. (6) (101) (109)
Other........................... (86) (18) 67 (196) (204) 441
------------ ------------ ------------- ------------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes....... 1,558 (3,194) (4,536) 5,720 7,356 15,948
Provision for (benefit from) income
taxes............................. 218 173 139 (2,412) 3,750 7,113
------------ ------------ ------------- ------------- ----------- -----------
Net income (loss)................... $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606 $ 8,835
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Weighted average shares outstanding:
Basic............................. 5,062 6,562 8,611 10,003 9,553 12,751
Diluted........................... 5,078 6,669 8,789 10,196 9,758 13,020
Net income (loss) per share:
Basic............................. $ 0.26 $ (0.51) $ (0.54) $ 0.81 $ 0.38 $ 0.69
Diluted........................... $ 0.26 $ (0.50) $ (0.53) $ 0.80 $ 0.37 $ 0.68
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDER'S
DIVISIONAL (DEFICIT) (DEFICIT)
EQUITY EARNINGS EQUITY
----------- ---------- ------------
<S> <C> <C> <C>
Balance at December 31, 1993................................................ $ 5,247 $ (4,780) $ 467
Issuance of Pooled Company common stock for cash.......................... 80 80
Cash dividends declared at Pooled Companies............................... (60) (60)
Net income................................................................ 1,340 1,340
----------- ---------- ------------
Balance at December 31, 1994................................................ 5,327 (3,500) 1,827
Transactions of Pooled Companies:
Issuance of warrants.................................................... 672 672
Issuance of Pooled Company common stock for cash........................ 500 500
Repurchase of treasury stock............................................ (92) (92)
Cash dividends declared and paid........................................ (160) (160)
Net loss.................................................................. (3,367) (3,367)
----------- ---------- ------------
Balance at December 31, 1995................................................ 6,407 (7,027) (620)
Transactions of Pooled Companies:
Exercise of warrants.................................................... 1,080 1,080
Cash dividends declared and paid........................................ (52) (52)
Net loss.................................................................. (4,675) (4,675)
----------- ---------- ------------
Balance at April 30, 1996................................................... 7,487 (11,754) (4,267)
Transactions of Pooled Companies:
Exercise of warrants and stock options.................................. 1,979 1,979
Retirement of treasury stock............................................ 34 (34)
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 10,485 10,485
Net income................................................................ 8,132 8,132
----------- ---------- ------------
Balance at April 26, 1997................................................... 19,985 (3,656) 16,329
Unaudited data:
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 3,566 3,566
Capital contribution by U.S. Office Products.............................. 69,762 69,762
Net income................................................................ 8,835 8,835
----------- ---------- ------------
Balance at January 24, 1998 (unaudited)..................................... $ 93,313 $ 5,179 $ 98,492
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOUR FOR THE NINE
MONTHS FISCAL MONTHS
FOR THE YEAR ENDED ENDED YEAR ENDED ENDED
---------------------------- ------------ ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................... $ 1,340 $ (3,367) $ (4,675) $ 8,132 $ 3,606
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 1,719 2,927 674 2,106 1,570
Non-recurring acquisition costs............. 1,122 1,792 1,792
Other....................................... 231 277 118 115 73
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable..................... (2,226) 2,666 3,727 1,277 (629)
Inventory............................... 4,365 (2,523) (4,376) 2,737 9,816
Prepaid expenses and other current
assets................................ (989) (338) (443) (2,361) (1,509)
Accounts payable........................ (4,367) 2,642 3,459 (6,969) (12,376)
Accrued liabilities..................... (341) 2,544 (784) (5,911) 1,866
------------- ------------- ------------ ------------- -----------
Net cash provided by (used in)
operating activities.............. (268) 4,828 (1,178) 918 4,209
------------- ------------- ------------ ------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (2,106) (5,389) (7,734) (7,609)
Payments of non-recurring acquisition costs..... (1,122) (1,792) (1,725)
Additions to property and equipment............. (630) (881) (120) (7,216) (5,317)
Other........................................... (120) 178 414
------------- ------------- ------------ ------------- -----------
Net cash used in investing
activities........................ (2,856) (6,092) (828) (16,742) (14,651)
------------- ------------- ------------ ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 80 500 1,080 1,979 1,979
Proceeds from issuance of long-term debt........ 1,850 1,715 750 1,160
Payments of long-term debt...................... (2,023) (1,488) (194) (16,962) (17,164)
Proceeds from (payments of) short-term debt,
net........................................... 3,295 655 1,263 (29,908) (29,775)
Advances from U.S. Office Products Company...... 59,919 55,029
Capital contribution by U.S. Office Products....
Payments of dividends at Pooled Companies....... (134) (138)
Purchase of treasury stock at Pooled Company.... (92)
------------- ------------- ------------ ------------- -----------
Net cash provided by financing
activities........................ 3,202 1,156 2,011 15,778 11,229
------------- ------------- ------------ ------------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 78 (108) 5 (46) 787
Cash and cash equivalents at beginning of
period.......................................... 71 149 41 46 46
------------- ------------- ------------ ------------- -----------
Cash and cash equivalents at end of period........ $ 149 $ 41 $ 46 $ $ 833
------------- ------------- ------------ ------------- -----------
------------- ------------- ------------ ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid............................... $ 2,850 $ 5,564 $ 1,461 $ 456 $ 630
Income taxes paid (refunded)................ $ 236 $ 9 $ (3) $ (132) $ (139)
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 8,835
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization expense....... 3,382
Non-recurring acquisition costs.............
Other....................................... 43
Changes in current assets and liabilities
(net of assets acquired and liabilities
assumed in business combinations accounted
for under the purchase method):
Accounts receivable..................... (6,450)
Inventory............................... 9,590
Prepaid expenses and other current
assets................................ 3,844
Accounts payable........................ (6,593)
Accrued liabilities..................... 2,741
-----------
Net cash provided by (used in)
operating activities.............. 15,392
-----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash
received...................................... (92,076)
Payments of non-recurring acquisition costs.....
Additions to property and equipment............. (4,095)
Other........................................... (366)
-----------
Net cash used in investing
activities........................ (96,537)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock..........
Proceeds from issuance of long-term debt........
Payments of long-term debt...................... (6,200)
Proceeds from (payments of) short-term debt,
net........................................... (1,841)
Advances from U.S. Office Products Company...... 19,424
Capital contribution by U.S. Office Products.... 69,762
Payments of dividends at Pooled Companies.......
Purchase of treasury stock at Pooled Company....
-----------
Net cash provided by financing
activities........................ 81,145
-----------
Net increase (decrease) in cash and cash
equivalents.....................................
Cash and cash equivalents at beginning of
period..........................................
-----------
Cash and cash equivalents at end of period........ $
-----------
-----------
Supplemental disclosures of cash flow information:
Interest paid............................... $ 27
Income taxes paid (refunded)................ $
</TABLE>
F-8
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method in the years ended December
31, 1994 and 1995, the fiscal year ended April 26, 1997, and the nine months
ended January 25, 1997 and January 24, 1998. The fair values of the assets and
liabilities of the acquired companies at the dates of the acquisitions are
presented as follows:
<TABLE>
<CAPTION>
FOR THE
NINE
FOR THE MONTHS
FOR THE YEAR ENDED FOR THE FOUR FISCAL ENDED
---------------------------- MONTHS ENDED YEAR ENDED -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Accounts receivable............................... $ 8,112 $ 1,589 $ $ 5,381 $ 5,381
Inventories....................................... 9,743 1,823 6,922 6,922
Prepaid expenses and other current assets......... 823 502 2,371 2,371
Property and equipment............................ 2,211 4,536 1,155 1,155
Intangible assets................................. 3,268 14,248 13,994
Other assets...................................... 1,488 156 29 29
Short-term debt................................... (6,785) (191) (4,283) (4,283)
Accounts payable.................................. (6,447) (274) (4,012) (4,012)
Accrued liabilities............................... (1,661) (225) (1,846) (1,717)
Long-term debt.................................... (5,378) (5,795) (1,746) (1,746)
------------- ------------- ------------- ------------- -----------
Net assets acquired................. $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ $ $ $ 10,485 $ 10,485
Cash paid, net of cash acquired................... 2,106 5,389 7,734 7,609
------------- ------------- ------------- ------------- -----------
Total............................... $ 2,106 $ 5,389 $ $ 18,219 $ 18,094
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Accounts receivable............................... $ 17,848
Inventories....................................... 18,075
Prepaid expenses and other current assets......... 2,431
Property and equipment............................ 6,667
Intangible assets................................. 74,741
Other assets...................................... 210
Short-term debt................................... (1,850)
Accounts payable.................................. (9,410)
Accrued liabilities............................... (7,050)
Long-term debt.................................... (6,020)
-----------
Net assets acquired................. $ 95,642
-----------
-----------
The acquisitions were funded as follows:
U.S. Office Products common stock................. $ 3,566
Cash paid, net of cash acquired................... 92,076
-----------
Total............................... $ 95,642
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
School Specialty, Inc. (the "Company") is a Delaware corporation which is a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Educational Supplies and Products Division (the "Education
Division") as an independent publicly owned company. This transaction is
expected to be effected through the distribution of shares of the Company to
U.S. Office Products' shareholders effective on or about June 9, 1998 (the
"Distribution"). Prior to the Distribution, U.S. Office Products plans to
contribute its equity interests in certain wholly-owned subsidiaries associated
with the Education Division to the Company. U.S. Office Products and the Company
will enter into a number of agreements to facilitate the Distribution and the
transition of the Company to an independent business enterprise. Additionally,
concurrently with the Distribution, the Company anticipates selling 2.1 million
shares (2.4 million shares if the over-allotment is sold) in an initial public
offering ("IPO").
The Education Division was created by U.S. Office Products in May 1996 in
connection with the acquisition of School Specialty, Inc., a Wisconsin
corporation ("Old School"). This business combination and the acquisition in
July 1996 of The Re-Print Corp. ("Re-Print") were accounted for under the
pooling-of-interests method (Old School and Re-Print are herein referred to as
the "Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. The Company's statement of income
includes all of the related costs of doing business, including an allocation of
certain general corporate expenses of U.S. Office Products which were not
directly related to these businesses including certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing, human resources as well as other general overhead
costs. These allocations were based on a variety of factors, dependent upon the
nature of the costs being allocated, including revenues, number and size of
acquisitions and number of employees. Management believes these allocations were
made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 9 for further discussion of interest expense.
F-10
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April. A four-month fiscal transition period from January
1, 1996 through April 30, 1996 has been presented for the Company to conform its
fiscal year-end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
F-11
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method and non-compete agreements.
Substantially all goodwill is amortized on a straight line basis over an
estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Other intangible assets are being amortized over
their estimated useful lives ranging from one to four years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of selling, general and administrative expenses.
DEFERRED CATALOG COSTS
Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one to two years. Amortization
expense related to deferred catalog costs is
F-12
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in the consolidated statement of income as a component of selling,
general and administrative expenses. Such amortization expense for the year
ended December 31, 1994 and 1995, the four months ended April 30, 1996, the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$3,755, $4,395, $832, $3,621 and $4,646 (unaudited), respectively.
INTERNALLY DEVELOPED SOFTWARE
Internal costs related to internally developed software, such as internal
salaries and supplies, are expensed as incurred as a component of selling,
general and administrative expenses. External costs related to internally
developed software, such as fees for outside programmers and consultants, are
capitalized and expensed over the expected useful life of the software, normally
three to five years.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals, and various regulatory
fees. Generally accepted accounting principles require the Company to expense
all acquisition costs (both those paid by the Company and those paid by the
sellers of the acquired companies) related to business combinations accounted
for under the pooling-of-interests method.
RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees in accordance with EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in Restructuring)."
NET INCOME PER SHARE
Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The difference between the
weighted-average number of common shares used for the calculation of basic EPS
and the weighted average number of shares of common shares used for the diluted
EPS is comprised of the dilutive effect of outstanding common stock options.
However, a portion of the Company's employee stock options outstanding during
the periods presented were not included in the computation of diluted EPS as
they were anti-dilutive.
F-13
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company will issue approximately 12.3 million shares
of its common stock to U.S. Office Products, which will then distribute such
shares to its shareholders in the ratio of one share of Company common stock for
every nine shares of U.S. Office Products common stock held by each shareholder.
The share data reflected in the accompanying financial statements represents the
historical share data for U.S. Office Products for the period or as of the date
indicated, retroactively adjusted to give effect to the one for nine
distribution ratio.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 4,257,693 shares of U.S. Office Products
common stock to acquire the Pooled Companies. The Pooled Companies and the
number of shares issued are as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
- ------------------------------------------------------------------------------- -------------
<S> <C>
School Specialty, Inc.......................................................... 2,307,693
Re-Print....................................................................... 1,950,000
-------------
Total shares issued........................................................ 4,257,693
-------------
-------------
</TABLE>
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies reported on years
ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
F-14
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1994
Revenues................................................................... $ $ 119,510 $ 119,510
Net income................................................................. $ $ 1,340 $ 1,340
For the year ended December 31, 1995
Revenues................................................................... $ $ 150,482 $ 150,482
Net income (loss).......................................................... $ $ (3,367) $ (3,367)
For the four months ended April 30, 1996
Revenues................................................................... $ $ 28,616 $ 28,616
Net income (loss).......................................................... $ $ (4,675) $ (4,675)
For the year ended April 26, 1997
Revenues................................................................... $ 181,420 $ 10,326 $ 191,746
Net income................................................................. $ 7,791 $ 341 $ 8,132
For the nine months ended January 25, 1997 (unaudited):
Revenues................................................................... $ 149,651 $ 10,326 $ 159,977
Net income................................................................. $ 3,265 $ 341 $ 3,606
For the nine months ended January 24, 1998 (unaudited):
Revenues................................................................... $ 247,880 $ $ 247,880
Net income................................................................. $ 8,835 $ $ 8,835
</TABLE>
PURCHASE METHOD
In 1994, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $2,106. The
total assets related to the acquisition were $22,377. The results of the
acquisition have been included in the Company's results from its date of
acquisition.
In 1995, one of the Pooled Companies made one acquisition accounted for
under the purchase method for an aggregate cash purchase price of $5,389. The
total assets related to the acquisition were $11,874, including goodwill of
$3,268. The results of the acquisition have been included in the Company's
results from its date of acquisition.
In fiscal 1997, the Company made six acquisitions accounted for under the
purchase method for an aggregate purchase price of $18,219, consisting of $7,734
of cash and U.S. Office Products common stock with a market value of $10,485.
The total assets related to these six acquisitions were $30,106, including
goodwill of $14,248. The results of these acquisitions have been included in the
Company's results from their respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and the fiscal year ended April 26,
1997 and includes the Company's
F-15
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
consolidated financial statements, which give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented, and the results
of the companies acquired in purchase acquisitions through April 27, 1997 as if
all such purchase acquisitions had been made at the beginning of 1995. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation of
$1,200 and $124 for the year ended December 31, 1995 and the fiscal year ended
April 26, 1997, respectively, and the inclusion of a federal income tax
provision on all earnings:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
------------------------
<S> <C> <C>
DECEMBER 31, APRIL 26,
1995 1997
------------ ----------
Revenues............................................................................... $ 206,329 $ 206,566
Net income (loss)...................................................................... (1,199) 2,939
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of 1995 or the results
which may occur in the future.
NOTE 5--RESTRUCTURING COSTS
The Company records the costs of consolidating existing Company facilities
into acquired operations, including the external costs and liabilities to close
redundant Company facilities and severance and relocation costs related to the
Company's employees. The following table sets forth the Company's accrued
restructuring costs:
<TABLE>
<CAPTION>
FACILITY SEVERANCE OTHER ASSET
CLOSURE AND AND WRITE-DOWNS
CONSOLIDATION TERMINATIONS AND COSTS TOTAL
--------------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at April 30 1996.................................... $ 641 $ 469 $ 1,422 $ 2,532
Additions................................................. 194 194
Utilizations.............................................. (641) (469) (1,465) (2,575)
----- ----- ------------ ---------
Balance at April 26, 1997................................... 151 151
Utilizations.............................................. (151) (151)
----- ----- ------------ ---------
Balance at January 24, 1998 (unaudited)..................... $ $ $ $
----- ----- ------------ ---------
----- ----- ------------ ---------
</TABLE>
NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
----------- ---------
<S> <C> <C>
Deferred catalog costs....................................................................... $ 4,387 $ 5,740
Deferred income taxes........................................................................ 1,184
Other........................................................................................ 1,169 3,407
----------- ---------
Total prepaid expenses and other current assets............................................ $ 5,556 $ 10,331
----------- ---------
----------- ---------
</TABLE>
F-16
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS (CONTINUED)
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods. These deferred catalog
costs will be expensed in the periods the catalogs are used.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Land........................................................................................ $ 58 $ 729
Buildings................................................................................... 2,042 6,488
Furniture and fixtures...................................................................... 882 6,502
Warehouse Equipment......................................................................... 8,767 3,163
Leasehold improvements...................................................................... 631 2,185
--------- ---------
12,380 19,067
Less: Accumulated depreciation.............................................................. (4,733) (4,589)
--------- ---------
Net property and equipment.................................................................. $ 7,647 $ 14,478
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996 and the fiscal year ended April 26, 1997 was
$888, $1,645, $470 and $1,540, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill....................................................................... $ 8,312 $ 22,128 $ 96,770
Other.......................................................................... 1,647 2,020 2,487
--------- --------- -----------
9,959 24,148 99,257
Less: Accumulated amortization................................................. (2,817) (3,324) (4,606)
--------- --------- -----------
Net intangible assets..................................................... $ 7,142 $ 20,824 $ 94,651
--------- --------- -----------
--------- --------- -----------
</TABLE>
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
nine months ended January 24, 1998 was $757, $1,098, $204, $566 and $1,411
(unaudited), respectively.
F-17
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Credit facilities with banks, average interest rates ranging from 10% to 10.75% at April 30,
1996...................................................................................... $ 21,898 $
Subordinated debt, interest at 8% at April 30, 1996......................................... 1,000
Other....................................................................................... 441 30
Current maturities of long-term debt........................................................ 2,548 232
--------- ---------
Total short-term debt....................................................................... $ 25,887 $ 262
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Subordinated notes, at 12.5% at April 30, 1996.............................................. $ 13,325 $
Note payable to former shareholder, interest at 10% at April 30, 1996....................... 2,717
Other....................................................................................... 953 483
Capital lease obligations................................................................... 584 315
--------- ---------
17,579 798
Less: Current maturities of long-term debt.................................................. (2,548) (232)
--------- ---------
Total long-term debt.................................................................... $ 15,031 $ 566
--------- ---------
--------- ---------
</TABLE>
The agreement related to the subordinated notes provided for the bank and
its agents to receive 12,551 and 14,941 detachable warrants for Pooled Company
common stock in June 1994 and January 1995, respectively. The warrants were
valued at $45 per share with such amount deducted from the face value of the
subordinated notes. In conjunction with the acquisition of the Pooled Company by
U.S. Office Products, the outstanding subordinated debt balance was paid in full
and all of the outstanding warrants were exercised and subsequently converted to
U.S. Office Products common stock.
F-18
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998............................................................................... $ 232
1999............................................................................... 216
2000............................................................................... 204
2001............................................................................... 41
2002............................................................................... 36
Thereafter......................................................................... 68
---------
Total maturities of long-term debt............................................... $ 797
---------
---------
</TABLE>
PAYABLE TO U.S. OFFICE PRODUCTS
The short-term payable to U.S. Office Products was incurred by the Company
primarily as a result of U.S. Office Products repaying short-term debt
outstanding of the businesses acquired by U.S. Office Products at or soon after
the respective dates of acquisition and through the centralized cash management
system, which involves daily advances or sweeps of cash to keep the cash balance
at or near zero on a daily basis.
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. An
analysis of the activity in this account is as follows:
<TABLE>
<S> <C>
Balance at April 30, 1996......................................................... $
Payments of long-term debt of acquired companies.................................. 21,379
Funding of acquisitions and payment of acquisition costs.......................... 8,203
Allocated corporate expenses...................................................... 2,221
Normal operating costs paid by U.S. Office Products............................... 1,423
---------
Balance at April 26, 1997......................................................... 33,226
Unaudited data:
Payments of long-term debt of acquired companies.................................. 822
Funding of acquisitions and payment of acquisition costs.......................... 24,646
Allocated corporate expenses...................................................... 3,089
Normal operating costs paid by U.S. Office Products............................... 687
---------
Balance at January 24, 1998 (unaudited)........................................... $ 62,470
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 and the nine months ended January 24, 1998 was
$27,269 and $47,767 (unaudited), respectively.
Interest has been allocated to the Company based upon the Company's average
outstanding payable (short and long term) balance with U.S. Office Products at
U.S. Office Products' weighted average interest rate during such period. The
Company's financial statements include allocations of interest expense from
F-19
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
U.S. Office Products totaling $3,879 and $4,057 (unaudited) during the year
ended April 26, 1997 and the nine months ended Janaury 24, 1998, respectively.
NOTE 10--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
--------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal............................................. $ (165) $ (66) $ $ 71
State............................................... 149 99
------ ------------ ------------- -------------
(16) (66) 170
------ ------------ ------------- -------------
Deferred income tax expense (benefit)................. 234 239 139 (2,582)
------ ------------ ------------- -------------
Total provision for (benefit from) income taxes... $ 218 $ 173 $ 139 $ (2,412)
------ ------------ ------------- -------------
------ ------------ ------------- -------------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ (349) $ 265
Allowance for doubtful accounts............................................................ 106 193
Net operating loss carryforward............................................................ 3,820 3,069
Accrued liabilities........................................................................ 332 421
Prepaid catalog advertising/restructuring.................................................. (205) (1,893)
--------- ---------
Total current deferred tax assets........................................................ 3,704 2,055
--------- ---------
Long-term deferred tax assets (liabilities):
Property and equipment..................................................................... (126) (289)
Intangible assets.......................................................................... 622 258
--------- ---------
Total long-term deferred tax assets (liabilities)........................................ 496 (31)
--------- ---------
Subtotal................................................................................. 4,200 2,024
--------- ---------
Valuation allowance........................................................................ (5,339)
--------- ---------
Net deferred tax asset (liability)....................................................... $ (1,139) $ 2,024
--------- ---------
--------- ---------
</TABLE>
At April 30, 1996, the valuation allowance had been recorded, related to
deferred tax assets of a Pooled Company, including net operating loss
carryforwards. Based upon the improved profitability of this Pooled Company
during fiscal 1997, the valuation allowance was reversed, resulting in a benefit
from income taxes.
F-20
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate........................... 34.0% 34.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit
for fiscal 1997..................................... 9.6 1.0
Net operating loss utilized........................... (33.0)
Net benefit for current year net operating loss....... (34.0) (32.8)
Reversal of valuation allowance....................... (84.8)
Nondeductible goodwill................................ (2.2) 1.6
Nondeductible acquisition costs....................... 5.0
Tax on separate company income not offset against
other company's loss................................ (5.4) (3.0)
Other................................................. 3.4
----- ----- ----- -----
Effective income tax rate............................. 14.0% (5.4)% (3.0 )% (42.2 )%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
NOTE 11--LEASE COMMITMENTS
The Company leases various types of retail, warehouse and office facilities
and equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998......................................................................................... $ 232 $ 871
1999......................................................................................... 118 806
2000......................................................................................... 6 599
2001......................................................................................... 517
2002......................................................................................... 496
Thereafter................................................................................... 1,057
----- -----------
Total minimum lease payments................................................................. 356 $ 4,346
-----
-----------
-----------
Less: Amounts representing interest (42)
-----
Present value of net minimum lease payments.................................................. $ 314
-----
-----
</TABLE>
Rent expense for the years ended December 31, 1994 and 1995, the four months
ended April 30, 1996 and the fiscal year ended April 26, 1997 was $1,486,
$1,947, $600 and $1,817, respectively.
F-21
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
Under the Distribution Agreement, the Company is required, on or prior to
the Distribution, to obtain a credit facility, to borrow funds under such
facility and to use the proceeds of such borrowings to pay off $83.3 million of
U.S. Office Products' debt. See additional discussion in Note 16.
On or before the date of the Distribution, School Specialty, U.S. Office
Products and the other Spin-Off Companies will enter into the Distribution
Agreement, the Tax Allocation Agreement, and the Employee Benefits Agreement and
the Spin-Off Companies will enter into the Tax Indemnification Agreement and may
enter into other agreements, including agreements relating to referral of
customers to one another. These agreements are expected to provide, among other
things, for U.S. Office Products and School Specialty to indemnify each other
from tax and other liabilities relating to their respective businesses prior to
and following the Distribution. Certain of the obligations of School Specialty
and the other Spin-Off Companies to indemnify U.S. Office Products are joint and
several. Therefore, if one of the other spin-off companies fails to satisfy its
indemnification obligations to U.S. Office Products when such a loss occurs,
School Specialty may be required to reimburse U.S. Office Products for all or a
portion of the losses that otherwise would have been allocated to other spin-off
companies. In addition, the agreements will allocate liabilities, including
general corporate and securities liabilities of U.S. Office Products not
specifically related to the school supplies business, between U.S. Office
Products and the Company and the other Spin-Off Companies. The terms of the
agreements that will govern the relationship between School Specialty and U.S.
Office Products will be established by U.S. Office Products in consultation with
School Specialty's management prior to the Distribution while School Specialty
is a wholly-owned subsidiary of U.S. Office Products.
NOTE 13--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the
F-22
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
employees. The subsidiaries paid all general and administrative expenses of the
plans and in some cases made matching contributions on behalf of the employees.
For the years ended December 31, 1994 and 1995 and the four months ended April
30, 1996, the subsidiaries incurred expenses totaling $175, $105 and $6,
respectively, related to these plans.
NOTE 14--STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS
During the nine months ended January 24, 1998, U.S. Office Products
contributed $69,762 of capital to the Company. The contribution reflects the
forgiveness of intercompany debt by U.S. Office Products, as it was agreed that
the Company would be allocated only $80,000 of debt plus the amount of any
additional debt incurred after January 12, 1998 in connection with the
acquisition of entities that will become subsidiaries of School Specialty.
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Compensation Plan covering employees of
U.S. Office Products. The Company expects to adopt an employee stock option plan
at approximately the time of the Distribution. The Company expects to replace
the options to purchase shares of common stock of U.S. Office Products held by
employees with options to purchase shares of common stock of the Company. U.S.
Office Products granted 249,600 options to Company employees under the Plan
during fiscal 1997; and the Company accounted for these options in accordance
with APB Opinion No. 25. Accordingly, because the exercise prices of the options
have equaled the market price on the date of grant, no compensation expense was
recognized for the options granted. Had compensation expense been recognized
based upon the fair value of the stock options on the grant date under the
methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and basic net income per share for the
year ended April 26, 1997 would have been reduced by $749 and $0.01,
respectively.
Under a services agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products has agreed that Jonathan J. Ledecky will
receive a stock option for School Specialty Common Stock from School Specialty
as of the date of the Distribution. The U.S. Office Products Board intends the
option to be compensation for Mr. Ledecky's services as a director of the
Company, and certain services as an employee of the Company. The option will
cover 7.5% of the outstanding Company common stock determined as of the date of
the Distribution, with no anti-dilution provisions in the event of issuance of
additional shares of common stock (other than with respect to stock splits or
reverse stock splits). The option will have a per share exercise price equal to
the IPO price.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant options covering 7.5% of the outstanding shares
of the Company's common stock, immediately following the Distribution and prior
to the IPO to certain executive management personnel (excluding the 7.5% granted
to Mr. Ledecky). The options granted will be granted under the 1998 Stock
Incentive Plan (the "Plan") and will have a per share exercise price equal to
the IPO price, with other terms to be determined by the Company's Board of
Directors. Total options available for grant under the Plan will be 20.0% of the
outstanding shares of the
F-23
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
Company's common stock immediately following the Distribution and the IPO,
including the options to be granted to Mr. Ledecky on that date.
The Company will be required to disclose in the footnotes of the financial
statements the impact of the compensation expense associated with these options
on a pro forma basis in accordance with FAS 123.
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995 and the fiscal year ended April 26, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
Revenues................................................ $ 18,760 $ 36,702 $ 69,192 $ 25,828 $ 150,482
Gross profit............................................ 4,960 11,130 20,795 7,840 44,725
Operating income (loss)................................. (3,014) 1,196 8,934 (4,792) 2,324
Net income (loss)....................................... (3,711) (252) 4,309 (3,713) (3,367)
<CAPTION>
YEAR ENDED APRIL 26, 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 58,991 $ 71,682 $ 29,304 $ 31,769 $ 191,746
Gross profit............................................ 18,110 19,823 7,664 9,572 55,169
Operating income (loss)................................. 5,197 6,732 (1,520) (688) 9,721
Net income (loss)....................................... 1,981 2,692 (1,067) 4,526 8,132
</TABLE>
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED)
DISTRIBUTION AND ACQUISITIONS PRO FORMA
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed eight business combinations accounted for
under the purchase method for an aggregate purchase price of $98,892, consisting
of $95,326 of cash and U.S. Office Products Common Stock with a market value of
$3,566. The total assets related to these eight acquisitions were $123,222,
including goodwill of $77,541. The results of operations for the nine months
ended January 24, 1998 include the results of the acquired companies from their
respective dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the acquisitions described above and the six
acquisitions accounted for under the purchase method completed in fiscal 1997
(see Note 4) had been consummated as of the beginning of fiscal 1997. The
results presented below include certain pro forma adjustments to reflect the
amortization of intangible assets and
F-24
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 16--SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
adjustments in executive compensation of $124 for the fiscal year ended April
26, 1997 and the nine months ended January 25, 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR --------------------------------
ENDED JANUARY 25, JANUARY 24,
APRIL 26, 1997 1997 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues.................................................... $ 350,760 $ 292,244 $ 318,667
Net income.................................................. 11,714 7,809 9,991
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
The Distribution Agreement allocates a specified amount of U.S. Office
Products' debt outstanding under its credit facilities to each Spin-Off Company
and requires each Spin-Off Company, on or prior to the Distribution, to obtain
credit facilities, to borrow funds under such facilities and to use the proceeds
of such borrowings to pay off the U.S. Office Products' debt so allocated plus
any additional debt incurred by U.S. Office Products after January 12, 1998 (the
date of the Investment Agreement) in connection with the acquisition of an
entity that has become or will become a subsidiary of such Spin-Off Company.
Under the Distribution Agreement, $80,000 of U.S. Office Products' debt has been
allocated to School Specialty, and since January 12, 1998, U.S. Office Products
has incurred an additional $3,300 of debt in connection with School Specialty's
acquisition of Education Access. Prior to the Distribution, School Specialty
will enter into the credit facility and will borrow $83,300 under the facility
to pay off debt of U.S. Office Products.
PROPOSED CREDIT FACILITY
The Company has received a committment letter for a secured $250,000
revolving credit facility from NationsBank, N.A. as administrative agent.
NationsBanc Montgomery Securities LLC, one of the Underwriters and an affiliate
of NationsBank, N.A., is the Arranger and Syndication Agent. The credit facility
will terminate five years from the Distribution Date. Interest on borrowings
under the credit facility will accrue interest at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base rate, plus a margin of 0%
to .25% for up to the first 6 months under the agreement. Thereafter, interest
will accrue at a rate of (i) LIBOR plus a range of .625% to 1.625% (depending on
the Company's leverage ratio of funded debt to EBITDA), or (ii) the lender's
base rate plus a range of .125% to .250%. Indebtedness will be secured by
substantially all of the assets of the Company. The credit facility will be
subject to terms and conditions typical of facilities of such size and will
include certain financial covenants. The Company will borrow under the credit
facility to repay the U.S. Office Products' debt which it is obligated under the
Distribution Agreement to repay. The balance of the credit facility will be
available for working capital, capital expenditures and acquisitions, subject to
compliance with financial covenants.
F-25
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the refinancing
of all amounts payable to U.S. Office Products and acquisitions completed
through May 1, 1998 and the Distribution. The pro forma offering adjustments
further adjust such pro forma financial statements to give effect to the
Offering and the sale of 250,000 shares of Common Stock to Messrs. Spalding,
Vander Zanden and Pate and the use of the proceeds therefrom to repay a portion
of the debt incurred to refinance the amounts payable to U.S. Office Products.
The pro forma combined balance sheet gives effect to (i) the refinancing of
all amounts payable to U.S. Office Products, (ii) the acquisition completed
after January 24, 1998, and (iii) the Distribution as if such transaction had
occurred as of the Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statement of income for the fiscal year ended April
26, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the acquisitions of six individually insignificant
companies in business combinations accounted for under the purchase method
completed during the fiscal year ended April 26, 1997 (the "Fiscal 1997 Purchase
Acquisitions"); and (iii) the acquisitions of Childcraft Education Corp., Sax
Arts & Crafts, Inc. ("Sax Arts & Crafts"), American Academic and four other
individually insignificant companies in business combinations accounted for
under the purchase method completed during the fiscal year ending April 25, 1998
(the "Fiscal 1998 Purchase Acquisitions"), as if all such transactions had
occurred on May 1, 1996. The pro forma combined statement of income for the year
ended April 26, 1997 includes (i) the audited financial information of the
Company for the year ended April 26, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through their respective dates of acquisition; and (iii) the unaudited
financial information of the Fiscal 1998 Purchase Acquisitions for the period
from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the nine months ended January
24, 1998 gives effect to the refinancing of all amounts payable to U.S. Office
Products and the Fiscal 1998 Purchase Acquisitions, as if all such transactions
had occurred on April 27, 1997. The pro forma combined statement of income for
the nine months ended January 24, 1998 includes the unaudited financial
information of the Company for the nine months ended January 24, 1998 and the
unaudited financial information of the Fiscal 1998 Purchase Acquisitions for the
period from April 27, 1997 through the earlier of their respective dates of
acquisition or January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 gives effect to (i) the refinancing of all amounts payable to U.S.
Office Products; (ii) the Fiscal 1997 Purchase Acquisitions; and (iii) the
Fiscal 1998 Purchase Acquisitions, as if all such transactions had occurred on
May 1, 1996. The pro forma combined statement of income for the nine months
ended January 25, 1997 includes (i) the unaudited financial information of the
Company for the nine months ended January 25, 1997; (ii) the unaudited financial
information of the Fiscal 1997 Purchase Acquisitions for the period from May 1,
1996 through the earlier of their respective dates of acquisition or January 25,
1997; and (iii) the unaudited financial information of the Fiscal 1998 Purchase
Acquisitions for the period from May 1, 1996 through January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of School Specialty, Inc., a Wisconsin corporation, and The
Re-Print Corporation, which were acquired by the Education Division during the
fiscal year ended April 26, 1997 in business combinations accounted for under
the pooling-of-interests method of accounting.
F-26
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs and interest expense incurred by
U.S. Office Products. The allocated costs include expenses such as: certain
corporate executives' salaries, accounting and legal fees, departmental costs
for accounting, finance, legal, purchasing, marketing and human resources, as
well as other general overhead costs. These corporate overheads have been
allocated to the Company using one of several factors, dependent on the nature
of the costs being allocated, including, revenues, number and size of
acquisitions and number of employees. Interest expense has been allocated to the
Company based upon the Company's average outstanding intercompany balance with
U.S. Office Products at U.S. Office Products' weighted average interest rate
during such period.
In the first quarter of fiscal 1999, the Company will record a compensation
charge of approximately $263,000, representing the difference between the amount
which Messrs. Spalding, Vander Zanden and Pate will pay for the 250,000 shares
of Common Stock to be purchased directly from the Company and the amount which
they would have paid for such shares if the purchase price per share had been
the initial public offering price of the shares offered in the Offering. Because
this charge is non-recurring, it has not been reflected in the pro forma
statements of income.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-27
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
POST
SCHOOL JANUARY 24, 1998 PRO FORMA
SPECIALTY, PURCHASE PRO FORMA OFFERING PRO FORMA
INC. ACQUISTION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
------------- ----------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ $ $ $ $ 31,631(d) $
(31,631)(d)
Accounts receivable, net........... 41,530 41,530 41,530
Inventory.......................... 32,946 100 33,046 33,046
Prepaid and other current assets... 8,997 8,997 8,997
------------- ------- ----------- --------- ----------- -----------
Total current assets........... 83,473 100 83,573 83,573
Property and equipment, net.......... 20,489 350 20,839 20,839
Intangible assets, net............... 94,651 2,800(a) 97,451 97,451
Other assets......................... 2,594 2,594 2,594
------------- ------- ----------- --------- ----------- -----------
Total assets................... $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
------------- ------- ----------- --------- ----------- -----------
------------- ------- ----------- --------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short term debt.................... $ 272 $ $ $ 272 $ $ 272
Short-term Payable to U.S. Office
Products......................... 16,873 (16,873)(b)
Accounts payable................... 11,951 11,951 11,951
Accrued compensation............... 5,502 5,502 5,502
Other accrued liabilities.......... 5,262 5,262 5,262
------------- ------- ----------- --------- ----------- -----------
Total current liabilities...... 39,860 (16,873) 22,987 22,987
Long-term debt....................... 385 82,593(b) 82,978 (31,631)(d) 51,347
Long-term Payable to U.S. Office
Products........................... 62,470 3,250(a)
(65,720)(b)
------------- ------- ----------- --------- ----------- -----------
Total liabilities.............. 102,715 3,250 105,965 (31,631) 74,334
Stockholder's equity:
Common Stock....................... 13(c) 13 2(d) 15
Additional paid-in capital......... 93,300(c) 93,300 31,629(d) 124,929
Divisional equity.................. 93,313 (93,313)(c)
Retained earnings.................. 5,179 5,179 5,179
Equity in Purchased Company........ 450 (450)(a)
------------- ------- ----------- --------- ----------- -----------
Total stockholder's equity..... 98,492 450 (450) 98,492 31,631 130,123
------------- ------- ----------- --------- ----------- -----------
Total liabilities and
stockholder's equity......... $ 201,207 $ 450 $ 2,800 $ 204,457 $ $ 204,457
------------- ------- ----------- --------- ----------- -----------
------------- ------- ----------- --------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-28
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY
INSIGNIFICANT
SCHOOL SAX FISCAL 1998 PRO FORMA
SPECIALTY, ARTS & AMERICAN PURCHASE PRO FORMA OFFERING
INC. CRAFTS ACADEMIC ACQUISITIONS ADJUSTMENTS SUBTOTAL ADJUSTMENTS
------------- --------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 247,880 $ 5,421 $ 36,423 $ 28,943 $ $ 318,667 $
Cost of revenues..................... 176,501 3,467 26,203 21,314 227,485
------------- --------- ----------- ----------- ----------- --------- -----------
Gross profit..................... 71,379 1,954 10,220 7,629 91,182
Selling, general and administrative
expenses........................... 49,588 1,451 6,968 6,425 224(f) 64,656
Amortization expense................. 1,411 556(g) 1,967
------------- --------- ----------- ----------- ----------- --------- -----------
Operating income................. 20,380 503 3,252 1,204 (780) 24,559
Other (income) expense:
Interest expense................... 4,100 18 441 38 938(h) 5,535 (1,898)(j)
Interest income.................... (109) (3) (4) 116(h)
Other.............................. 441 24 57 522
------------- --------- ----------- ----------- ----------- --------- -----------
Income before provision for income
taxes.............................. 15,948 488 2,787 1,113 (1,834) 18,502 1,898
Provision for income taxes........... 7,113 189 892 141 176(i) 8,511 759
------------- --------- ----------- ----------- ----------- --------- -----------
Net income........................... $ 8,835 $ 299 $ 1,895 $ 972 $ (2,010) $ 9,991 $ 1,139
------------- --------- ----------- ----------- ----------- --------- -----------
------------- --------- ----------- ----------- ----------- --------- -----------
Weighted average shares:
Basic.............................. 12,751 12,300(k)
Diluted............................ 13,020 12,300(k)
Net income per share:
Basic.............................. $ 0.69 $ 0.81
Diluted............................ $ 0.68 $ 0.81
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues............................. $ 318,667
Cost of revenues..................... 227,485
-----------
Gross profit..................... 91,182
Selling, general and administrative
expenses........................... 64,656
Amortization expense................. 1,967
-----------
Operating income................. 24,559
Other (income) expense:
Interest expense................... 3,637
Interest income....................
Other.............................. 522
-----------
Income before provision for income
taxes.............................. 20,400
Provision for income taxes........... 9,270
-----------
Net income........................... $ 11,130
-----------
-----------
Weighted average shares:
Basic.............................. 14,675(l)
Diluted............................ 14,675(l)
Net income per share:
Basic.............................. $ 0.76
Diluted............................ $ 0.76
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-29
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
------------- --------- ----------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 159,977 $ 28,717 $ 34,024 $ 54,706 $ 14,820 $ $ 292,244
Cost of revenues............ 114,380 16,663 24,784 36,510 11,368 203,705
------------- --------- ----------- ------------- ------------- ------------- ---------
Gross profit................ 45,597 12,054 9,240 18,196 3,452 88,539
Selling, general and
administrative expenses... 33,000 7,504 6,702 13,773 3,312 (124)(e) 64,997
830(f)
Amortization expense........ 396 1,533(g) 1,929
Non-recurring acquisition
costs..................... 1,792 1,792
------------- --------- ----------- ------------- ------------- ------------- ---------
Operating income............ 10,409 4,550 2,538 4,423 140 (2,239) 19,821
Other (income) expense:
Interest expense............ 3,358 400 641 206 176 754(h) 5,535
Interest income............. (101) (37) 138(h)
Other....................... (204) (27) 67 (10) (174)
------------- --------- ----------- ------------- ------------- ------------- ---------
Income before provision for
income taxes.............. 7,356 4,177 1,897 4,187 (26) (3,131) 14,460
Provision for income
taxes..................... 3,750 1,620 395 111 775(i) 6,651
------------- --------- ----------- ------------- ------------- ------------- ---------
Net income (loss)........... $ 3,606 $ 2,557 $ 1,897 $ 3,792 $ (137) $ (3,906) $ 7,809
------------- --------- ----------- ------------- ------------- ------------- ---------
------------- --------- ----------- ------------- ------------- ------------- ---------
Weighted average shares:
Basic................... 9,553 12,300(k)
Diluted................. 9,758 12,300(k)
Net income per share:
Basic................... $ 0.38 $ 0.63
Diluted................. $ 0.37 $ 0.63
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS COMBINED
----------- -----------
<S> <C> <C>
Revenues.................... $ $ 292,244
Cost of revenues............ 203,705
----------- -----------
Gross profit................ 88,539
Selling, general and
administrative expenses... 64,997
Amortization expense........ 1,929
Non-recurring acquisition
costs..................... 1,792
----------- -----------
Operating income............ 19,821
Other (income) expense:
Interest expense............ (1,898)(j) 3,637
Interest income.............
Other....................... (174)
----------- -----------
Income before provision for
income taxes.............. 1,898 16,358
Provision for income
taxes..................... 759 7,410
----------- -----------
Net income (loss)........... $ 1,139 $ 8,948
----------- -----------
----------- -----------
Weighted average shares:
Basic................... 14,675(l)
Diluted................. 14,675(l)
Net income per share:
Basic................... $ 0.60
Diluted................. $ 0.60
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-30
<PAGE>
SCHOOL SPECIALTY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
INDIVIDUALLY INDIVIDUALLY
INSIGNIFICANT INSIGNIFICANT
SCHOOL SAX FISCAL 1998 FISCAL 1997
SPECIALTY, ARTS & AMERICAN PURCHASE PURCHASE PRO FORMA
INC. CRAFTS ACADEMIC ACQUISITIONS ACQUISITIONS ADJUSTMENTS SUBTOTAL
-------------- --------- ----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 191,746 $ 34,542 $ 40,563 $ 69,089 $ 14,820 $ $ 350,760
Cost of revenues.............. 136,577 20,067 29,608 46,776 11,368 244,396
-------------- --------- ----------- ------------- ------------- ------------- -----------
Gross profit.............. 55,169 14,475 10,955 22,313 3,452 106,364
Selling, general and
administrative expenses..... 42,896 9,698 8,102 18,056 3,312 (124)(e) 82,956
1,016(f)
Amortization expense.......... 566 1,908(g) 2,474
Non-recurring acquisition
costs....................... 1,792 1,792
Restructuring costs........... 194 194
-------------- --------- ----------- ------------- ------------- ------------- -----------
Operating income.......... 9,721 4,777 2,853 4,257 140 (2,800) 18,948
Other (income) expense:
Interest expense............ 4,197 474 850 234 176 1,369(h) 7,300
Interest income............. (45) 45(h)
Other....................... (196) (33) 81 (10) (158)
-------------- --------- ----------- ------------- ------------- ------------- -----------
Income (loss) before provision
for income taxes............ 5,720 4,336 2,003 3,987 (26) (4,214) 11,806
Provision for income taxes.... (2,412) 1,664 34 618 111 77(i) 92
-------------- --------- ----------- ------------- ------------- ------------- -----------
Net income (loss)............. $ 8,132 $ 2,672 $ 1,969 $ 3,369 $ (137) $ (4,291) $ 11,714
-------------- --------- ----------- ------------- ------------- ------------- -----------
-------------- --------- ----------- ------------- ------------- ------------- -----------
Weighted average shares
outstanding:
Basic..................... 10,003 12,300(k)
Diluted................... 10,196 12,300(k)
Net income per share:
Basic..................... $ 0.81 $ 0.95
Diluted................... $ 0.80 $ 0.95
<CAPTION>
PRO
FORMA PRO
OFFERING FORMA
ADJUSTMENTS COMBINED
------------- -----------
<S> <C> <C>
Revenues...................... $ $ 350,760
Cost of revenues.............. 244,396
------------- -----------
Gross profit.............. 106,364
Selling, general and
administrative expenses..... 82,956
Amortization expense.......... 2,474
Non-recurring acquisition
costs....................... 1,792
Restructuring costs........... 194
------------- -----------
Operating income.......... 18,948
Other (income) expense:
Interest expense............ (2,530)(j) 4,770
Interest income.............
Other....................... (158)
------------- -----------
Income (loss) before provision
for income taxes............ 2,530 14,336
Provision for income taxes.... 1,012 1,104
------------- -----------
Net income (loss)............. $ 1,518 $ 13,232
------------- -----------
------------- -----------
Weighted average shares
outstanding:
Basic..................... 14,675(l)
Diluted................... 14,675(l)
Net income per share:
Basic..................... $ 0.90
Diluted................... $ 0.90
</TABLE>
See accompanying notes for pro forma combined financial statements.
F-31
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with acquisition
of Education Access for $3,250 of cash provided by U.S. Office Products. The
portion of the consideration assigned to goodwill ($2,800) in the
transaction accounted for under the purchase method represents the excess of
the cost over the fair market value of the net assets acquired. The Company
amortizes goodwill over a period of 40 years. The recoverability of the
unamortized goodwill will be assessed on an ongoing basis by comparing
anticipated undiscounted future cash flows from operations to net book
value.
(b) Adjustment to reflect the refinancing of the payable to U.S. Office Products
with the proceeds received from expected borrowings under the revolving
credit facility with a third party.
(c) Adjustment to reflect the reclassification of divisional equity to common
stock and additional paid in capital as a result of the Distribution. The
Distribution will result in the issuance of 12,300 shares of common stock.
(d) Adjustment to reflect $31,631 of net proceeds from the sale of 2,375 shares
of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of the proceeds to repay long-term debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(e) Adjustment to reflect reductions in executive compensation as a result of
the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for
the foreseeable future and are not reasonably likely to affect the operating
performance of the Company.
(f) Adjustment to reflect additional corporate overhead expenses to be incurred
as a stand-alone, publicly traded entity, rather than as a division of U.S.
Office Products.
(g) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1997 and
Fiscal 1998 Purchase Acquisitions for the periods prior to the respective
dates of acquisition. The Company has recorded goodwill amortization in the
historical financial statements from the respective dates of acquisition
forward. The goodwill is being amortized over an estimated life of 40 years.
(h) Adjustment to reflect the increase in interest expense. Interest expense is
being calculated on the average pro forma debt outstanding during the
applicable periods at a weighted average interest rate of approximately
8.0%. The adjustment also reflects a reduction in interest income to zero as
the Company generally expects to use available cash to repay debt. Pro forma
interest expense will fluctuate $65 on an annual basis for each 0.125%
change in interest rates.
(i) Adjustment to calculate the provision for income taxes on the combined pro
forma results. The difference between the effective tax rate of 46% and the
statutory tax rate of 35% for the nine months ended January 25, 1997 and
January 24, 1998 relates primarily to state income taxes and non-deductible
goodwill. The difference between the effective pro forma tax rate and the
statutory tax rate for the fiscal year ended April 26, 1997 relates
primarily to state taxes and nondeductible goodwill, offset by the reversal
of a $5.3 million deferred tax valuation allowance.
F-32
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
(j) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Offering and sale of shares to
Messrs. Spalding, Vander Zanden and Pate of $31,631 to repay long-term debt
at an interest rate of 8%.
(k) The approximately 12,300 weighted average shares outstanding used to
calculate pro forma earnings per share is calculated based upon
approximately 110,700 shares of U.S. Office Products common stock expected
to be outstanding on the date of the School Specialty Distribution divided
by nine, which is the Distribution Ratio. The shares of U.S. Office Products
common stock expected to be outstanding on the date of the School Specialty
Distribution are based upon (a) approximately 133,800 shares currently
outstanding, plus (b) approximately 8,900 shares expected to be issued on
conversion of U.S. Office Products convertible debt, plus (c) approximately
5,000 shares expected to be issued on exercise of outstanding U.S. Office
Products stock options, minus (d) approximately 37,000 shares expected to be
accepted in U.S. Office Products' equity self-tender which is part of the
Strategic Restructuring Plan.
(l) The approximately 14,675 weighted average shares outstanding used to
calculate pro forma as adjusted earnings per share is based upon the
approximately 12,300 shares of common stock to be issued as a result of the
School Specialty Distribution and 2,125 shares to be sold in the Offering
and 250 shares to be sold to Messrs. Spalding, Vander Zanden and Pate.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Academic Suppliers Holding Corporation
We have audited the accompanying consolidated balance sheets of AMERICAN
ACADEMIC SUPPLIERS HOLDING CORPORATION AND SUBSIDIARY as of December 31, 1995
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Academic Suppliers Holding Corporation and Subsidiary as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
February 24, 1997
F-34
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash.............................................................. $ 7,228 $ 21,507 $ 9,841
Trade accounts receivable (net of allowance for doubtful accounts
of $25,000)..................................................... 4,525,451 3,656,546 13,476,228
Inventories (Note 1).............................................. 1,805,731 1,599,140 2,398,435
Other current assets and prepaid expenses......................... 127,673 173,549 269,234
------------- ------------- -------------
6,466,083 5,450,742 16,153,738
------------- ------------- -------------
Property, Plant and Equipment (less accumulated depreciation--
Notes 1 and 2).................................................... 3,081,784 2,949,000 2,845,858
------------- ------------- -------------
Other Assets:
Excess of cost over the fair value of net assets acquired (less
accumulated amortization of $320,322 $433,022, $509,311,
respectively--Note 1)........................................... 4,187,938 4,075,238 4,030,878
Deferred financing costs (less accumulated amortization of
$21,729, $42,729, and $50,965 respectively--Note 1)............. 40,544 19,544 0
Deposits.......................................................... 37,581 64,211 0
------------- ------------- -------------
4,266,063 4,158,993 4,030,878
------------- ------------- -------------
$ 13,813,930 $ 12,558,735 $ 23,030,474
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 1,476,312 $ 1,636,969 $ 4,281,450
Current portion of long-term debt (Note 4)........................ 168,673 3,135 10,772,516
Other current liabilities and accrued expenses (Notes 3 and 9).... 1,968,780 736,374 2,391,544
------------- ------------- -------------
3,613,765 2,376,478 17,445,510
------------- ------------- -------------
Long-term Liabilities:
Long-term debt (Note 4)........................................... 7,712,187 6,407,152 0
------------- ------------- -------------
Shareholders' Equity:
Common stock, (10,000 shares of $.01 par value authorized; 1,209,
1,232 and 1,232 shares issued and outstanding at December 31,
1995, 1996, and September 30, 1997, respectively--Note 8)....... 12 12 12
Additional paid-in capital........................................ 5,528,073 5,648,073 5,648,073
Retained earnings (Accumulated deficit)........................... (1,463,356) (296,229) 1,513,630
------------- ------------- -------------
4,064,729 5,351,856 7,161,715
Excess of Purchase Price over Predecessor Basis (Note 1).......... (1,576,751) (1,576,751) (1,576,751)
------------- ------------- -------------
2,487,978 3,775,105 5,584,964
------------- ------------- -------------
$ 13,813,930 $ 12,558,735 $ 23,030,474
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales........................................... $ 38,596,316 $ 39,290,879 $ 32,578,366 $ 38,497,843
Cost of Goods Sold.................................. 27,050,924 26,667,961 21,985,703 25,916,417
------------- ------------- ------------- -------------
Gross Profit........................................ 11,545,392 12,622,918 10,592,663 12,581,426
Selling, General and Administrative Expenses........ 9,522,851 9,995,206 7,229,895 8,932,382
------------- ------------- ------------- -------------
Income from Operations.............................. 2,022,541 2,627,712 3,362,768 3,649,044
------------- ------------- ------------- -------------
Other Expense:
Interest.......................................... 1,002,199 856,223 660,753 543,089
Guarantee fees (Note 4)........................... 305,384 148,996 148,996 0
Executive severance (Note 9)...................... 168,750 0 0 0
Amortization of intangibles (Note 1).............. 133,700 133,700 100,275 120,516
Management fee (Note 8)........................... 112,000 182,000 121,500 198,000
Other............................................. 104,574 128,908 81,115 126,523
------------- ------------- ------------- -------------
1,826,607 1,449,827 1,112,639 988,128
------------- ------------- ------------- -------------
Income before Income Taxes.......................... 195,934 1,177,885 2,250,129 2,660,916
Income Tax Provision--Current....................... 26,000 10,758 8,069 851,057
------------- ------------- ------------- -------------
Net Income.......................................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
EXCESS OF
RETAINED PURCHASE
SHARES ADDITIONAL EARNINGS PRICE OVER TOTAL
ISSUED AND PAID-IN (ACCUMULATED PREDECESSOR SHAREHOLDERS'
OUTSTANDING PAR VALUE CAPITAL DEFICIT) BASIS EQUITY
--------------- ------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994................ 1,209 $ 12 $5,528,073 $(1,633,290) ($1,576,751) $ 2,318,044
Net Income, Year Ended December 31, 1995... 169,934 169,934
----- --- ----------- ------------ ----------- -------------
Balances, December 31, 1995................ 1,209 12 5,528,073 (1,463,356) (1,576,751) 2,487,978
Issuance of Common Stock (Note 8).......... 23 120,000 120,000
Net Income, Year Ended December 31, 1996... 1,167,127 1,167,127
----- --- ----------- ------------ ----------- -------------
Balances, December 31, 1996................ 1,232 12 5,648,073 (296,229) (1,576,751) 3,775,105
Unaudited data:
Net Income, Nine Months Ended
September 30, 1997....................... 1,809,859 1,809,859
----- --- ----------- ------------ ----------- -------------
Balances, September 30, 1997 (unaudited)... 1,232 $ 12 $5,648,073 $1,513,630 ($1,576,751) $ 5,584,964
----- --- ----------- ------------ ----------- -------------
----- --- ----------- ------------ ----------- -------------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-37
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------- ----------------------------
1995 1996 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................................... $ 169,934 $ 1,167,127 $ 2,242,060 $ 1,809,859
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 404,222 381,791 281,842 292,031
Change in assets and liabilities:
Accounts receivable (net)....................... 643,826 868,905 (6,575,016) (9,819,682)
Inventories..................................... 172,680 206,591 (523,208) (799,296)
Other assets.................................... (56,950) (72,506) (95,646) (89,177)
Accounts payable................................ (140,915) 160,657 2,010,499 2,643,464
Other liabilities and accrued expenses.......... 968,782 (1,232,406) (1,530,288) 1,652,036
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities... 2,161,579 1,480,159 (4,189,757) (4,310,765)
------------- ------------- ------------- -------------
Cash Flows Used in Investing Activities:
Purchases of property and equipment................. (197,298) (115,307) (108,329) (67,282)
------------- ------------- ------------- -------------
Cash Flows from Financing Activities:
Repayment of revolving line of credit (net)......... (1,929,681) (1,305,935) 4,227,957 5,766,671
Repayment of term loans and mortgage................ (96,046) (107,306) (81,277) (1,400,290)
Principal payment on capital lease obligation....... (1,305) (3,496)
Repayment of promissory note payable to
shareholder....................................... 0 (53,836)
Proceeds from sale of common stock.................. 0 120,000 120,000
------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities........................................ (2,027,032) (1,350,573) 4,266,680 4,366,381
------------- ------------- ------------- -------------
Net Increase (Decrease) in Cash....................... (62,751) 14,279 (31,406) (11,666)
Cash, Beginning of Year............................... 69,979 7,228 7,228 21,507
------------- ------------- ------------- -------------
Cash, End of Year..................................... $ 7,228 $ 21,507 (24,178) 9,841
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest.......................................... $ 977,000 $ 864,134 $ 660,753 $ 543,089
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Income taxes...................................... $ 4,900 $ 11,046 $ 0 $ 85,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental Schedule of Noncash Operating, Investing
and Financing Activities: Acquisition of equipment
financed through capital lease obligation........... $ 8,953 $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Conversion of portion of accrued guaranteed fees to a
note payable (Note 4)............................... $ 53,836 $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES:
American Academic Suppliers Holding Corporation ("AASHC") and its wholly
owned subsidiary, American Academic Suppliers, Inc. ("AASI") (collectively
referred to as the "Company"), is a direct distributor of school supplies,
supplementary educational materials, furniture, and equipment to educational
institutions, school systems and administrative offices located throughout the
United States. Operations are conducted from owned and leased premises located
in Cary, Illinois and from leased premises located in Mt. Laurel, New Jersey
(Note 7).
On February 28, 1993, AASHC acquired all of the outstanding common stock of
AASI for $8,000,000. The acquisition was accounted for using the purchase method
of accounting. Since the former shareholders of AASI acquired an equity interest
in AASHC, the purchase price allocation has been adjusted by $1,576,751 to
reflect the excess of the purchase price over the predecessor basis in the net
assets acquired which, under generally accepted accounting principles, may not
be recognized as an asset. Such excess of purchase price over predecessor basis
was recorded as a reduction of the excess of cost over the fair value of net
assets acquired and as a decrease in shareholders' equity as of the date of
acquisition.
The Company primarily sells its products to separate schools or school
systems. As such, the majority of trade accounts receivable relate primarily to
these customers. Management believes that the recorded allowance for doubtful
accounts is adequate to cover potential losses associated with these customers.
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of September 30, 1997 and the
results of its operations and its cash flows for the nine months ended September
30, 1996 and 1997, as presented in the accompanying unaudited interim financial
statements.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
A summary of significant accounting policies is as follows:
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of AASHC and its wholly owned subsidiary, AASI. All
intercompany accounts and balances have been eliminated in the
consolidation.
INVENTORIES--Inventories are valued at the lower of cost or market, with
cost determined under the first-in, first-out ("FIFO") basis.
DEPRECIATION AND AMORTIZATION--Depreciation of property, plant and
equipment is computed under both accelerated and straight-line methods
for financial reporting purposes, based on the estimated useful lives of
the assets. For income tax reporting purposes, provisions for
depreciation are computed principally under accelerated methods, as
permitted by the Internal Revenue Code.
The excess of cost over fair value of net assets acquired is being
amortized under the straight-line method over a period of 40 years.
F-39
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Costs incurred in connection with obtaining long-term financing are
amortized, on a straight-line basis, over the term of the financing
commitment.
INCOME TAXES--The Company accounts for income taxes under the provisions
of Financial Accounting Standard No. 109. Under this standard, deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
NOTE 2--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at December 31, 1995 and 1996, stated at
acquisition cost, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land.............................................................. $ 415,000 $ 415,000
Buildings......................................................... 2,333,828 2,335,258
Warehouse equipment............................................... 603,590 638,976
Office furniture and equipment.................................... 249,060 255,613
Computer equipment................................................ 173,285 245,223
------------ ------------
Total owned assets............................................ 3,774,763 3,890,070
Equipment capitalized under lease obligation...................... 8,953 8,953
------------ ------------
3,783,716 3,899,023
Less accumulated depreciation..................................... (701,932) (950,023)
------------ ------------
$ 3,081,784 $ 2,949,000
------------ ------------
------------ ------------
</TABLE>
Depreciation of property, plant, and equipment, for the years ended December
31, 1995 and 1996, amounted to approximately $270,500 and $248,000,
respectively.
NOTE 3--OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES:
Other current liabilities and accrued expenses, at December 31, 1995 and
1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ----------
<S> <C> <C>
Compensation and commissions........................................ $ 1,037,714 $ 390,037
Guarantor's fee (Note 4)............................................ 305,383 0
Severance pay (Note 9).............................................. 170,442 0
Real estate taxes................................................... 77,253 80,385
Interest............................................................ 67,971 60,060
Other............................................................... 310,017 205,892
------------ ----------
$ 1,968,780 $ 736,374
------------ ----------
------------ ----------
</TABLE>
F-40
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT:
Long-term debt, at December 31, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Borrowings from Harris Trust and Savings Bank ("Harris") pursuant to a Credit
Agreement ("Agreement") (see below):
Revolving credit loan borrowings.................................................. $ 5,787,922 $ 4,481,987
Term loan borrowings.............................................................. 521,422 467,231
Mortgage note payable to Harris Bank Barrington, N.A. (secured by real estate occupied
by the Company; payable in monthly installments, inclusive of interest at prime plus
1 1/2%, of $16,600; final maturity on December 16, 1999. Fully paid subsequent to
year-end)........................................................................... 1,510,032 1,456,917
Promissory note payable to Pfingsten Executive Fund, L.P. (bearing interest at 10% per
annum; paid in full during 1996).................................................... 53,836 0
Capitalized lease obligation (payable in monthly installments of $291, inclusive of
interest at 10%; final maturity June 7, 1998)....................................... 7,648 4,152
------------ ------------
7,880,860 6,410,287
Less current portion.................................................................. 168,673 3,135
------------ ------------
Long-term portion, due in 1998........................................................ $ 7,712,187 $ 6,407,152
------------ ------------
------------ ------------
</TABLE>
At December 31, 1996, the Harris Agreement provided maximum aggregate
borrowings of $12,077,500. Interest on outstanding borrowings was payable
monthly, at the prime rate (8.25% at December 31, 1996) plus 1%. The Company had
availability under the Agreement of $1,100,000 at December 31, 1996. Pfingsten
Executive Fund, L.P. (the Company's majority shareholder) had guaranteed
$1,500,000 of the borrowings (reduced from $3,000,000 effective December 31,
1995) under the Agreement. Guarantee fees are charged to the Company at 10% per
annum, which amounted to $305,384 and $148,996 for the years ended December 31,
1995 and 1996. The guarantees were released by Harris on October 31, 1996.
On February 4, 1997, the Agreement with Harris was amended ("Amended
Agreement") to provide maximum aggregate borrowings of $16,800,000 from June 1
through October 31, and $11,800,000 at all other times. Revolving credit loan
borrowings, under the Amended Agreement which expires March 31, 1998, are
limited to a computed "Borrowing Base" amount and bear interest at the Company's
option at the prime rate or LIBOR plus 1.75%. The Amended Agreement requires the
Company to pay .25% per annum on the average daily unused portion of the
Revolving Credit Commitment and to pay a prepayment penalty in certain
situations.
The Amended Agreement contains covenants restricting certain corporate acts,
such as restricting dividend and management fee payments, and requiring the
maintenance of net worth levels and a financial ratio.
Borrowings under the agreement with Harris are secured by all of the
Company's assets.
On February 4, 1997, the Company repaid the mortgage note and term loan from
borrowings under the revolving credit loan.
F-41
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT: (CONTINUED)
Borrowings under the revolving credit, term loan and mortgage note at
December 31, 1996 have been reported as long-term liabilities at December 31,
1996 as a result of the Amended Agreement and repayment of the mortgage note and
term loan.
NOTE 5--INCOME TAXES:
AASHC and its wholly owned subsidiary file a consolidated federal income tax
return.
The primary differences between the statutory and effective tax rates for
1995 and 1996 relate to the use of net operating loss carryforwards not
previously recognized.
Gross deferred income tax assets consist primarily of (a) net operating loss
carryforwards, (b) accrued expenses not paid within two and one-half months
after the end of the Company's year which are deductible for tax reporting
purposes when paid, and (c) uniform capitalization rules (for additional
inventory costs) reflected for tax reporting purposes only. The gross deferred
income tax liability consists of the variation in the book and tax bases of
property, plant and equipment.
At December 31, 1995 and 1996, the Company's net deferred income tax asset
and related valuation allowance consisted of:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Gross deferred tax asset.............................................. $ 828,000 $ 262,000
Less valuation allowance.............................................. 517,000 84,000
---------- ----------
Deferred tax asset, net of valuation allowance........................ 311,000 178,000
Less deferred tax liability........................................... 311,000 178,000
---------- ----------
$ 0 $ 0
---------- ----------
---------- ----------
</TABLE>
The valuation allowance decreased by $112,799 and $433,000 during 1995 and
1996, respectively.
At December 31, 1996, the Company has available, as a carryforward to future
years, a federal net operating loss carryforward of approximately $560,000,
expiring in 2008 and 2009.
NOTE 6--EMPLOYEE BENEFIT PLAN:
The Company is a participant in a Pfingsten Partners, L.P. master employee
benefit plan. The plan, established under the provisions of Section 401(k) of
the Internal Revenue Code provides, among other things, for the Company to make
discretionary contributions. Such employer contributions to the plan, for the
years ended December 31, 1995 and 1996, amounted to $43,427 and $24,534,
respectively.
Certain professionals of Pfingsten Partners, L.P. (Note 8) serve as the
trustees of the plan.
NOTE 7--LEASES:
The Company leases an office building and a warehouse under various
operating agreements which expire in 1998. The office building lease is
renewable at the Company's option for 36 additional months with an escalated
monthly payment. Rent expense incurred under these leases, for the years ended
December 31, 1995 and 1996, totalled approximately $253,000 and $251,000,
respectively.
F-42
<PAGE>
AMERICAN ACADEMIC SUPPLIERS HOLDING CORPORATION
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LEASES: (CONTINUED)
Future minimum lease payments under the aforementioned operating leases, at
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 258,000
1998.............................................................. 73,000
---------
$ 331,000
---------
---------
</TABLE>
NOTE 8--SHAREHOLDERS' EQUITY AND RELATED-PARTY TRANSACTIONS:
During the year ended December 31, 1996, the Company issued 23 shares of
common stock to certain officers for $120,000 in cash.
For the years ended December 31, 1995 and 1996, the Company incurred
$112,000 and 182,000, respectively, in fees pursuant to a management agreement
with Pfingsten Partners, L.P., which entity is an affiliate of the Company's
majority shareholder, Pfingsten Executive Fund, L.P.
During the years ended December 31, 1995 and 1996, approximately $15,300 and
$6,900, respectively, in consulting services were paid by Pfingsten Partners,
L.P., on behalf of the Company, and charged to the Company. Additionally, at
December 31, 1995, $12,000 was owed to a shareholder of the Company for services
rendered during 1995.
See Notes 3 and 4 for additional related-party transactions.
NOTE 9--SEVERANCE AGREEMENTS:
During December 1995, the Company terminated its employment agreement with
its president and recognized a $168,750 charge to operations to cover the cost
associated with this termination. The related amount owed pertaining to the
aforementioned charge, as well as a 1993 termination, at December 31, 1995, was
$170,442. There were no outstanding amounts at December 31, 1996.
NOTE 10--SUBSEQUENT EVENT (UNAUDITED):
Effective December 15, 1997, the Company and its stockholders entered into a
definitive agreement with U.S. Office Products Company ("U.S. Office Products")
pursuant to which U.S. Office Products acquired all outstanding shares of the
Company's common stock in exchange for cash.
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Sax Arts and Crafts, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Sax Arts and Crafts, Inc. at
December 16, 1995 and December 25, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 25, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the accounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 3, 1998
F-44
<PAGE>
SAX ARTS AND CRAFTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25, JUNE 29,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.............................................................. $ 102,900 $ 114,492 $ 109,544
Accounts receivable--trade, less allowance for doubtful accounts
of $31,860, $49,860 and $37,448, respectively................... 4,656,651 4,383,464 4,114,798
Inventories....................................................... 5,591,557 5,441,664 7,145,216
Prepaid expenses and other current assets......................... 856,943 429,741 747,466
------------- ------------- -------------
Total current assets............................................ 11,208,051 10,369,361 12,117,024
Net property, plant and equipment................................... 1,034,648 820,827 658,356
Other assets........................................................ 42,477 26,506 26,506
------------- ------------- -------------
Total assets.................................................... $ 12,285,176 $ 11,216,694 $ 12,801,886
------------- ------------- -------------
------------- ------------- -------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable--trade........................................... $ 4,210,593 $ 1,947,833 $ 3,403,006
Affiliate payable, net............................................ 3,212,473 1,806,645 3,130,496
Accrued income taxes.............................................. 1,802,399 1,814,139 401,063
Other accrued expenses............................................ 684,089 806,241 856,057
------------- ------------- -------------
Total current liabilities....................................... 9,909,554 6,374,858 7,790,622
Deferred income taxes............................................... 42,256 16,202 16,202
Other liabilities................................................... 69,195 69,197 92,000
------------- ------------- -------------
Total liabilities............................................... 10,021,005 6,460,257 7,898,824
Shareholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding....................................................... 1,000 1,000 1,000
Capital surplus--additional paid-in capital....................... 1,507,597 1,507,597 1,507,597
Retained earnings................................................. 755,574 3,247,840 3,394,465
------------- ------------- -------------
Total shareholder's equity...................................... 2,264,171 4,756,437 4,903,062
------------- ------------- -------------
Total liabilities and shareholder's equity...................... $ 12,285,176 $ 11,216,694 $ 12,801,886
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 29,169,879 $ 33,239,883 $ 34,350,947 $ 11,125,967 $ 13,009,456
Cost of sales............................... 16,369,453 19,029,918 20,078,806 6,562,838 8,286,522
------------- ------------- ------------- ------------- -------------
Gross profit............................ 12,800,426 14,209,965 14,272,141 4,563,129 4,722,934
Selling, administrative and other
expenses.................................. 8,401,463 9,169,667 9,734,256 4,379,178 4,427,608
------------- ------------- ------------- ------------- -------------
Operating earnings...................... 4,398,963 5,040,298 4,537,885 183,951 295,326
Other income (expense), net................. (510,508) (545,302) (476,886) (222,759) (52,971)
------------- ------------- ------------- ------------- -------------
Earnings before income taxes................ 3,888,455 4,494,996 4,060,999 (38,808) 242,355
Income taxes................................ 1,502,315 1,738,191 1,568,733 (14,351) 95,730
------------- ------------- ------------- ------------- -------------
Net earnings (loss)......................... $ 2,386,140 $ 2,756,805 $ 2,492,266 $ (24,457) $ 146,625
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 18, 1993..................... 1,000 $ 1,000 $ 1,507,597 $ 512,629 $ 2,021,226
Dividends.................................... (2,400,000) (2,400,000)
Net income................................... 2,386,140 2,386,140
---------- --------- ------------ ------------- --------------
Balance, December 17, 1994..................... 1,000 1,000 1,507,597 498,769 2,007,366
Dividends.................................... (2,500,000) (2,500,000)
Net income................................... 2,756,805 2,756,805
---------- --------- ------------ ------------- --------------
Balance, December 16, 1995..................... 1,000 1,000 1,507,597 755,574 2,264,171
Net income................................... 2,492,266 2,492,266
---------- --------- ------------ ------------- --------------
Balance, December 25, 1996..................... 1,000 1,000 1,507,597 3,247,840 4,756,437
Net income (unaudited)....................... 146,625 146,625
---------- --------- ------------ ------------- --------------
Balance, June 29, 1997 (unaudited)............. 1,000 $ 1,000 $ 1,507,597 $ 3,394,465 $ 4,903,062
---------- --------- ------------ ------------- --------------
---------- --------- ------------ ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
SAX ARTS AND CRAFTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 17, DECEMBER 16, DECEMBER 25, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................. $2,386,140 $2,756,805 $2,492,266 $ (24,457) $ 146,625
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities:
Depreciation and amortization................ 327,489 340,556 371,516 178,529 153,891
Deferred income taxes........................ 599 (30,302) (26,054) -- --
Gain on disposal of fixed assets............. (5,350) (21,505) (6,578) (6,205) (23,234)
Impact on cash flow from changes in working
capital:
Accounts receivable...................... (185,934) (734,239) 273,187 1,403,353 268,666
Inventory................................ (659,936) 144 149,893 (2,287,194) (1,703,552)
Other current assets..................... (632,521) (56,442) 427,202 (109,614) (317,726)
Accounts payable......................... 155,519 2,590,011 (2,262,760) (2,172,326) 1,455,174
Affiliates payable....................... 942,481 (2,521,286) (1,405,828) 2,927,060 1,323,851
Accrued expenses......................... (212,673) 656,493 133,894 27,125 (1,340,457)
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in)
operating activities............... 2,115,814 2,980,235 146,738 (63,729) (36,762)
------------ ------------ ------------ ---------- ----------
Cash flows from investing activities:
Purchased property, plant and equipment.......... (196,752) (473,305) (157,695) (9,789) (27,006)
Proceeds from sales of assets.................... 5,350 21,505 6,578 11,450 58,820
Increase in other assets......................... -- -- 15,971 15,971 --
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in)
investing activities............... (191,402) (451,800) (135,146) 17,632 31,814
------------ ------------ ------------ ---------- ----------
Cash flows from financing activities:
Dividend payment................................. (2,400,000) (2,500,000) -- -- --
------------ ------------ ------------ ---------- ----------
Net cash used in financing
activities......................... (2,400,000) (2,500,000) -- -- --
------------ ------------ ------------ ---------- ----------
Net increase (decrease) in cash.................... (475,588) 28,435 11,592 (46,097) (4,948)
Cash at beginning of period........................ 550,053 74,465 102,900 102,900 114,492
------------ ------------ ------------ ---------- ----------
Cash at end of period.............................. $ 74,465 $ 102,900 $ 114,492 $ 56,803 $ 109,544
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest......................... $ 91,585 $ 390 $ -- $ -- $ 23
Cash paid for taxes............................ $1,540,000 $1,480,000 $1,780,000 $ 141,000 $ 95,000
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Sax Arts and Crafts, Inc. (the "Company") is a national mail order
distributor of art and craft supplies to schools and educational institutions.
Sax Arts and Crafts, Inc. is a wholly-owned subsidiary of Day-Timers, Inc. (the
"Parent"). The Parent is owned by ACCO World Corporation ("ACCO"), which is a
wholly-owned subsidiary of Fortune Brands International ("Fortune Brands"). On
June 30, 1997, the Company and its shareholder entered into a definitive
agreement with U.S. Office Products Company ("U.S. Office Products") pursuant to
which the Company was acquired by U.S. Office Products. All outstanding shares
of the Company were exchanged for cash.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the third Saturday in December. Fiscal
year 1994 ended on December 17, 1994 and fiscal year 1995 ended on December 16,
1995. In 1996, the Company's fiscal year end was changed to December 25, 1996 in
order to comply with the closing date of the Parent. As a result, fiscal 1996
has 53 weeks.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of June 29, 1997 and the results of
its operations and its cash flows for the six months ended June 30, 1996 and
June 29, 1997, as presented in the accompanying unaudited interim financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product as obligations
subsequent to delivery are not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company provides products to a wide range of customers who primarily operate in
the education sector. The Company does not believe it is exposed to any undue
concentration of credit risk based on the strong credit history of the Company's
customer base.
F-49
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is part of a consolidated tax group with its Parent. For
purposes of these financial statements, income taxes have been provided as if
the Company filed a separate tax return. Income taxes are calculated in
accordance with the liability method of accounting for income taxes as provided
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred taxes are provided on temporary differences between book and
tax basis of assets and liabilities which will have a future impact on taxable
income.
3. INVENTORIES
Inventories are recorded at cost (not in excess of market value) as
determined by the weighted average cost method. Inventories are comprised as
follows:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Finished goods....................................................................... $5,647,290 $5,493,859
Less--Reserves....................................................................... 55,733 52,195
------------ ------------
Total inventory.................................................................. $5,591,557 $5,441,664
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Buildings and improvements........................................................... $ 129,302 $ 120,045
Automobiles.......................................................................... 251,382 245,403
Machinery and equipment.............................................................. 1,463,156 1,482,480
Computer hardware and software....................................................... 806,755 982,415
Construction in progress............................................................. 157,534 58,544
------------ ------------
Total cost....................................................................... 2,808,129 2,888,887
Less--Accumulated depreciation....................................................... (1,773,481) (2,068,060)
------------ ------------
Net property, plant and equipment.................................................... $1,034,648 $ 820,827
------------ ------------
------------ ------------
</TABLE>
Depreciation is generally computed on a straight-line method over the
estimated useful lives of the assets including assets acquired by capital
leases. Accelerated depreciation is used for income tax purposes where
permitted. Depreciation expense recorded for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 was $327,489, $340,556 and $371,516,
respectively.
F-50
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current portion:
Federal............................................................. $1,292,616 $1,522,247 $1,372,728
State............................................................... 209,100 246,246 222,059
------------ ------------ ------------
1,501,716 1,768,493 1,594,787
------------ ------------ ------------
Deferred portion:
Federal............................................................. 516 (26,083) (22,426)
State............................................................... 83 (4,219) (3,628)
------------ ------------ ------------
599 (30,302) (26,054)
------------ ------------ ------------
Income tax provision.................................................. $1,502,315 $1,738,191 $1,568,733
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------ ------------
<S> <C> <C>
Accruals............................................................................. $ 58,944 $ 64,186
Asset reserves....................................................................... 12,585 19,693
Inventories.......................................................................... 17,370 15,610
Pension.............................................................................. 41,828 39,066
------------ ------------
Gross deferred tax assets........................................................ 130,727 138,555
Depreciation......................................................................... (172,983) (154,757)
------------ ------------
Gross deferred tax liabilities................................................... (172,983) (154,757)
------------ ------------
Net deferred tax liability....................................................... $ (42,256) $ (16,202)
------------ ------------
------------ ------------
</TABLE>
The effective rate for income taxes differs from the statutory rate as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
U.S. federal statutory tax rate....................................... 34.0% 34.0% 34.0%
Non-deductible expenses............................................... 0.1 0.2 0.1
State income taxes, net of federal benefit............................ 5.5 5.5 5.5
Other................................................................. (1.0) (1.0) (1.0)
--- --- ---
38.6% 38.7% 38.6%
--- --- ---
--- --- ---
</TABLE>
F-51
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS
The affiliates payable component on the balance sheet represents the net
balance payable to the Parent and its affiliates. Interest is charged to the
Company on the outstanding balance. An analysis of the activity in this account
is as follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period....................................... $ (4,791,279) $ (5,733,759) $ (3,212,473)
Cost allocations and direct charges from Parent...................... (59,981) (24,414) (73,569)
Interest charged by Parent........................................... (421,370) (602,674) (528,324)
Intercompany sales................................................... -- 273,106 471,794
Cash transfers....................................................... (461,129) 2,875,268 1,535,927
------------- ------------- -------------
Balance at end of period............................................. $ (5,733,759) $ (3,212,473) $ (1,806,645)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company has the following affiliated receivables and payables:
<TABLE>
<CAPTION>
DECEMBER 16, DECEMBER 25,
1995 1996
------------- -------------
<S> <C> <C>
Receivable from:
Day-Timers Canada................................................................. $ 11,054 $ 186,581
Fortune Brands.................................................................... -- 648,932
------------- -------------
Total........................................................................... $ 11,054 $ 835,513
------------- -------------
------------- -------------
Payable to:
ACCO.............................................................................. $ (2,089,941) $ (2,618,265)
Parent............................................................................ (21,202) (23,893)
Fortune Brands.................................................................... (1,112,384) --
------------- -------------
Total........................................................................... $ (3,223,527) $ (2,642,158)
------------- -------------
------------- -------------
</TABLE>
Services provided to the Company by the Parent and its affiliates include
expenses incurred and paid by the Parent on the Company's behalf and charges for
accounting and payroll functions provided by the Parent. The primary components
of cost allocations and direct charges from the Parent and affiliates are as
follows:
<TABLE>
<CAPTION>
DECEMBER 17, DECEMBER 16, DECEMBER 25,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Payroll and accounting function....................................... $ 38,950
Employee benefits..................................................... $ 34,922
Insurance............................................................. 21,009 $ 21,202 29,222
Bank charges.......................................................... 4,050 3,212 5,397
------------ ------------ ------------
$ 59,981 $ 24,414 $ 73,569
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-52
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS
<TABLE>
<CAPTION>
DECEMBER 25,
FISCAL YEAR 1996
- ---------------------------------------------------------------------------- ------------
<S> <C>
1997........................................................................ $ 506,847
1998........................................................................ 417,091
1999........................................................................ 334,447
2000........................................................................ 319,545
2001 and thereafter......................................................... 399,431
------------
Total minimum lease payments.............................................. $1,977,361
------------
------------
</TABLE>
Rental expense for all operating leases charged against earnings amounted to
$553,198, $546,603 and $559,830 for the years ended December 17, 1994, December
16, 1995 and December 25, 1996, respectively.
8. RETIREMENT PLAN
Nonunion employees of the Company participate in a noncontributory defined
benefit plan established by the Parent. Benefits for the plan are based
primarily on years of service and employees' average monthly earnings. The
Parent's funding policy is consistent with the funding requirements of federal
law and regulations. Plan assets consist principally of listed equity
securities. Participants are fully vested in the plan after completing five
years of service.
As of the most recent actuarial valuation, the total pension costs for the
Parent for the year ended December 25, 1996 consisted of the following:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
------------
<S> <C>
Service cost--benefits earned during the period............................. $ 1,479,787
Interest cost on projected benefit obligation............................... 1,640,620
Expected return on plan assets.............................................. (1,783,635)
Amortization of unrecognized prior service cost............................. (6,752)
All other cost components................................................... 40,302
------------
Net pension costs........................................................... $ 1,370,322
------------
------------
</TABLE>
The net pension costs of the plan for the years ended December 17, 1994,
December 16, 1995 and December 25, 1996 allocated to the Company by the Parent
were $86,000, $94,000 and $108,000, respectively.
F-53
<PAGE>
SAX ARTS AND CRAFTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT PLAN (CONTINUED)
As of the most recent actuarial valuation, the funded status of the plan for
the Parent as of December 25, 1996 is as follows:
<TABLE>
<CAPTION>
TOTAL
PARENT'S
PLAN
-------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits.......................................................... $ 17,629,613
Non-vested benefit....................................................... 1,458,142
-------------
Accumulated benefit obligation............................................. 19,087,755
Effect of projected future compensation increases.......................... 5,300,546
-------------
Projected benefit obligation............................................... 24,388,301
Plan assets at fair value.................................................. 22,052,322
-------------
Projected benefit obligation in excess of plan assets...................... (2,335,979)
Unrecognized prior service cost............................................ (32,672)
Unrecognized net gain...................................................... (60,338)
-------------
Accrued pension costs...................................................... $ (2,428,989)
-------------
-------------
</TABLE>
The accrued pension costs at December 16, 1995 and December 31, 1996
attributed to the Company were $183,000 and $177,000, respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for the
Company's plan participants and the net assets will be distributed for their
benefit.
9. OTHER POSTRETIREMENT PLAN
The Parent provides health care and life insurance benefits for eligible
retired employees and their eligible dependents. The cost of these benefits was
determined by application of actuarial assumptions and healthcare trend rates.
Based on the actuarial valuations performed for the years ended December 17,
1994, December 16, 1995 and December 25, 1996, the total net periodic
postretirement costs (benefit) allocated by the Parent to the Company were
$10,000, $2,000 and $(1,000), respectively.
The accrued other postretirement costs as of the years ended December 16,
1995 and December 25, 1996 attributed to the Company were $141,000 and $129,000,
respectively.
Upon being acquired by U.S. Office Products, the plan was terminated for the
Company's plan participants and the net assets will be distributed for their
benefit.
F-54
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses payable by School
Specialty in connection with the issuance and distribution of the securities.
All of such expenses except the Securities and Exchange Commission registration
fee are estimated:
<TABLE>
<S> <C>
SEC Registration........................................................ $ 9,768
Nasdaq Listing Fee...................................................... $ 47,500
Legal Fees and Expenses................................................. $ 500,000
Accounting Fees and Expenses............................................ $ 500,000
Printing Fees and Expenses.............................................. $ 350,000
Miscellaneous........................................................... $ 17,732
---------
Total............................................................... $1,500,000
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of School Specialty's Certificate of Incorporation provides
that School Specialty shall indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of School Specialty's Certificate of Incorporation states that
directors of School Specialty will not be liable to School Specialty or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to School Specialty or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, which makes directors liable for unlawful dividends or unlawful stock
repurchases or redemptions or (iv) for any transaction from which the director
derived an improper personal benefit.
Article IV of School Specialty's Bylaws provides that School Specialty shall
indemnify its officers and directors (and those serving at the request of School
Specialty as an officer or director of another corporation, partnership, joint
venture, trust or other enterprise), and may indemnify its employees and
II-1
<PAGE>
agents (and those serving at the request of School Specialty as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred, if such officer,
director, employee or agent acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of School Specialty, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In a derivative action, indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such officer, director, employee or agent in the defense or
settlement of such action or suit, and no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to School Specialty unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Unless the Board of Directors of School Specialty otherwise determines in a
specific case, expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by School Specialty in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the officer or director to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by School Specialty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No.2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Appleton, Wisconsin, on May 14, 1998.
<TABLE>
<S> <C> <C>
SCHOOL SPECIALTY, INC.
By: /s/ DANIEL P. SPALDING
-----------------------------------------
Name: Daniel P. Spalding
Title: Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ --------------------------- -------------------
/s/ DANIEL P. SPALDING Chief Executive Officer May 14, 1998
- ------------------------------ (Principal Executive
Daniel P. Spalding Officer); Director
/s/ DONALD J. NOSKOWIAK Chief Financial Officer May 14, 1998
- ------------------------------ (Principal Financial and
Donald J. Noskowiak Accounting Officer)
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1*** Amended and Restated Certificate of Incorporation
3.2*** Bylaws
4.1*** Form of certificate representing shares of Common Stock
5*** Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8*** Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Consulting, Inc., Navigant International, Inc., and School Specialty, Inc.
10.2*** Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec
Technology Partners, Inc., Navigant International, Inc., and School Specialty, Inc.
10.3* Tax Indemnification Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc.,
Navigant International, Inc., and School Specialty, Inc.
10.4* Employee Benefits Agreement among Workflow Management, Inc., Aztec Technology Partners, Inc., Navigant
International, Inc., and School Specialty, Inc.
10.5** Employment Agreement dated April 29, 1996, between Daniel P. Spalding and School Specialty, Inc.
10.6** Employment Agreement dated July 26, 1996, between Donald Ray Pate, Jr. and The Re-Print Corp.
10.7** Employment Agreement dated June 27, 1997, between Richard H. Nagel and Sax Arts & Crafts, Inc.
10.8*** Agreement dated as of January 13, 1998 between U.S. Office Products and Jonathan J. Ledecky.
10.9*** Form of Employment Agreement between David Vander Zanden and School Specialty, 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 Price Waterhouse, LLP
23.7** Consent of David J. Vander Zanden to be named as director
23.8** Consent of Jonathan J. Ledecky to be named as director
23.9** Consent of Leo C. McKenna to be named as director
23.10** Consent of Rochelle Lamm Wallach to be named as director
27* Financial data schedule
99.1* Valuation and Qualifying Accounts and Reserves Schedule
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
*** To be filed by amendment.
II-4
<PAGE>
AGREEMENT
AND
PLAN OF DISTRIBUTION
Dated as of May __, 1998
between
U.S. Office Products Company,
Workflow Management, Inc.,
School Specialty, Inc.,
Aztec Technology Partners, Inc.
and
Navigant International, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................2
SECTION 1.01 General.........................................................................2
SECTION 1.02 References; Interpretation.....................................................16
ARTICLE II
PRELIMINARY TRANSACTIONS................................................................................16
SECTION 2.01 Stock Transfers................................................................16
SECTION 2.02 Liabilities....................................................................16
SECTION 2.03 Transfer of Certain Licenses and Permits.......................................17
SECTION 2.04 Transfer and Assumption Documentation..........................................18
SECTION 2.05 Intercompany Accounts..........................................................18
SECTION 2.06 Elimination of Guarantees......................................................19
SECTION 2.07 Assignments and Transfers Not Effected Prior to the
Distribution.................................................................................19
SECTION 2.08 Debt...........................................................................20
SECTION 2.09 Assignment of Acquisition Claims...............................................20
SECTION 2.10 Pledged Shares.................................................................21
SECTION 2.11 Other Transactions.............................................................21
ARTICLE III
THE DISTRIBUTION........................................................................................21
SECTION 3.01 Directors and Employees........................................................21
SECTION 3.02 Mechanics of Distribution......................................................21
SECTION 3.03 Timing of Distribution.........................................................22
ARTICLE IV
MUTUAL RELEASE..........................................................................................22
ARTICLE V
INDEMNIFICATION.........................................................................................23
SECTION 5.01 Indemnification by the Company.................................................23
SECTION 5.02 Indemnification by Printco.....................................................24
SECTION 5.03 Indemnification by Schoolco....................................................25
SECTION 5.04 Indemnification by Techco......................................................25
SECTION 5.05 Indemnification by Travelco....................................................26
SECTION 5.06 Limitations on Indemnification Obligations.....................................27
SECTION 5.07 Procedures for Indemnification of Third Party Claims...........................27
</TABLE>
i
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<TABLE>
<CAPTION>
<S> <C>
SECTION 5.08 Indemnification Payments.......................................................29
SECTION 5.09 Defaults.......................................................................29
SECTION 5.10 Tax Adjustments................................................................30
SECTION 5.11 MCI Agreement..................................................................30
SECTION 5.12 Survival of Indemnities........................................................30
ARTICLE VI
COVENANTS...............................................................................................31
SECTION 6.01 Provision of Corporate Records.................................................31
SECTION 6.02 Access to Information..........................................................31
SECTION 6.03 Retention of Records...........................................................31
SECTION 6.04 Witness Services...............................................................32
SECTION 6.05 Reimbursement..................................................................32
SECTION 6.06 Confidentiality................................................................32
SECTION 6.07 Further Assurances.............................................................33
ARTICLE VII
INSURANCE...............................................................................................33
SECTION 7.01 General........................................................................33
SECTION 7.02 Distributed Companies' Insurance...............................................33
SECTION 7.03 Access to the Company's Insurance Program and to the
Transferred Policies.........................................................................34
SECTION 7.04 Insurance Recoveries...........................................................34
SECTION 7.05 Insurance Representations......................................................35
SECTION 7.06 Assignment.....................................................................36
SECTION 7.07 Deductibles and Maximums.......................................................36
SECTION 7.08 Conflicts Between Article VII and the Company's Insurance
Program......................................................................................36
ARTICLE VIII
CONDITIONS..............................................................................................36
SECTION 8.01 Conditions to Obligations of the Company.......................................36
ARTICLE IX
DISPUTE RESOLUTION......................................................................................38
SECTION 9.01 Mediation and Binding Arbitration..............................................38
SECTION 9.02 Initiation of Negotiation......................................................38
SECTION 9.03 Submission to Mediation........................................................38
SECTION 9.04 Selection of Mediator..........................................................38
SECTION 9.05 Treatment of Negotiation and Mediation.........................................38
SECTION 9.06 Arbitration....................................................................38
SECTION 9.07 Confidentiality................................................................40
SECTION 9.08 Notices........................................................................40
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 9.09 Consolidation..................................................................40
ARTICLE X
MISCELLANEOUS...........................................................................................40
SECTION 10.01 Modification, Amendment or Termination........................................40
SECTION 10.02 Waiver; Remedies..............................................................40
SECTION 10.03 Counterparts..................................................................41
SECTION 10.04 Notices.......................................................................41
SECTION 10.05 Entire Agreement..............................................................42
SECTION 10.06 Certain Obligations...........................................................42
SECTION 10.07 Assignment....................................................................42
SECTION 10.08 Captions......................................................................42
SECTION 10.09 Severability..................................................................43
SECTION 10.10 Equitable Relief..............................................................43
SECTION 10.11 Third Party Beneficiaries.....................................................43
SECTION 10.12 Expenses......................................................................43
SECTION 10.13 Exhibits and Schedules........................................................43
SECTION 10.14 Governing Law.................................................................43
SECTION 10.15 Consent to Jurisdiction........................................................43
SECTION 10.16 Ancillary Agreements..........................................................44
SECTION 10.17 Survival of Agreements........................................................44
SECTION 10.18 Successors and Assigns........................................................44
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF DISTRIBUTION
AGREEMENT AND PLAN OF DISTRIBUTION dated as of May __, 1998,
between U.S. OFFICE PRODUCTS COMPANY, a Delaware corporation (the "Company"),
WORKFLOW MANAGEMENT, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Printco"), SCHOOL SPECIALTY, INC., a Delaware corporation and
wholly owned subsidiary of the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS,
INC., a Delaware corporation and wholly owned subsidiary of the Company
("Techco"), and NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly
owned subsidiary of the Company ("Travelco"). Certain capitalized terms used
herein without definition have the meanings specified in Section 1.01.
W I T N E S S E T H:
WHEREAS the Board of Directors of the Company has approved the
form, terms and provisions of this Agreement, pursuant to which and subject to
the terms of which (a) the Company will distribute all the issued and
outstanding shares of common stock of the Distributed Companies held by the
Company (as to the shares of each Distributed Company, the "Printco Common
Shares," the "Schoolco Common Shares," the "Techco Common Shares," and the
"Travelco Common Shares") to the holders of record of shares of common stock of
the Company (the "Company Common Stock"), other than shares held in the treasury
of the Company, (b) each Distributed Company will assume entirely such
Distributed Company's Liabilities and other liabilities specified herein, (c)
each Distributed Company will agree to indemnify the Company and hold it
harmless from and against its Pro Rata Share of certain Shared Liabilities and
(d) certain other transactions will be consummated, all as set forth in Article
II hereof (the "Preliminary Transactions");
WHEREAS the purpose of the Preliminary Transactions and the
Distributions is to divest the Company of all businesses, operations and
Liabilities other than the Retained Business, Retained Assets and Retained
Liabilities of the Company and its Subsidiaries;
WHEREAS it is the intention of the parties to this Agreement
that for U.S. federal income tax purposes the Distributions shall qualify as
tax-free spin-offs under Section 355 of the Code and shall not be taxable under
Section 355(e) of the Code; and
WHEREAS in order to effect the separation of ownership of the
Company and the Distributed Companies, this Agreement sets forth the principal
corporate transactions required to effect the Preliminary Transactions and the
Distributions and sets forth other agreements that will govern certain other
matters following the Distributions.
NOW, THEREFORE, in consideration of the premises, and of the
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01 General. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"AAA" shall mean the American Arbitration Association.
"Acquisition Agreement" shall mean each of the merger, stock
purchase, asset purchase or other acquisition agreements pursuant to which
certain of the Distributed Company Subsidiaries were acquired by the Company or
any of its Subsidiaries prior to the Distributions.
"Acquisition Claim" shall mean any and all rights or claims
that the Company or any of its Subsidiaries may have against the sellers of the
Distributed Company Subsidiaries under any of the Acquisition Agreements.
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
Person, another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
"Agent" shall mean American Stock Transfer & Trust Company, as
transfer agent for the Company.
"Ancillary Agreements" shall mean the Employee Benefits
Agreement, the Tax Allocation Agreement, the Imagenet Licensing Agreement and
the Lead Generation System Licensing Agreement.
"Assets" shall mean any and all assets, properties and rights,
whether tangible or intangible, whether real, personal or mixed, whether fixed,
contingent or otherwise, and wherever located, including, without limitation,
the following:
(i) real property interests (including leases), land,
plants, buildings and improvements;
(ii) machinery, equipment, tooling, vehicles, furniture and
fixtures, leasehold improvements, repair parts, tools,
plant, and office equipment and other tangible personal
property, together with any rights or claims arising
2
<PAGE>
out of the breach of any express or implied warranty by
the manufacturers or sellers of any of such assets or
any component part thereof;
(iii) inventories, including raw materials, work-in-process,
finished goods, parts, accessories and supplies;
(iv) cash, bank accounts, notes, loans and accounts
receivable (whether current or not current), interests
as beneficiary under letters of credit, advances and
performance and surety bonds;
(v) certificates of deposit, banker's acceptances, shares
of stock, bonds, debentures, evidences of indebtedness,
certificates of interest or participation in
profit-sharing agreements, collateral-trust
certificates, preorganization certificates or
subscriptions, transferable shares, investment
contracts, voting-trust certificates, puts, calls,
straddles, options, swaps, collars, caps and other
securities or hedging arrangements of any kind;
(vi) financial, accounting and operating data and records
including, without limitation, books, records, notes,
sales and sales promotional data, advertising
materials, credit information, cost and pricing
information, customer and supplier lists, reference
catalogs, payroll and personnel records, minute books,
stock ledgers, stock transfer records and other similar
property, rights and information;
(vii) patents, patent applications, trademarks, trademark
applications and registrations, trade names, service
marks, service mark applications and registrations,
service names, copyrights and copyright applications
and registrations, commercial and technical information
including engineering, production and other designs,
drawings, specifications, formulae, technology,
computer and electronic data processing programs and
software, inventions, processes, trade secrets,
know-how, confidential information and other
proprietary property, rights and interest and all
rights thereto;
(viii) agreements, leases, contracts, sale orders, purchase
orders, open bids and other commitments and all rights
therein;
(ix) prepaid expenses, deposits and retentions held by third
parties;
(x) claims, causes of action, choses in action, rights
under insurance policies, rights under express or
implied warranties, rights of recovery, rights of
set-off, rights of subrogation and all other rights of
any kind;
(xi) licenses, franchises, permits, authorizations and
approvals; and
3
<PAGE>
(xii) goodwill and going concern value.
"Assignee" shall have the meaning set forth in Section 2.07.
"Assignor" shall have the meaning set forth in Section 2.07.
"CDR-PC" shall mean CDR-PC Acquisition, L.L.C., a Delaware
limited liability company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Company" shall have the meaning set forth in the heading of
this Agreement.
"Company Debt" shall mean all Liabilities of the Company and
its Subsidiaries under or arising out of the Credit Agreement, dated as of
August 21, 1996, among the Company, various lending institutions and Bankers
Trust Company, as agent.
"Company Common Stock" shall have the meaning set forth in
the recitals to this Agreement.
"Company Indemnitees" shall mean the Company, each Affiliate
of the Company after the Distribution Date, Clayton, Dubilier & Rice, Inc.,
CDR-PC, Clayton, Dubilier & Rice Fund V Limited Partnership, CD&R Associates V
Limited Partnership, each of their respective partners, members, directors,
officers, employees and agents and each of the heirs, executors, successors and
assigns of any of the foregoing.
"Company Transaction Costs" shall mean Transaction Costs
incurred by the Company in connection with the Transactions.
"Conveyancing and Assumption Instruments" shall have the
meaning set forth in Section 2.04.
"Conveyancing Instruments" shall have the meaning set forth
in Section 2.04.
"Covered Claims" shall mean those Liabilities that,
individually or in the aggregate, and if reported timely, are covered within the
terms and conditions of any Policy in the Insurance Program.
"Defaulted Payment Obligation" shall have the meaning set
forth in Section 5.09.
"Dispute" shall have the meaning set forth in Section 9.01.
4
<PAGE>
"Distributed Companies" shall mean Printco, Schoolco, Techco
and Travelco.
"Distributed Companies' Assets" shall mean the Printco
Assets, the Schoolco Assets, the Techco Assets and the Travelco Assets.
"Distributed Companies' Businesses" shall mean the Printco
Business, the Schoolco Business, the Techco Business and the Travelco Business.
"Distributed Companies' Indemnitees" shall mean the Printco
Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees.
"Distributed Companies' Liabilities" shall mean the Printco
Liabilities, the Schoolco Liabilities, the Techco Liabilities and the Travelco
Liabilities.
"Distributed Company Subsidiaries" shall mean the Printco
Subsidiaries, the Schoolco Subsidiaries, the Techco Subsidiaries and the
Travelco Subsidiaries.
"Distributed Company Transaction Costs" shall mean, as to any
Distributed Company, the Transaction Costs incurred by such Distributed Company
or the Company that relate to such Distributed Company's IPO or credit
facilities described in Section 2.08.
"Distribution Date" shall mean such date as hereafter may be
determined by the Company's Board of Directors as the date as of which the
Distributions shall be effected.
"Distribution Record Date" shall mean such date as hereafter
may be determined by the Company's Board of Directors as the record date for the
Distributions.
"Distribution Shares" shall mean the Printco Common Shares,
the Schoolco Common Shares, the Techco Common Shares and the Travelco Common
Shares.
"Distribution Time" shall mean 11:59 P.M. (Eastern time) on
the Distribution Date.
"Distributions" shall mean the distributions on the
Distribution Date to holders of record of shares of Company Common Stock, as
of the Distribution Record Date, other than shares held in the treasury of
the Company, of (i) all the Printco Common Shares on the basis of one Printco
Common Share for each outstanding shares of Company Common Stock, (ii)
all the Schoolco Common Shares on the basis of one Schoolco Common Share for
each outstanding shares of Company Common Stock, (iii) all the Techco
Common Shares on the basis of one Techco Common Share for each
outstanding shares of Company Common Stock, and (iv) all the Travelco Common
Shares on the basis of one Travelco Common Share for each outstanding
shares of Company Common Stock.
5
<PAGE>
"Earn-Out Payment Liability" shall mean any contingent cash
payment required to be made after the Distribution Date by the Company or any of
its Subsidiaries to sellers of certain Distributed Company Subsidiaries or
Retained Subsidiaries under circumstances that may arise under the Acquisition
Agreements.
"Employee Benefits Agreement" shall mean the Employee
Benefits Agreement between the Company and the Distributed Companies
substantially in the form of Exhibit I hereto.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Guaranteed Liability" shall have the meaning set forth in
Section 2.06.
"Guaranteed Party" shall have the meaning set forth in
Section 2.06.
"Guarantor" shall have the meaning set forth in Section 2.06.
"Imagenet Licensing Agreement" shall have the meaning set
forth in Schedule 2.11.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' and accountants' fees and expenses and any and
all out-of-pocket expenses) arising from Third Party Claims or any Indemnifying
Party's breach of its obligations under the Ancillary Agreements or this
Agreement, including all losses, liabilities, claims, damages, demands, costs or
expenses reasonably incurred in investigating, preparing for or defending
against any Actions or potential Actions or in asserting, preserving or
enforcing any rights hereunder (including, without limitation, rights under
Article V) or under any Ancillary Agreement.
"Indemnifying Party" shall have the meaning set forth in
Section 5.06.
"Indemnitee" shall have the meaning set forth in Section
5.06.
"Information" of a party shall mean any and all information
that such party or any of its Representatives furnishes or has furnished to the
receiving party or any of its Representatives whether furnished orally or in
writing or by any other means or gathered by inspection and regardless of
whether the same is specifically marked or designated as "confidential" or
"proprietary," together with any and all notes, memoranda, analyses,
compilations, studies or other documents (whether in hard copy or electronic
media) prepared by the receiving party or any of its Representatives which
contain or otherwise reflect such Information, together with any and all copies,
extracts or other reproductions of any of the same; provided, however, that for
the purposes hereof all information relating to the Distributed Companies, the
Distributed Companies' Businesses or the Distributed
6
<PAGE>
Companies' Assets in the possession of the Company at the Distribution Time
shall be deemed to have been furnished by the related Distributed Company and
all information relating to the Retained Business or the Retained Assets in the
possession of the Distributed Companies or any of the Distributed Company
Subsidiaries at the Distribution Time shall be deemed to have been furnished by
the Company; provided further, however, that the term "Information" does not
include information that:
(a) at the time of disclosure is generally
available to and known by the public (other than as a result of a violation of
this Agreement or any other confidentiality obligation, whether directly or
indirectly, by a party to this Agreement or any of its Representatives);
(b) is available to the receiving party on a
non-confidential basis from a source other than the providing party or its
Representatives, provided that such source is not known by the receiving party
to be subject to a confidentiality agreement regarding such information; or
(c) has been independently acquired or developed by
the receiving party without violation of any of the obligations of the receiving
party or its Representatives under this Agreement.
"Information Statements" shall mean the Information
Statements/Prospectuses to be sent to the holders of shares of Company Common
Stock, as of the Distribution Record Date, in connection with the Distributions,
including any amendments or supplements thereto, which are included as exhibits
to the registration statements on Forms S-1 filed by the Distributed Companies,
as applicable, under the Securities Act.
"Insurance Program" shall mean, collectively, the series of
policies pursuant to which various insurance carriers provide insurance coverage
to the Company and its Affiliates in respect of claims or occurrences relating
to, without limitation, property damage, bodily injury, business interruption,
transit, fire, non-owned aircrafts, crime, fiduciary liability, general
liability, products' liability, professional liability, automobile liability and
employer's liability.
"Investment Agreement" shall mean the Investment Agreement,
dated as of January 12, 1998, as amended, between the Company and CDR-PC, as the
same may be amended from time to time.
"IPO" shall mean, as to any Distributed Company, the initial
public offering of securities to be conducted by such company, which offering is
scheduled to occur on or about the Distribution Date.
7
<PAGE>
"IPO Prospectus" shall mean, as to any Distributed Company,
the Registration Statement/Prospectus prepared in connection with such
Distributed Company's IPO.
"Lead Generation System Licensing Agreement" shall have the
meaning set forth in Schedule 2.11.
"Liabilities" shall mean any and all debts, liabilities,
obligations, claims, damages, fees, costs and expenses, absolute or contingent,
matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or
unknown, whenever arising, including, without limitation, those debts,
liabilities, obligations, claims, damages, fees, costs and expenses, arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"Mediation Period" shall have the meaning set forth in Section
9.03.
"MCI Agreement" shall mean the Special Customer Arrangement,
effective as of November 15, 1997, by and between MCI Telecommunications
Corporation and the Company.
"NASDAQ" shall mean the NASDAQ National Market System.
"Nonassignable Contract" shall have the meaning set forth in
Section 2.07.
"Person" shall mean any natural person, corporation, trust,
limited liability company, joint venture, association, company, partnership,
entity, unincorporated organization or government, or any agency or political
subdivision thereof.
"Pledged Shares" shall mean any Company Common Stock pledged
or assigned to the Company as of the Distribution Date as collateral security by
sellers of certain of the Distributed Company Subsidiaries under the Acquisition
Agreements.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies, commercial
general liability policies, fiduciary liability, automobile, aircraft, property
and casualty, workers' compensation and employee dishonesty insurance policies,
bonds and self-insurance and captive insurance company arrangements, together
with the rights, benefits and privileges thereunder.
"Preliminary Transactions" shall have the meaning set forth in
the recitals to this Agreement.
8
<PAGE>
"Printco" shall have the meaning set forth in the heading of
this Agreement.
"Printco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Printco and the Printco Subsidiaries under the Acquisition Agreements
pursuant to which Printco and the Printco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Printco Assets" shall mean (a) the Assets of Printco and the
Printco Subsidiaries and (b) the rights of Printco and the Printco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Printco Assets shall not include any claim of Printco against the Company
relating to the payment of finders' fees or other compensation in respect of
customers referred to the Company by Printco or the payment of rebates or other
compensation in respect of office products sold by Printco.
"Printco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Printco and
the Printco Subsidiaries including all businesses, Assets and operations
conducted or owned by Printco and the Printco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Printco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Printco Indemnitees" shall mean Printco, the Printco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Printco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Printco and the Printco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all Liabilities of the Company and its Subsidiaries
arising primarily out of or relating primarily to the management or conduct of
the Printco Business or the administration of the Printco Subsidiaries, (iii)
all Specified Securities Liabilities of Printco, (iv) all Liabilities of the
Company relating to any Earn-Out Payment Liabilities arising out of any of the
Acquisition Agreements pursuant to which any of the Printco Subsidiaries or any
part of the Printco Business was acquired, (v) the Distributed Company
Transaction Costs of Printco, (vi) $1,000,000 of the Company Transaction Costs
and (vii) any Company Debt allocated to Printco pursuant to Section 2.08 of this
Agreement.
"Printco Subsidiaries" shall mean the Subsidiaries of Printco
as listed on Exhibit II.
"Pro Rata Share" shall mean, (i) as to any Distributed
Company, the percentage that is equal to the average of (a) the ratio of the pro
forma fiscal year 1998
9
<PAGE>
revenues for such Distributed Company to the fiscal year 1998 consolidated
revenues of the Company (prior to the Distributions), and (b) the ratio of the
pro forma fiscal year 1998 net income for such Distributed Company to the fiscal
year 1998 consolidated net earnings of the Company (prior to the Distributions),
and (ii) as to the Company, the percentage that is equal to 100% less the sum of
the Pro Rata Share percentages of the Distributed Companies as defined in (i)
above. Estimations of the Company's Pro Rata Share and each Distributed
Company's Pro Rata Share using financial data for the nine-month period ended
January 24, 1998 are set forth in Exhibit III.
"Proxy" shall mean the definitive proxy statement dated May 1,
1998, distributed by the Company to the holders of the Company Common Stock,
describing and seeking approval for (i) the investment provided for in the
Investment Agreement and (ii) a one-for-four reverse stock split, as the same
may be amended.
"Recovery" shall mean those monies received by an insured from
an insurance carrier or paid by an insurance carrier on behalf of an insured
pursuant to a claim under an insurance policy in the Insurance Program.
"Recovery Costs" shall have the meaning set forth in Section
7.04.
"Representatives" of either party shall mean such party's
Affiliates, directors, officers, partners, employees, agents or other
representatives (including attorneys, accountants and financial advisors).
"Retained Assets" shall mean (a) all the Assets of the Company
and its Subsidiaries except for the Distributed Companies' Assets, and (b) the
rights of the Company and its Subsidiaries under this Agreement and the
Ancillary Agreements.
"Retained Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by the Company
and the Retained Subsidiaries, including all businesses, Assets or operations
conducted or owned by the Company or its Subsidiaries that have been sold or
otherwise disposed of or discontinued, (other than the Distributed Companies'
Assets, Distributed Companies' Businesses and the business of managing and
administering the Distributed Companies' Subsidiaries).
"Retained Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of the Company and the Retained Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all Liabilities of the Company and its Retained
Subsidiaries arising primarily out of or relating primarily to the management or
conduct of the Retained Business or the administration of the Retained
Subsidiaries, (iii) all Specified Securities Liabilities of the Company, (iv)
all Liabilities of the Company relating to any Earn-Out Payment Liabilities
arising out of any of the Acquisition Agreements pursuant to which any of the
Retained Subsidiaries or any part of
10
<PAGE>
the Retained Business was acquired, (v) all of the Company Transaction Costs
(excluding, in aggregate, the $4,000,000 that is treated as part of the
Distributed Companies' Liabilities) and (vi) any indebtedness for borrowed money
of the Company other than Company Debt to be allocated to the Distributed
Companies pursuant to Section 2.08 of this Agreement.
"Retained Subsidiaries" shall mean (x) all of the Subsidiaries
of the Company other than the Distributed Companies and the Distributed Company
Subsidiaries, and (y) 1186203 Ontario Limited, 1243231 Ontario Limited and
1203803 Ontario Limited, and their respective Subsidiaries.
"Schoolco" shall have the meaning set forth in the heading of
this Agreement.
"Schoolco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Schoolco and the Schoolco Subsidiaries under the Acquisition Agreements
pursuant to which Schoolco and the Schoolco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Schoolco Assets" shall mean (a) the Assets of Schoolco and
the Schoolco Subsidiaries and (b) the rights of Schoolco and the Schoolco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Schoolco Assets shall not include any claim of Schoolco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Schoolco or the payment of
rebates or other compensation in respect of office products sold by Schoolco.
"Schoolco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Schoolco and
the Schoolco Subsidiaries including all businesses, Assets or operations
conducted or owned by Schoolco and the Schoolco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Schoolco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Schoolco Indemnitees" shall mean Schoolco, the Schoolco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Schoolco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Schoolco and the Schoolco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries or Affiliates, arising primarily out of or relating primarily to
the management or conduct of the Schoolco Business or the administration of the
Schoolco Subsidiaries, (iii) all Specified Securities Liabilities of Schoolco,
(iv) all Liabilities of the Company relating to any Earn-Out Payment Liabilities
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arising out of any of the Acquisition Agreements pursuant to which any of the
Schoolco Subsidiaries or any part of the Schoolco Business was acquired, (v) the
Distributed Company Transaction Costs of Schoolco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Schoolco
pursuant to Section 2.08 of this Agreement.
"Schoolco Subsidiaries" shall mean the Subsidiaries of
Schoolco as listed on Exhibit II.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securities Laws" shall mean the Exchange Act, the Securities
Act and foreign, provincial and state securities laws.
"Shared Liability" shall mean (i) any Liability of the Company
and its Subsidiaries, including without limitation a Liability arising under the
Securities Laws, that (x) arises out of an act or omission that occurred prior
to the Distribution Date, and (y) is not a Retained Liability, Printco
Liability, Schoolco Liability, Techco Liability or Travelco Liability, and (ii)
the Liabilities listed on Exhibit IV. By way of example and not of limitation,
Shared Liabilities shall include: any Liability arising in connection with the
Proxy or Tender Offer (other than a liability relating to information supplied
by a specific subsidiary of the Company); and any Liability relating to the
operation of the Company's headquarters arising prior to the Distribution Date;
and any other liability not relating to the business of any particular Retained
Subsidiary or Distributed Company Subsidiary.
"Special Insurance Recoveries" shall mean Recoveries whenever
received by the Company (i) relating to insured casualty losses of a Distributed
Company or Distributed Company Subsidiary occurring prior to the Distribution
Date and (ii) not actually used by the relevant Distributed Company or
Distributed Company Subsidiary to rebuild, reconstruct, renovate or repair
properties or facilities that suffered such loss.
"Specified Securities Liabilities" shall mean (a) as to any
Distributed Company, any Liability under the Securities Laws arising out of or
relating to (x) the Information Statement (other than Liabilities relating to
those sections of the Information Statements specified on Exhibit V) and/or IPO
Prospectus of such Distributed Company, and (y) any other securities filings or
disclosures made by, or the failure to make filings or disclosures required to
be made by, the Company or any of its Subsidiaries prior to the Distribution
Date to the extent such Liability arises primarily out of material omissions
made by or materially incorrect, false, or misleading information supplied by
such Distributed Company or any of its Subsidiaries; and (b) as to the Company,
any Liability under the Securities Laws arising out of or relating to any
securities filings or disclosures made by, or the failure to make filings or
disclosures required to be made by, the Company, or any of its
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Subsidiaries prior to the Distribution Date to the extent such Liability arises
primarily out of material omissions made by or materially incorrect, false or
misleading information supplied by the Retained Business or a Retained
Subsidiary.
"Subsidiary" shall mean any corporation, partnership, joint
venture or other entity (i) in which another entity owns, directly or
indirectly, ownership interests sufficient to elect a majority of the Board of
Directors (or persons performing similar functions) (irrespective of whether at
the time any other class or classes of ownership interests of such corporation,
partnership, joint venture or other entity shall or might have such voting power
upon the occurrence of any contingency) or (ii) of which another entity is a
general partner or an entity performing similar functions (e.g., a trustee or
managing member).
"Tax" shall mean all U.S. federal, state, local and foreign
taxes and assessments, including all interest, penalties and additions imposed
with respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation
Agreement between the Company and the Distributed Companies substantially in the
form of Exhibit VI hereto, as and to the extent amended and restated as of the
closing of the Transactions.
"Techco" shall have the meaning set forth in the heading of
this Agreement.
"Techco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Techco and the Techco Subsidiaries under the Acquisition Agreements pursuant
to which Techco and the Techco Subsidiaries were acquired by the Company or any
of its Subsidiaries.
"Techco Assets" shall mean (a) the Assets of Techco and the
Techco Subsidiaries and (b) the rights of Techco and the Techco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Techco Assets shall not include any claim of Techco against the Company relating
to the payment of finders' fees or other compensation in respect of customers
referred to the Company by Techco or the payment of rebates or other
compensation in respect of office products sold by Techco.
"Techco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Techco and
the Techco Subsidiaries including all businesses, Assets or operations conducted
or owned by Techco and the Techco Subsidiaries that have been sold or otherwise
disposed of or discontinued.
"Techco Common Shares" shall have the meaning set forth in the
recitals to this Agreement.
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"Techco Indemnitees" shall mean Techco, the Techco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Techco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Techco and the Techco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Techco Business or the administration of the Techco
Subsidiaries, (iii) all Specified Securities Liabilities of Techco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Techco
Subsidiaries or any part of the Techco Business was acquired, (v) the
Distributed Company Transaction Costs of Techco, (vi) $1,000,000 of the Company
Transaction Costs and (vii) any Company Debt allocated to Techco pursuant to
Section 2.08 of this Agreement.
"Techco Subsidiaries" shall mean the Subsidiaries of Techco as
listed on Exhibit II.
"Tender Offer" shall mean, collectively, (i) the cash tender
offer by the Company to purchase approximately 37 million shares (including
shares issuable upon exercise of outstanding stock options) of Company Common
Stock at a price of $27 per share commenced on May 4, 1998, and (ii) the tender
offer of the Company to purchase any and all of its $230.0 million outstanding 5
1/2% Convertible Subordinated Notes due 2003 for a purchase price of 94.5% of
the principal amount, plus accrued interest, commenced on May 5, 1998.
"Third Party Claim" shall have the meaning set forth in
Section 5.07.
"Transaction Costs" shall mean all transaction costs including
legal, accounting, investment banking, financial advisory and other fees
incurred by a party hereto (or one of its Subsidiaries) in connection with the
Transactions or any of the other transactions described in, or contemplated by,
IPO Prospectuses and Section 2.08.
"Transactions" shall mean the execution, delivery and
performance of this Agreement, the Ancillary Agreements, and the Investment
Agreement and the consummation of the Preliminary Transactions, the
Distributions, the Proxy, the Tender Offer, the 2001 Note Exchange Offer and any
other transactions contemplated by this Agreement, the Ancillary Agreements and
the Investment Agreement, including without limitation the financing of the
Company related thereto, but not including the initial public offerings by the
Distributed Companies or the financings of the Distributed Companies.
"Transferred Policies" shall have the meaning set forth in
Section 7.02(b).
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"Travelco" shall have the meaning set forth in the heading of
this Agreement.
"Travelco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Travelco and the Travelco Subsidiaries under the Acquisition Agreements
pursuant to which Travelco and the Travelco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Travelco Assets" shall mean (a) the Assets of Travelco and
the Travelco Subsidiaries and (b) the rights of Travelco and the Travelco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Travelco Assets shall not include any claim of Travelco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Travelco or the payment of
rebates or other compensation in respect of office products sold by Travelco.
"Travelco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Travelco and
the Travelco Subsidiaries including all businesses, Assets or operations
conducted or owned by Travelco and the Travelco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Travelco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Travelco Indemnitees" shall mean Travelco, the Travelco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Travelco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Travelco and the Travelco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Travelco Business or the administration of the Travelco
Subsidiaries, (iii) all Specified Securities Liabilities of Travelco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Travelco
Subsidiaries or any part of the Travelco Business was acquired, (v) the
Distributed Company Transaction Costs of Travelco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Travelco
pursuant to Section 2.08 of this Agreement.
"Travelco Subsidiaries" shall mean the Subsidiaries of
Travelco as listed on Exhibit II.
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"2001 Note Exchange Offer" shall mean the Company's offer to
exchange its 5 1/2% Convertible Subordinated Notes due 2001 for Company Common
Stock at a temporarily reduced conversion price commenced on May 1, 1998.
SECTION 1.02 References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
or "Article" are, unless otherwise specified, to one of the Sections and
Articles of this Agreement. Any time the word "including" is used herein it
means "including without limitation".
ARTICLE II
PRELIMINARY TRANSACTIONS
SECTION 2.01 Stock Transfers.
(a) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Printco all its right, title and
interest in and to all the shares of capital stock of the Printco Subsidiaries.
(b) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Schoolco all its right, title and
interest in and to all the shares of capital stock of the Schoolco Subsidiaries.
(c) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Techco all its right, title and
interest in and to all the shares of capital stock of the Techco Subsidiaries.
(d) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Travelco all its right, title and
interest in and to all the shares of capital stock of the Travelco Subsidiaries.
Immediately after the stock transfers set forth in this Section 2.01, the
Company shall not own any capital stock of (or other equity interest in) any of
the Distributed Company Subsidiaries.
SECTION 2.02 Liabilities.
(a) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Printco hereby unconditionally agrees to cause each
Printco Subsidiary that has incurred a Printco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
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(b) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Schoolco hereby unconditionally agrees to cause each
School Subsidiary that has incurred a Schoolco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
(c) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Techco hereby unconditionally agrees to cause each Techco
Subsidiary that has incurred a Techco Liability to pay, perform and discharge
such Liability when due in accordance with its terms.
(d) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Travelco hereby unconditionally agrees to cause each
Travelco Subsidiary that has incurred a Travelco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
SECTION 2.03 Transfer of Certain Licenses and Permits.
(a) In furtherance of the transfer of the capital
stock of the Printco Subsidiaries to Printco and the assumption of the Printco
Liabilities set forth in this Article II, at or prior to the Distribution Time,
(i) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Printco Business but which are held in the name of the Company or any
Retained Subsidiary shall be duly and validly transferred by the Company or such
Subsidiary to Printco or the appropriate Printco Subsidiary, and (ii) all
transferrable licenses, permits and authorizations issued by governmental or
regulatory entities which are used primarily in connection with the Retained
Business but which are held in the name of Printco or the Printco Subsidiaries
shall be duly and validly transferred by Printco or such Subsidiary to the
Company or the appropriate Subsidiary of the Company.
(b) In furtherance of the transfer of the capital
stock of the Schoolco Subsidiaries to Schoolco and the assumption of the
Schoolco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Schoolco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Schoolco or the appropriate Schoolco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Schoolco or the Schoolco
Subsidiaries shall be duly and validly transferred by Schoolco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
(c) In furtherance of the transfer of the capital
stock of the Techco Subsidiaries to Techco and the assumption of the Techco
Liabilities set forth in this Article
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II, at or prior to the Distribution Time, (i) all transferrable licenses,
permits and authorizations issued by governmental or regulatory entities which
are used primarily in connection with the Techco Business but which are held in
the name of the Company or any Retained Subsidiary shall be duly and validly
transferred by the Company or such Subsidiary to Techco or the appropriate
Techco Subsidiary, and (ii) all transferrable licenses, permits and
authorizations issued by governmental or regulatory entities which are used
primarily in connection with the Retained Business but which are held in the
name of Techco or the Techco Subsidiaries shall be duly and validly transferred
by Techco or such Subsidiary to the Company or the appropriate Subsidiary of the
Company.
(d) In furtherance of the transfer of the capital
stock of the Travelco Subsidiaries to Travelco and the assumption of the
Travelco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Travelco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Travelco or the appropriate Travelco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Travelco or the Travelco
Subsidiaries shall be duly and validly transferred by Travelco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
SECTION 2.04 Transfer and Assumption Documentation. In
furtherance of the transfer of the capital stock of the Distributed Company
Subsidiaries to the relevant Distributed Companies and the assumption of the
Distributed Companies' Liabilities set forth in this Article II, at or prior to
the Distribution Time, (i) the parties hereto shall execute and deliver, and
cause their respective Subsidiaries to execute and deliver, such deeds, bills of
sale, stock powers, certificates of title, assignments of leases and contracts
and other instruments of contribution, grant, conveyance, assignment, transfer
and delivery necessary to evidence such contribution, grant, conveyance,
assignment, transfer and delivery (collectively, the "Conveyancing Instruments")
and (ii) each party hereto or the appropriate Subsidiary of such party shall
execute and deliver such instruments of assumption (together with the
Conveyancing Instruments, the "Conveyancing and Assumption Instruments") as and
to the extent necessary to evidence such assumption.
SECTION 2.05 Intercompany Accounts. All intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder) between any Distributed Company or Distributed Company Subsidiary, on
the one hand, and the Company or any of the Retained Subsidiaries, on the other
hand, including, without limitation, in respect of any cash balances, any cash
balances representing deposited checks or drafts for which only a provisional
credit has been allowed or any cash held in any centralized cash management
system, shall be settled or otherwise eliminated prior to the Distribution Date.
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SECTION 2.06 Elimination of Guarantees. To the extent that any
of the parties to this Agreement or any Subsidiary thereof is a guarantor of or
obligor for (a "Guarantor") any Liability of any other party to this Agreement
or any Subsidiary thereof (a "Guaranteed Party"), the Guarantor and the
Guaranteed Party shall use their commercially reasonable efforts to have, on or
prior to the Distribution Date, or as soon as practicable thereafter, the
Guarantor removed as guarantor of or obligor for such Liability of the
Guaranteed Party (a "Guaranteed Liability"). In the event that the Guarantor
cannot be removed as guarantor of or obligor for such Guaranteed Liability, the
Guaranteed Party agrees that until such Guaranteed Liability is discharged in
full, the Guaranteed Party shall take no action, and shall not permit any of its
Subsidiaries to take any action, which will have the effect of increasing the
contingent liability or exposure of the Guarantor or any of its Subsidiaries
with respect to such Guaranteed Liability. This Section 2.06 shall not apply to
the obligations set forth on Schedule 2.06.
SECTION 2.07 Assignments and Transfers Not Effected Prior to
the Distribution. Anything contained herein to the contrary notwithstanding, (a)
this Agreement shall not constitute an agreement to assign or transfer any
agreement, contract, lease, license, permit, sales order, purchase order, open
bid or other commitment if an assignment, attempted assignment, transfer or
attempted transfer of the same without the consent of a third party would
constitute a breach thereof or in any way impair the rights of the Distributed
Companies or the Company or any of their respective Subsidiaries thereunder (any
such item being referred to as a "Nonassignable Contract") and (b) nothing
herein shall be deemed to require the transfer of any Assets or the assumption
of any Liabilities which by their terms or operation of law cannot be
transferred or assumed. To the extent that any assignments or transfers
contemplated by this Article II shall not have been consummated at or prior to
the Distribution Time, the parties hereto and their respective Subsidiaries
shall cooperate and use commercially reasonable efforts to obtain any necessary
consents or approvals for the assignment of all Nonassignable Contracts, the
transfer of all Assets and the assumption of all Liabilities contemplated to be
assigned, transferred or assumed pursuant to this Article II and shall otherwise
cooperate and use reasonable best efforts to effect any such assignments,
transfers or assumptions as promptly following the Distribution Time as shall be
practicable. In the event that any consent required with respect to a
Nonassignable Contract is not obtained or an attempted assignment thereof would
be ineffective or would impair either party's rights under any such
Nonassignable Contract, then the party obligated to assign such Nonassignable
Contract (the "Assignor") will promptly pay or cause to be paid to the assignee
thereof (the "Assignee"), when received, all monies received by the Assignor
with respect to any such Nonassignable Contract and in consideration thereof the
Assignee shall pay, perform and discharge on behalf of the Assignor all the
Assignor's Liabilities, thereunder in a timely manner and in accordance with the
terms thereof. In the event that any such transfer of Assets or assumption of
Liabilities has not been consummated, from and after the Distribution Time, the
party retaining such Asset or Liability shall hold such Asset in trust for the
use and benefit of the party entitled thereto (at the expense of the party
entitled thereto) or retain such Liability for the account
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of the party by whom such Liability is to be assumed pursuant hereto, as the
case may be. The parties hereto will take such other action as may be reasonably
requested by the Assignee or party to whom such Asset is to be transferred, or
by whom such Liability is to be assumed, as the case may be, in order to place
such party, insofar as is reasonably possible, in the same position as would
have existed had such Nonassignable Contract been assigned, or such Asset or
Liability been transferred or assumed, as contemplated hereby. As and when any
required consent to the assignment of a Nonassignable Contract is obtained or
any such Asset or Liability becomes transferable or able to be assumed, such
assignment, transfer or assumption shall be effected forthwith. The parties
agree that, as of the Distribution Time, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership over all Assets, together
with all rights, powers and privileges incident thereto, and shall be deemed to
have assumed all Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party is entitled to acquire or required to assume
pursuant to the terms of this Agreement or any of the Ancillary Agreements.
SECTION 2.08 Debt. On or prior to the Distribution Date, each
Distributed Company shall obtain bank credit facilities, borrow funds under such
facilities and pay such moneys borrowed to reduce the Company Debt equal in
amount to (i) the amounts reflected in relation to such Distributed Company on
Schedule 2.08, and (ii) the amount of any debt incurred by the Company after the
date of the Investment Agreement in connection with the acquisition of any
entities that, upon the Distributions, will become a Subsidiary of such
Distributed Company, which money shall be paid to the Company to be applied to
the Company Debt.
SECTION 2.09 Assignment of Acquisition Claims. The Company
shall contribute, grant, convey, assign, transfer and deliver to Printco,
Schoolco, Techco and Travelco all the Company's rights and interest in and to
the Printco Acquisition Claims, the Schoolco Acquisition Claims, the Techco
Acquisition Claims and the Travelco Acquisition Claims, respectively.
Notwithstanding the assignment of the foregoing Acquisition Claims under this
Section 2.09: (i) the net recoveries of Printco arising out of the Printco
Acquisition Claims shall be shared between Printco and the Company, as they are
collected, in a ratio of 20% to 80%, respectively, until the Company has
received the amount shown on Schedule 2.09 (including through any Special
Insurance Proceeds retained by the Company pursuant to Section 7.04), after
which time any net recoveries from the Printco Acquisition Claims shall be
shared, as they are collected, between Printco and the Company in a ratio of 95%
to 5%, respectively, (ii) the net recoveries of Schoolco arising out of the
Schoolco Acquisition Claims shall be shared, as they are collected, between
Schoolco and the Company in a ratio of 20% to 80%, respectively, until the
Company has received the amount shown on Schedule 2.09, after which time any net
recoveries from the Schoolco Acquisition Claims shall be shared, as they are
collected, between Schoolco and the Company in a ratio of 95% to 5%,
respectively, (iii) the net recoveries from the Techco Acquisition Claims shall
be assigned 100% to Techco, and (iv) the net recoveries from the Travelco
Acquisition Claims shall be assigned 100% to Travelco.
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SECTION 2.10 Pledged Shares. The Company shall hold all
Pledged Shares for the purposes specified in, and distribute such Pledged Shares
as provided pursuant to, Schedule 2.10.
SECTION 2.11 Other Transactions. In furtherance of the
transfer of the capital stock of the Distributed Company Subsidiaries to the
relevant Distributed Companies and the assumption of the Distributed Companies'
Liabilities set forth in this Article II, at or prior to the Distribution Time,
the parties agree to effect the transactions, if any, described in Schedule 2.11
attached hereto.
ARTICLE III
THE DISTRIBUTION
SECTION 3.01 Directors and Employees.
(a) The Company shall cause all those individuals
who will be officers or directors of the Company or any Retained Subsidiary
immediately after the Distribution Time to resign, effective as of the
Distribution Time, from all officer or director positions with any of the
Distributed Companies or Distributed Company Subsidiaries in which they serve.
(b) The Company shall cause all those individuals
who will be officers or directors of any of the Distributed Companies or the
Distributed Company Subsidiaries immediately after the Distribution Time to
resign, effective as of the Distribution Time, from all officer or director
positions with the Company or any Retained Subsidiary in which they serve.
SECTION 3.02 Mechanics of Distribution.
(a) Delivery of Shares to Agent. Following
consummation of the transactions contemplated by Section 2.01 and subject to the
closing conditions set forth in Article VIII the Company shall deliver to the
Agent, for the benefit of holders of record of the Company Common Stock as at
the close of business on the Distribution Record Date, the share certificates
representing (i) all the Printco Common Shares, (ii) all the Schoolco Common
Shares, (iii) all the Techco Common Shares and (iv) all the Travelco Common
Shares, and shall instruct the Agent to distribute such share certificates to
such holders of the Company Common Stock upon notice from the Company that the
conditions to the obligation of the Company to consummate the Distributions have
been satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares. Immediately following the
Distributions, the Company shall not own any capital stock of the Distributed
Companies or the Distributed Company Subsidiaries.
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(b) Distribution of Certificates. The
Distributions shall be effected by the distribution to each holder of record
of Company Common Stock, as of the Distribution Record Date, of certificates
representing one Printco Common Share for each shares of Company
Common Stock, one Schoolco Common Share for each shares of Company Common
Stock, one Techco Common Share for each shares of Company Common Stock, one
Travelco Common Share for each shares of Company Common Stock and
of cash in lieu of fractional shares as set forth in Section 3.02(c). The
Company shall instruct the Agent to distribute the Distribution Shares and
the cash in lieu of fractional shares as promptly as practicable after the
Distribution Time.
(c) Payment for Fractional Shares. No certificate
or scrip representing fractional shares of the Distribution Shares shall be
distributed to holders of the Company Common Stock as part of the Distributions.
Each holder of Company Common Stock who would otherwise be entitled to receive a
fractional share of the common stock of any of the Distributed Companies
pursuant to the Distributions shall receive cash in lieu of such fractional
share. As soon as practicable after the Distribution Date, the Company shall
direct the Agent to determine the number of fractional shares of any of the
Distribution Shares allocable to each holder of record of Company Common Stock
as of the Distribution Record Date who will receive cash in lieu of such
fractional shares, to aggregate all such fractional shares into whole shares and
sell the whole shares obtained thereby in open market transactions or otherwise,
in each case at then prevailing trading prices, and to cause to be distributed
to each such holder, in lieu of any fractional share, such holder's ratable
share of the proceeds of such sale, after making appropriate deductions of the
amount required to be withheld for U.S. federal income tax purposes and after
deducting an amount equal to all brokerage charges, commissions and transfer
taxes attributed to such sale.
SECTION 3.03 Timing of Distribution. The Board of Directors of
the Company shall, or shall authorize certain officers of the Company to,
formally declare the Distributions and shall authorize the Company to effect the
Distributions at the Distribution Time, subject to the satisfaction or waiver of
the conditions set forth in Article VIII. The Distributions shall be deemed to
be effective upon notification by the Company to the Agent that the conditions
to the obligations of the Company to consummate the Distributions have been
satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares.
ARTICLE IV
MUTUAL RELEASE
Effective as of the Distribution Time and except as otherwise
specifically set forth in this Agreement or any of the Ancillary Agreements,
each of the parties hereto, on its own behalf and on behalf of each of its
respective Subsidiaries, releases and forever discharges all of the other
parties hereto and their respective Subsidiaries, and their
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respective officers, directors, agents, Affiliates, record and beneficial
security holders (including, without limitation, trustees and beneficiaries of
trusts holding such securities), advisors and Representatives (in their
respective capacities as such) and their respective heirs, executors,
administrators, successors and assigns, of and from all debts, demands, actions,
causes of action, suits, accounts, covenants, contracts, agreements, damages,
claims and Liabilities whatsoever of every name and nature, both in law and in
equity, which the releasing party has or ever had, which arise out of or relate
to the Transactions or the IPOs; provided, however, that the foregoing general
release shall not apply to (i) any Liabilities (including Liabilities with
respect to indemnification) assumed, transferred, assigned, allocated or arising
under this Agreement, any of the Ancillary Agreements or the Investment
Agreement and shall not affect any party's right to enforce this Agreement, any
Ancillary Agreement or the Investment Agreement in accordance with their
respective terms, (ii) any Liabilities of the Company, any of its Subsidiaries
or any seller of a Retained Subsidiary or Distributed Company Subsidiary arising
out of the agreement pursuant to which such Retained Subsidiary or Distributed
Company Subsidiary was acquired by the Company or any of its Subsidiaries or any
other agreement to which the Company or any of its Subsidiaries and such a
seller (acting in the capacity of a seller) are parties, or (iii) any Liability
arising out of an agreement between any party to this Agreement and Jonathan J.
Ledecky. Each party understands and agrees that, except as otherwise
specifically provided in this Agreement or the Ancillary Agreements, none of the
parties is, in this Agreement or the Ancillary Agreements or otherwise,
representing or warranting in any way as to the Assets, business or Liabilities
transferred, assumed or retained as contemplated hereby or as to any consents or
approvals required in connection with the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements, it being agreed and
understood that each party shall take or keep all of its Assets "as is" and that
it shall bear the economic and legal risk that conveyance of such Assets shall
prove to be insufficient or that the title to any Assets shall be other than
good and marketable and free from encumbrances of any nature whatsoever;
provided, however, that the foregoing disclaimer shall not apply to any
representations made by the Company, any of its Subsidiaries or any seller of a
Retained Subsidiary or Distributed Company Subsidiary under the agreement
pursuant to which such Retained Subsidiary or Distributed Company Subsidiary was
acquired.
ARTICLE V
INDEMNIFICATION
SECTION 5.01 Indemnification by the Company. Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, (a) the Company and, as to any particular Indemnifiable
Loss, the Retained Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the
Distributed Companies' Indemnitees from and against, and pay or reimburse the
Distributed Companies' Indemnitees for, any and all Indemnifiable Losses, as
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incurred, of the Distributed Companies' Indemnitees arising out of, relating to
or resulting from (i) the Retained Liabilities, the Retained Assets or the
Retained Business or (ii) the breach by the Company or any of the Retained
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to or arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) the Company shall bear the costs of and indemnify, defend and hold harmless
the Printco Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and
the Travelco Indemnitees from the Company's Pro Rata Share of Indemnifiable
Losses, as incurred, that relate to, arise out of or result from the Shared
Liabilities; provided, however, that the Company shall have no obligation to
indemnify any of the Distributed Companies' Indemnitees for any Indemnifiable
Losses arising out of, relating to or resulting from (y) the gross negligence,
bad faith or wilful misconduct of the relevant Distributed Company or
Distributed Company Subsidiary after the Distribution Time or (z) the failure of
such Distributed Company or any of its Subsidiaries to perform its obligations
under any agreement in accordance with the terms of such agreement after the
Distribution Time.
SECTION 5.02 Indemnification by Printco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Printco and, as to any particular Indemnifiable Loss, the Printco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Schoolco Indemnitees, the Techco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Schoolco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Printco Liabilities, the Printco Assets,
the Printco Business or the Printco Acquisition Claims, (ii) the breach by
Printco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time and (b) Printco shall bear the costs of and indemnify, defend
and hold harmless the Company Indemnitees, the Schoolco Indemnitees, the Techco
Indemnitees and the Travelco Indemnitees from Printco's Pro Rata Share of
Indemnifiable Losses, as incurred, that relate to, arise out of or result from
the Shared Liabilities; provided, however, that Printco shall have no obligation
to indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the
Techco Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable, after the Distribution Time or (y)
the failure of the Company, Schoolco, Techco or Travelco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time; provided further, however, that Printco shall have no obligation to
indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the Techco
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Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.02 to the extent that Printco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.02 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.03 Indemnification by Schoolco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Schoolco and, as to any particular Indemnifiable Loss, the
Schoolco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Schoolco Liabilities, the Schoolco Assets,
the Schoolco Business or the Schoolco Acquisition Claims and (ii) the breach by
Schoolco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time, and (b) Schoolco shall bear the costs of and indemnify,
defend and hold harmless the Company Indemnitees, the Printco Indemnitees, the
Techco Indemnitees and the Travelco Indemnitees from Schoolco's Pro Rata Share
of Indemnifiable Losses, as incurred, that relate to, arise out of or result
from the Shared Liabilities; provided, however, that Schoolco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Techco Indemnitees and the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Printco, Techco or Travelco, as
applicable, after the Distribution Time or (y) the failure of the Company,
Printco, Techco or Travelco, or any of their respective Subsidiaries, as
applicable, to perform its obligations under any agreement in accordance with
the terms of such agreement after the Distribution Time; provided further,
however, that Schoolco shall have no obligation to indemnify any of the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees or the Travelco
Indemnitees for any Indemnifiable Losses pursuant to clause (b) of this Section
5.03 to the extent that Schoolco has previously indemnified such Indemnitees for
Losses pursuant to clause (b) of this Section 5.03 in an aggregate amount equal
to or exceeding $1.75 million.
SECTION 5.04 Indemnification by Techco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Techco and, as to any particular Indemnifiable Loss, the Techco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Printco Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees arising out
of, relating to or resulting
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from (i) the Techco Liabilities, the Techco Assets, the Techco Business or the
Techco Acquisition Claims and (ii) the breach by Techco or any of its
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to, arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Techco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees from Techco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Techco shall have no obligation to indemnify any of the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees for any Indemnifiable Losses relating to, arising out of or
resulting from (x) the gross negligence, bad faith or wilful misconduct of the
Company, Printco, Schoolco or Travelco, as applicable, after the Distribution
Time or (y) the failure of the Company, Printco, Schoolco or Travelco, or any of
their respective Subsidiaries, as applicable, to perform its obligations under
any agreement in accordance with the terms of such agreement after the
Distribution Time; provided further, however, that Techco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Schoolco Indemnitees or the Travelco Indemnitees for any Indemnifiable
Losses pursuant to clause (b) of this Section 5.04 to the extent that Techco has
previously indemnified such Indemnitees for Losses pursuant to clause (b) of
this Section 5.04 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.05 Indemnification by Travelco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Travelco and, as to any particular Indemnifiable Loss, the
Travelco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the Techco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Techco Indemnitees arising out of,
relating to or resulting from (i) the Travelco Liabilities, the Travelco Assets,
the Travelco Business or the Travelco Acquisition Claims and (ii) the breach by
Travelco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to
or arise from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Travelco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Techco Indemnitees from Travelco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Travelco shall have no obligation to indemnify any of
the Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and
the Techco Indemnitees for any Indemnifiable Losses relating to, arising out of
or resulting from (x) the gross negligence, bad faith or wilful misconduct of
the Company, Printco, Schoolco or Techco, as applicable, after the Distribution
Time or
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(y) the failure of the Company, Printco, Schoolco or Techco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time ; provided further, however, that Travelco shall have no obligation to
indemnify any of the Company Indemnitees, the Printco Indemnitees, the Schoolco
Indemnitees or the Techco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.05 to the extent that Travelco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.05 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.06 Limitations on Indemnification Obligations. The
amount that any party (an "Indemnifying Party") is or may be required to pay to
any other Person (an "Indemnitee") pursuant to Sections 5.01, 5.02, 5.03, 5.04
or 5.05, as applicable, shall be reduced (retroactively or prospectively) by any
Insurance Proceeds, settlement recoveries or other amounts actually recovered by
or on behalf of such Indemnitee in respect of the related Indemnifiable Loss. If
an Indemnitee shall have received the payment required by this Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
actually receive Insurance Proceeds, settlement recoveries or other amounts in
respect of such Indemnifiable Loss, then such Indemnitee shall pay to such
Indemnifying Party a sum equal to the amount of such Insurance Proceeds,
settlement recoveries or other amounts actually received, up to the aggregate
amount of any payments made by such Indemnifying Party pursuant to this
Agreement in respect of such Indemnifiable Loss. Amounts paid by an Indemnifying
Party pursant to clause (b) of Sections 5.01, 5.02, 5.03, 5.04 or 5.05 which are
paid with, or reimbursed by, Insurance Proceeds, settlement recoveries or other
amounts actually recovered, by or on behalf of an Indemnifying Party, in respect
of the related Indemnifiable Loss, shall not count toward the limit on each
party's Shared Liabilities set forth in the second proviso of Sections 5.01,
5.02, 5.03, 5.04 or 5.05, as applicable.
SECTION 5.07 Procedures for Indemnification of Third Party
Claims.
(a) If a claim or demand is made against an
Indemnitee by any person who is not a party, or an Affiliate of a party, to this
Agreement or any of the Ancillary Agreements (a "Third Party Claim") as to which
such Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 10 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent that the
defense or conduct of such Third Party Claim by the Indemnifying Party shall
have been actually and materially prejudiced as a result of such failure (except
that the Indemnifying Party shall not be liable for any expenses incurred during
the period in which the Indemnitee failed to give such notice); provided
further, however, that in no event shall such failure to notify the Indemnifying
Party (i) constitute prejudice suffered by the Indemnifying Party if it has
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otherwise received notice of the Third Party Claim or (ii) relieve it from any
liability or obligation that it may otherwise have to such Indemnitee.
Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly
(and in any event within 10 business days) after the Indemnitee's receipt
thereof, copies of all notices and documents (including court papers) received
by the Indemnitee relating to the Third Party Claim.
(b) (i) If a Third Party Claim is made against an
Indemnitee, the Indemnifying Party shall be entitled to participate in the
defense thereof and, if it so chooses and acknowledges in writing its obligation
to indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party, provided that such counsel is not reasonably
objected to by the Indemnitee, and, thereafter, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
elects to assume the defense of a Third Party Claim pursuant to this subsection
(b)(i), the Indemnitee shall have the right to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party, it being understood that the Indemnifying
Party shall have full control of such defense, and the Indemnifying Party shall
be liable for the reasonable fees and expenses of counsel employed by the
Indemnitee for any period during which the Indemnifying Party has failed to
assume the defense thereof.
(ii) Notwithstanding subsection (b)(i) of this
Section 5.07, if the Indemnitee reasonably believes that a Third Party Claim
could lead to a material adverse effect on its business, it shall be entitled to
retain control of (and the related Indemnifying Party shall not be entitled to
assume), or to reassert control over, the defense of the claim and shall be
entitled to be reimbursed for its reasonable out-of-pocket expenses attributable
to such defense. If the Indemnitee elects to retain control of, or to reassert
control over, the defense of a Third Party Claim pursuant to this subsection
(b)(ii), the Indemnifying Party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnitee, it being understood that the Indemnitee
shall have full control of such defense.
(c) If the Indemnifying Party elects to assume the
defense of any Third Party Claim pursuant to subsection (b)(i) of this Section
5.07, all of the Indemnitees shall cooperate with the Indemnifying Party in the
defense or prosecution thereof. If the Indemnitee elects to retain control of,
or to reassert control over, the defense of any Third Party Claim pursuant to
subsection (b)(ii) of this Section 5.07, the Indemnifying Party shall cooperate
with the Indemnitee in the defense or prosecution thereof. Such cooperation
shall include the retention and, upon the Indemnitee's or Indemnifying Party's
request, as applicable, the provision to such party of records and information
which are reasonably relevant to such Third Party Claim and making employees
available on a mutually convenient basis to provide additional information
regarding any material provided hereunder.
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(d) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Third Party Claim seeks
an order, injunction or other equitable relief or relief for other than money
damages against the Indemnitee which the Indemnitee reasonably determines in
good faith, after conferring with its counsel, cannot be separated from any
related claim for money damages. If such equitable relief or other relief
portion of the Third Party Claim can be so separated from that for money
damages, the Indemnifying Party shall be entitled to assume the defense of the
portion relating to money damages.
(e) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Indemnitee reasonably
determines in good faith, after conferring with its counsel, that the Indemnitee
has available to it one or more defenses or counterclaims that are inconsistent
with one or more of those that may be available to the Indemnifying Party in
respect of such Third Party Claim.
(f) Whether or not the Indemnifying Party shall
have assumed the defense of a Third Party Claim, in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Indemnifying Party's prior written consent (which
consent shall not be unreasonably withheld or delayed); provided, however, that
the Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases in writing the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such settlement,
compromise or discharge would not otherwise adversely affect the Indemnifying
Party. If the Indemnifying Party shall have assumed the defense of a Third Party
Claim (and the Indemnitee shall not have reasserted control over the defense of
such claim pursuant to Section 5.07(b)(ii)), the Indemnitee shall agree to any
settlement, compromise or discharge of a Third Party Claim that the Indemnifying
Party may recommend and that by its terms does not obligate the Indemnitee to
pay any of the liability in connection with such Third Party Claim, releases the
Indemnitee completely and unconditionally in connection with such Third Party
Claim and does not provide for injunctive or other nonmonetary relief affecting
the Indemnitee.
SECTION 5.08 Indemnification Payments. Indemnification
required by this Article V shall be made by prompt periodic payments of the
amount thereof during the course of the investigation, preparation or defense,
as and when bills are received or loss, liability, claim, damage, cost or
expense is incurred.
SECTION 5.09 Defaults. In the event that any obligation of any
Indemnifying Party to indemnify an Indemnitee as required by Sections 5.02,
5.03, 5.04 and
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5.05 proves to be uncollectible by the Indemnitee despite reasonable collection
efforts (a "Defaulted Payment Obligation"), such Defaulted Payment Obligation
shall be treated as a Shared Liability and shall be shared by the Company and
the Distributed Companies as provided in clause (b) of Sections 5.02, 5.03, 5.04
and 5.05; provided, however, that for purposes of calculating each
non-defaulting party's Pro Rata Share of such Shared Liability, "Pro Rata Share"
for each non-defaulting party shall be calculated as the fraction (a) the
numerator of which is such party's Pro Rata Share and (b) the denominator of
which is the sum of each non-defaulting party's Pro Rata Share. Defaulted
Payment Obligations shall count toward the limit on each party's Shared
Liabilities set forth in the second proviso to Sections 5.02, 5.03, 5.04 and
5.05, as applicable.
SECTION 5.10 Tax Adjustments. The amount of any Indemnifiable
Loss shall be (i) increased by the amount of any net Tax cost actually incurred
by the Indemnitee arising from any payments required by this Article V (other
than this Section 5.10) and received from the Indemnifying Party, together with
such additional amounts as are necessary so that the aggregate payments received
from the Indemnifying Party on account of such Indemnifiable Loss, net of any
such net Tax cost and any net Tax cost actually incurred by the Indemnitee as a
result of the receipt or accrual of such additional amounts, is equal to the
amount of such Indemnifiable Loss; and (ii) reduced by the amount of any net Tax
benefit actually realized by the Indemnitee arising from the incurrence or
payment of any such Indemnifiable Loss; provided however, that in the event such
net Tax benefit is subsequently reduced as a result of the carryback of any
other Tax benefit, or disallowed, the Indemnifying party shall promptly pay the
Indemnitee the amount of such reduction or disallowance. For purposes of this
Section 5.10, a net Tax benefit shall be deemed to be "actually realized" only
to the extent of the excess of (i) the aggregate amount of Taxes that would have
been shown as due and payable on the U.S. federal, state and local income Tax
returns of the Indemnitee in the taxable period in which such net Tax benefit is
actually realized if such Indemnifiable Loss had not been incurred, and no
payment had been made in respect of such Indemnifiable Loss by the Indemnifying
Party over (ii) the aggregate amount of Taxes actually shown as due and payable
on such Tax returns.
SECTION 5.11 MCI Agreement. Notwithstanding Sections 5.01,
5.02, 5.03, 5.04 and 5.05, each of the parties hereto agrees to indemnify and
hold the other parties hereto harmless for any Liability under the MCI Agreement
attributable to the failure of such party to meet the required targets under the
MCI Agreement set forth on Schedule 5.11.
SECTION 5.12 Survival of Indemnities. The obligations of the
parties under this Article V shall survive the sale or other transfer by any of
them of any Assets or businesses or the assignment by any of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related to
such Assets, businesses or Liabilities.
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ARTICLE VI
COVENANTS
SECTION 6.01 Provision of Corporate Records. Prior to or as
promptly as practicable after the Distribution Time, the Company shall deliver
to each Distributed Company copies of, or, if in the possession of such
Distributed Company or its Subsidiaries, such Distributed Company shall retain,
all corporate books and records and the relevant portions (or copies thereof) of
all corporate books and records relating directly and primarily to such
Distributed Company's Assets, such Distributed Company's Business, or such
Distributed Company's Liabilities, including, in each case, all agreements,
litigation files and government filings, whether or not active. From and after
the Distribution Time, all such books, records and other items or such copies
thereof shall be the property of such Distributed Company; provided however,
that nothing in this Section 6.01 shall preclude the Company from retaining
duplicates of all such corporate records that are delivered to a Distributed
Company.
SECTION 6.02 Access to Information. From and after the
Distribution Time each party hereto shall afford to each other party and their
respective authorized accountants, counsel and other designated representatives
reasonable access and duplicating rights (at such other party's expense) during
normal business hours and upon reasonable advance notice, subject to the
confidentiality provisions hereof and any additional appropriate restrictions
for classified, privileged or confidential information, to all Information
within the possession or control of such party or to which it has access
relating to the business, Assets or Liabilities of such other party as they
existed prior to the Distribution Time or relating to or arising in connection
with the relationship between the Retained Business, on the one hand, and the
Distributed Companies' Businesses, on the other hand, on or prior to the
Distribution Time, insofar as such access is reasonably required for a
reasonable purpose. Without limiting the foregoing, Information may be requested
under this Section 6.02 for audit, accounting, claims, litigation and Tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
SECTION 6.03 Retention of Records. Except as provided in this
Agreement or any of the Ancillary Agreements or as otherwise agreed in writing,
if any Information relating to the business, Assets or Liabilities of a party
hereto, as they existed prior to the Distribution Time or as they are
transferred, assumed or imposed pursuant to this Agreement, is retained by one
of the other parties hereto, the party retaining such Information shall, and
shall cause its Subsidiaries to, retain all such Information in such party's
possession or under its control until such Information is at least ten years old
except that if, prior to the expiration of such period, the party retaining such
information wishes to destroy or dispose of any such Information that is at
least three years old, prior to destroying or disposing of any of such
Information, (a) such party shall provide no less than 30 days' prior written
notice to the other party, specifying the Information proposed to be destroyed
or disposed of and (b) if, prior to the scheduled date for such destruction or
disposal, the other party requests in writing
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that any of the Information proposed to be destroyed or disposed of be delivered
to such other party, the party proposing to dispose of or destroy such
Information shall arrange for the delivery of the requested Information to a
location specified by, and at the expense of, the requesting party.
SECTION 6.04 Witness Services. From and after the Distribution
Time, each of the parties hereto shall use commercially reasonable efforts to
make available to each other party hereto, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses to
the extent that (i) such persons may reasonably be required in connection with
the prosecution, investigation or defense of any Action or threatened Action in
which the requesting party may from time to time be involved and (ii) there is
no conflict in the Action or threatened Action between the requesting party and
the other party.
SECTION 6.05 Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing books and records,
access to Information or witness services to the other party under this Article
VI shall be entitled to receive from the recipient, upon the presentation of
invoices therefor, payments for supplies, disbursements and other out-of-pocket
expenses and direct and indirect costs of employees, as may be reasonably
incurred in providing such books and records, access to Information or witness
services.
SECTION 6.06 Confidentiality.
(a) Each party hereto shall keep, and shall cause
its Representatives to keep, the other party's Information strictly confidential
and will disclose such Information only to such of its Representatives who need
to know such Information and who agree to be bound by this Section 6.06 and not
to disclose such Information to any other Person or entity. Without the prior
written consent of the other party, each party and its Representatives shall not
disclose the other party's Information to any Person or entity except as may be
required by law or judicial process or in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements and, in each
case, in accordance with this Section 6.06. Each party agrees to be responsible
for any breach of this confidentiality provision by any of its Representatives.
(b) In the event that any party hereto or any of
its Representatives becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process),
or determines that it is necessary in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements, to disclose all
or any part of the other party's Information, the receiving party or its
Representatives shall promptly notify the other party of such compulsion or
determination in writing, and consult with and assist the other party in seeking
a protective order or request for other appropriate remedy. In the event that
such protective order or other
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remedy is not obtained or the other party waives compliance with the terms
hereof, such receiving party or its Representatives, as the case may be, shall
disclose only that portion of the Information which, in the opinion of the
receiving party's outside counsel, is legally required to be disclosed, and
shall exercise all commercially reasonable efforts to assure that confidential
treatment will be accorded such Information by the Persons or entities receiving
such Information. The providing party shall be given an opportunity to review
the Information prior to disclosure.
SECTION 6.07 Further Assurances. In case at any time after the
Distribution Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers at such time of each party to this Agreement shall promptly take
all such action. Without limiting the foregoing, the Company and the Distributed
Companies or their respective Subsidiaries, as appropriate, shall use
commercially reasonable efforts to obtain all consents and approvals, to enter
into all agreements and to make all filings and applications that may be
required or are reasonably necessary for the consummation of the Transactions,
including, without limitation, all applicable governmental and regulatory
filings.
ARTICLE VII
INSURANCE
SECTION 7.01 General. Except as provided in this Article, the
Company shall keep in effect all policies under its Insurance Program as of the
date hereof insuring the Distributed Companies' Assets and the operations of the
Distributed Companies' Businesses until 12:00 midnight (Eastern time) on the
Distribution Date, except to the extent that a Distributed Company shall have
earlier obtained appropriate coverage and notified the Company in writing to
that effect. Except for the Transferred Policies (as defined below), beginning
at 12:01 a.m. (Eastern time) on the day following the Distribution Date, the
Distributed Companies will cease to be insured under all policies in the
Company's Insurance Program. Each Distributed Company understands that the
effect of these actions will be to eliminate insurance coverage under the
Insurance Program for future occurrences under such Policies, and in some cases
(as set forth in Section 7.03(b)), for prior occurrences that might have given
or may give rise to liabilities for which such Distributed Company and its
Affiliates would be responsible.
SECTION 7.02 Distributed Companies' Insurance.
(a) Each Distributed Company will purchase and pay
for the types and amounts of insurance coverage that it reasonably deems
appropriate and sufficient for the period beginning on and continuing after the
Distribution Date, including Broad Form Contractual Liability insurance coverage
as to such Distributed Company's indemnity obligations set forth in this
Agreement.
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(b) The Company shall transfer, on or prior to the
Distribution Date, the Policies in the Company's Insurance Program listed on
Schedule 7.02(b) (the "Transferred Policies") to certain of the Distributed
Companies designated as Transferees on such schedule.
(c) Each Distributed Company agrees that the
Company has made no warranty, expressed or implied, and no representation that
the insurance described in Sections 7.01, 7.02(a) or 7.02(b) above is or will be
adequate or sufficient to meet such Distributed Company's current or future
insurance needs.
SECTION 7.03 Access to the Company's Insurance Program and to
the Transferred Policies.
(a) Except as provided in Section 7.03(b), each
Distributed Company and its Affiliates shall have access through the Company
after the Distribution Date to such coverages and limits as may be available
under the Company's Insurance Program for Covered Claims occurring prior to the
Distribution Date. Such access shall be subject to available coverage and to all
of the terms, conditions, exclusions, retentions and limits of such Policies.
(b) The Distributed Companies and their Affiliates'
access to the Company's Insurance Program as provided in Section 7.03(a) hereof
shall be limited as to Policies listed on Schedule 7.03(b) in that the
Distributed Companies shall have no access to any insurance provided by such
Policies after the Distribution Date other than for Covered Claims the Company
has reported to its carriers or underwriters as of the Distribution Date.
(c) The Company and its Affiliates shall have
access through the relevant Distributed Company after the Distribution Date to
coverages and limits under the Transferred Policies to the extent specified in
Schedule 7.02(b). Such access shall be subject to available coverage and to all
the terms, conditions, exclusions, retentions and limits on such Transferred
Policies.
SECTION 7.04 Insurance Recoveries.
(a) The Company shall use reasonable efforts to
obtain Recoveries for the Distributed Companies and their Affiliates from the
Company's insurance carriers for coverage available under Section 7.03 and shall
keep the Distributed Companies reasonably informed of the Company's efforts
under this Section 7.04. The Company will reimburse the Distributed Companies
for any Recovery obtained by it on behalf of such Distributed Company or
Affiliate thereof pursuant to such claims; provided, however, that Special
Insurance Recoveries shall be shared between the Company and the relevant
Distributed Company in the same manner as any net recoveries of an Acquisition
Claim of such Distributed Company (payable at that time) would be shared between
the Company and such
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Distributed Company pursuant to Section 2.09, including that, if the net
recoveries from an Acquisition Claim of such Distributed Company are not
required to be shared in any manner with the Company pursuant to Section 2.09,
any Special Insurance Recoveries related to such Distributed Company should be
entirely payable to it. Any Distributed Company receiving a Recovery in its
entirety under this Section 7.04 shall pay all costs incurred by the Company
after the Distribution Date in making the related claim pursuant to this Section
7.04, including the salaries of the Company's officers and employees based on
the portion of time spent on such claims ("Recovery Costs"), and such Recovery
Costs incurred in pursuing the claim may be deducted from the Recovery. As to
any Recovery Costs incurred in relation to Special Insurance Recoveries, the
party or parties receiving such Special Insurance Recoveries, or a portion
thereof, shall bear the related Recovery Costs in proportion to the share of the
Special Insurance Recoveries such party receives. Each Distributed Company
agrees to make available to the Company such of its employees as the Company may
reasonably request as witnesses or deponents in connection with the Company's
management of claims, at such Distributed Company's sole cost and expense
notwithstanding Sections 6.04 and 6.05. Each Distributed Company agrees that, if
the Company has paid a Recovery to it for such a claim and such Distributed
Company receives proceeds from any other person with respect to such claim, it
will pay over to the Company the amount of proceeds it has received.
(b) In relation to the Transferred Policies, the
relevant Distributed Company shall use reasonable efforts to obtain recoveries
for the Company and its Affiliates from the Distributed Company's insurance
carrier for coverage available under the Transferred Policies and shall keep the
Company reasonably informed of such Distributed Company's efforts under this
Section 7.04. The Distributed Company will reimburse the Company for any
Recovery obtained by it on behalf of the Company or an Affiliate thereof
pursuant to such claims. The Company shall pay all costs incurred by the
Distributed Company after the Distribution Date in making any claim pursuant to
this Section 7.04, including the salaries of the Distributed Company's officers
and employees based on the portion of time spent on such claims, and such costs
incurred in pursuing a claim may be deducted from any Recovery for such claim.
The Company agrees to make available to the Distributed Company such of its
employees as the Distributed Company may reasonably request as witnesses or
deponents in connection with the Distributed Company's management of claims, at
the Company's sole cost and expense notwithstanding Sections 6.04 and 6.05. The
Company agrees that, if the Distributed Company has paid a Recovery to it for
such a claim and the Company receives proceeds from any other person with
respect to such claim, it will pay over to the Distributed Company the amount of
proceeds it has received.
SECTION 7.05 Insurance Representations. Each Distributed
Company hereby represents and warrants to the Company that no representation by
such Distributed Company (or any of its officers, directors or Subsidiaries)
relating to information underlying any Insurance Policy of the Company contains
an untrue statement of material fact or omits
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<PAGE>
to state a material fact necessary to make a statement contained therein, in
light of the circumstances under which they were made, not misleading with
respect to such information.
SECTION 7.06 Assignment. Except to the extent that the
Transferred Policies are considered to be assigned by the Company to the
relevant Distributed Company, nothing in this Agreement shall be deemed to
constitute (or to reflect) an assignment of any insurance policy or insurance
benefit.
SECTION 7.07 Deductibles and Maximums.
(a) To the extent that there are deductible amounts
or retentions applicable to potential insurance recoveries for claims of the
Company or a Distributed Company that are not per-occurrence deductibles, the
Company or the relevant Distributed Company (as to any deductibles in relation
to the Transferred Policies) shall allocate such deductibles or retentions in
such manner as the Company or a Distributed Company, as applicable, determines,
in good faith, is fair and reasonable. For purposes of this Section 7.06, the
parties agree that it is fair and reasonable to allocate the deductibles, if
any, first to any claims based on recklessness, bad faith or wilful misconduct.
(b) To the extent that the Recoveries for any
particular group of claims of the Company or a Distributed Company may be
subject to overall policy limits, the Company or the relevant Distributed
Company (as to any policy maximums in relation to the Transferred Policies)
shall allocate Recoveries in such manner as the Company or Distributed Company,
as applicable, determines, in good faith, is fair and reasonable.
SECTION 7.08 Conflicts Between Article VII and the Company's
Insurance Program. Any provision of this Agreement that conflicts with any term
or provision of the Company's applicable insurance policies shall be void.
ARTICLE VIII
CONDITIONS
SECTION 8.01 Conditions to Obligations of the Company. The
obligation of the Company to consummate the Distributions hereunder shall be
subject to the satisfaction or waiver of each of the following conditions:
(a) All of the transactions contemplated by Article
II hereof to occur prior to the Distribution Time shall have been consummated.
(b) The Distribution Shares to be issued in the
Distributions shall have been approved for trading on the NASDAQ, subject only
to official notice of issuance.
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(c) All filings required to be made prior to the
Distribution Time with, and all consents, approvals and authorizations required
to be obtained prior to the Distribution Time from, any government or any court,
arbitral tribunal, administrative agency or commission or other regulatory
authority, agency or commission, governmental or otherwise, in connection with
the consummation of the Preliminary Transactions, the Distributions and any
other transaction contemplated hereby shall have been made or obtained, except
where the failure to make or obtain the same would not, individually or in the
aggregate, have a material adverse effect on the business, properties, results
of operations or financial condition of the Company, the Distributed Companies
or any of their respective Subsidiaries, or on the ability of any thereof to
consummate the transactions contemplated hereby, or to perform its obligations
under this Agreement or any of the Ancillary Agreements to which it is or will
be a party.
(d) Each of the Ancillary Agreements shall have
been executed and delivered by each of the parties thereto and shall be in full
force and effect in accordance with its terms.
(e) Each of the registration statements on Forms
S-1 under the Securities Act filed with the SEC by the Distributed Companies in
connection with the Distributions shall have become effective under the Exchange
Act, no stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated by the SEC; and
the Information Statements shall have been or shall be simultaneously mailed to
holders of Distribution Shares in accordance with the rules, regulations and
policies of the SEC.
(f) No statute, rule or regulation or temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
shall be in effect that prohibits consummation of the Preliminary Transactions
or the Distributions.
(g) All conditions to the Tender Offer shall have
been satisfied or waived by the Company, and the Tender Offer shall have been
consummated prior to or on the Distribution Date.
(h) The Company and each of the Distributed
Companies shall have received an opinion of Wilmer, Cutler & Pickering, counsel
to the Company, that for U.S. federal income tax purposes the Distributions will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e) of the Code. In rendering such opinion, such
counsel shall be entitled to rely on certain assumptions and representations
provided by the Company, the Distributed Companies and CDR-PC and certain other
information, data, documentation and other materials that Wilmer, Cutler &
Pickering deems necessary.
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ARTICLE IX
DISPUTE RESOLUTION
SECTION 9.01 Mediation and Binding Arbitration. Except as may
be expressly provided in any of the Ancillary Agreements or in any other
agreement between the parties entered into pursuant hereto, if a dispute,
controversy or claim (collectively, a "Dispute") between the Company and any of
the Distributed Companies or any of their respective Affiliates arises out of or
relates to this Agreement, any Ancillary Agreement, or any other agreement
entered into pursuant hereto or thereto, including, without limitation, the
breach, termination, enforceability, interpretation or validity of any such
agreement or any matter involving an Indemnifiable Loss, the Company and such
Distributed Company agree to use the following procedures, in lieu of either
party pursuing other available remedies and as the sole and exclusive remedy
(except as provided in Section 10.11 below), to resolve the Dispute.
SECTION 9.02 Initiation of Negotiation. A party seeking to
initiate the procedures shall provide written notice to the other party,
describing briefly the nature of the Dispute. A meeting shall be held between
the parties within 10 days of the receipt of such notice, attended by executives
who have decision-making authority regarding the Dispute, to attempt in good
faith to negotiate a resolution of the Dispute.
SECTION 9.03 Submission to Mediation. If, within 30 days after
such meeting, the parties have not succeeded in negotiating a resolution of the
Dispute, the parties agree to submit the Dispute at the earliest possible date
to mediation conducted in accordance with the Commercial Mediation Rules of the
AAA, and to bear equally the costs of the mediation. The parties agree to
participate in good faith in the mediation and negotiations related thereto for
a period of 30 days or such longer period as they may mutually agree following
the initial mediation session (the "Mediation Period").
SECTION 9.04 Selection of Mediator. The parties will jointly
appoint a mutually acceptable and neutral mediator. If they are unable to agree
upon such appointment within 20 days from the conclusion of the negotiation
period, a mediator shall be appointed by the AAA pursuant to the Commercial
Mediation Rules of the AAA.
SECTION 9.05 Treatment of Negotiation and Mediation. All
negotiations and mediations pursuant to this Article shall be treated as
compromise and settlement negotiations for purposes of Rule 408 of the Federal
Rules of Evidence and comparable state rules.
SECTION 9.06 Arbitration.
(a) Notwithstanding the foregoing provisions of
this Article IX, at the end of the Mediation Period any party may submit the
matter to binding arbitration
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conducted in accordance with the Commercial Arbitration Rules of the AAA, by one
or three arbitrators(s) selected in accordance with the provisions of Section
9.06(b). Any arbitration proceeding hereunder shall be held in the city of New
York, New York, and shall be governed by the Federal Arbitration Act, 9 U.S.C.
ss.ss. 1-16, and judgment upon the award rendered by the arbitrator(s) may be
entered by any court having jurisdiction thereof or having jurisdiction over the
relevant party or its assets. Any arbitral award hereunder shall be in writing,
state the reasons for the award and be final and binding on the parties.
(b) The parties shall seek to appoint jointly a
mutually acceptable sole arbitrator. If the parties cannot agree on an
acceptable sole arbitrator within 10 days after the commencement of the
arbitration, the Dispute shall be heard by a panel of three arbitrators, one
appointed by each of the parties within 20 days after commencement of the
arbitration, and the third arbitrator selected by the other two arbitrators
within 15 days of appointment of the first two arbitrators. If either side fails
to appoint an arbitrator within 20 days after the commencement of the
arbitration, then that arbitrator shall be appointed by the AAA, which shall
promptly notify the parties of such appointment. If the first two arbitrators
appointed fail to appoint a third arbitrator within the 15-day period prescribed
above, then the AAA shall appoint the third arbitrator and shall promptly notify
the parties of the appointment. References herein to the "Arbitrator" shall mean
the sole arbitrator or the three-arbitrator panel, as the case may be.
(c) In the event the Dispute involves (i) valuation
of a liability under (A) this Agreement, (B) any Ancillary Agreement or (C) any
other agreement entered into by the parties pursuant to this Agreement or any
Ancillary Agreement, (ii) an amount in controversy in a Dispute or (iii) the
amount of damages following a determination of liability, the arbitration shall
proceed in the following manner: Each party shall submit to the Arbitrator and
exchange with each other, on a schedule to be determined by the Arbitrator, a
proposed valuation, amount or damages, as the case may be, together with a
statement, including all supporting documents or other evidence upon which it
relies, setting forth such party's explanation as to why its proposal is
reasonable and appropriate. The Arbitrator, within 15 days of receiving such
proposals and supporting documents, shall choose between the two proposals and
shall be limited to awarding only one or the other of the two proposals
submitted.
(d) Cost of Arbitration. The costs of arbitration
shall be apportioned between the parties to the arbitration as determined by the
Arbitrator in such manner as the Arbitrator deems reasonable taking into account
the circumstances of the case, the conduct of the parties during the proceeding
and the result of the arbitration.
(e) Arbitration Period. Any arbitration proceeding
shall be concluded in a maximum of six (6) months from the commencement of the
arbitration. The parties involved in the proceeding may agree in writing to
extend the arbitration period if necessary to appropriately resolve the Dispute.
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SECTION 9.07 Confidentiality. All negotiation, mediation and
arbitration proceedings under this Article shall be treated as confidential
Information in accordance with the provisions of Section 6.06 hereof. Any
mediator or the Arbitrator shall be bound by an agreement containing
confidentiality provisions at least as restrictive as those contained in Section
6.06 hereof.
SECTION 9.08 Notices. All notices by one party to the other
party in connection with the dispute resolution provisions set forth in this
Article shall be in accordance with the provisions of Section 10.05 hereof.
SECTION 9.09 Consolidation. The Arbitrator may consolidate an
arbitration under this Agreement with any arbitration arising under or relating
to the Ancillary Agreements or any other agreement between the parties entered
into pursuant hereto, as the case may be, if the subject of the Disputes
thereunder arise out of or relate essentially to the same set of facts or
transactions. Such consolidated arbitration shall be determined by the
arbitrator appointed for the arbitration proceeding that was commenced first in
time.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Modification, Amendment or Termination. This
Agreement may not be modified, amended or terminated except by an agreement in
writing signed by each of the parties hereto and approved by the board of
directors of each of the parties hereto; provided, however, that any
modification or amendment to this Agreement that is adverse to the rights or
interests of CDR-PC, as determined by those directors of the Company that are
not employed by either the Company or CD&R, in their good faith reasonable
judgment, and any termination of this Agreement shall not be effective unless
such modification, amendment or termination was approved by an affirmative vote
of not less than three-fourths of the members of the board of directors of the
Company; provided further, however, that the preceding proviso shall apply only
for so long as CDR-PC has the right to designate at least two nominees to the
board of directors of the Company pursuant to Section 4.01(b) of the Investment
Agreement; provided further, however, that Article V shall not be terminated or
amended after the Distribution Time in respect of the third party beneficiaries
thereto without the consent of such persons.
SECTION 10.02 Waiver; Remedies. The conditions to the
Company's obligation to consummate the Distributions are for the sole benefit of
the Company and may be waived by the Company in whole or in part in its sole
discretion. No delay on the part of the Company or the Distributed Companies in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either the Company or the
Distributed Companies of any right, power or privilege hereunder operate as a
waiver of any other right, power or privilege hereunder, nor will any single or
partial
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exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the parties
may otherwise have at law or in equity.
SECTION 10.03 Counterparts. For the convenience of the
parties, this Agreement may be executed in any number of separate counterparts,
each such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
SECTION 10.04 Notices. Any notice, request, instruction or
other communication to be given hereunder by any party to another shall be in
writing and shall be deemed to have been duly given (i) on the date of delivery
if delivered personally, or by telefacsimile, upon confirmation of receipt, (ii)
on the first business day following the date of dispatch if delivered by Federal
Express or other nationally reputable next-day courier service with proof of
delivery, or (iii) on the fifth business day following the date of mailing if
delivered by registered or certified mail, return receipt requested, postage
prepaid. All notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice.
(a) If to Printco:
Workflow Management, Inc.
[contact information]
(b) If to Schoolco:
School Specialty, Inc.
[contact information]
(c) If to Techco:
Aztec Consulting, Inc.
[contact information]
(d) If to Travelco:
Navigant International, Inc.
[contact information]
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(e) If to the Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W., Suite 600 East
Washington, D.C. 20007-5490
Attention: Mark D. Director, Esq.
Kathleen Delaney, Esq.
Telefacsimile: (202) 339-6733
with copies to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
18th Floor
New York, NY 10152
Attention: Brian D. Finn
Telefacsimile: (212) 407-5200
SECTION 10.05 Entire Agreement. This Agreement and the
Ancillary Agreements (including Exhibits, Annexes and Schedules hereto and
thereto) constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties, both written and
oral, between the parties, with respect to the subject matter hereof and
thereof.
SECTION 10.06 Certain Obligations. Whenever any Ancillary
Agreement requires any of the Subsidiaries of any party to such Ancillary
Agreement to take any action, this Agreement will be deemed to include an
undertaking on the part of such party to cause such Subsidiary to take such
action.
SECTION 10.07 Assignment. This Agreement shall be assignable
in whole in connection with a merger or consolidation or the sale or transfer of
all or substantially all the Assets or stock of a party hereto so long as the
resulting, surviving or transferee entity assumes all the obligations of the
relevant party hereto by operation of law or pursuant to an agreement in form
and substance reasonably satisfactory to the other party. Otherwise, this
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Agreement
without such consent shall be void.
SECTION 10.08 Captions. The Article, Section and paragraph
captions herein are for convenience of reference only, do not constitute part of
this Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
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SECTION 10.09 Severability. If any provision of this Agreement
or any of the Ancillary Agreements or the application thereof to any person or
circumstance is determined to be invalid, void or unenforceable by a court of
competent jurisdiction or by one or more arbitrator(s), the remaining provisions
thereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated thereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith in
an effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
SECTION 10.10 Equitable Relief. No provision of this Agreement
shall preclude any party from seeking equitable relief to prevent any immediate,
irreparable harm to its interests, including multiple breaches of this Agreement
or the Ancillary Agreements by another party. Otherwise, the procedures set
forth in Article IX regarding dispute resolution are exclusive and shall be
fully exhausted prior to the initiation of litigation. Any party to this
Agreement may also seek specific enforcement of the Arbitrator's decision under
Article IX; the opposing party's only defense to such a request for specific
performance shall be fraud by or on the Arbitrator.
SECTION 10.11 Third Party Beneficiaries. Except as provided in
Article V relating to Indemnitees and Sections 10.01 and 10.02 relating to
modification, amendment and termination, this Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates,
directors and officers, and should not be deemed to confer upon third parties
any remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
SECTION 10.12 Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses incurred after the Distribution Time.
SECTION 10.13 Exhibits and Schedules. The Exhibits and
Schedules to this Agreement shall be construed with and as an integral part of
this Agreement to the same extent as if the same had been set forth verbatim
herein.
SECTION 10.14 Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such state,
without regard to the conflicts of law principles of such state.
SECTION 10.15 Consent to Jurisdiction. Each of the parties
irrevocably submits to the exclusive jurisdiction of the state and federal
courts of Delaware for the purposes of any suit, action or other proceeding
arising out of this Agreement or any
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transaction contemplated hereby. Each of the parties agree that service of any
process, summons, notice or document by U.S. registered mail to such party's
respective address set forth above shall be effective service of process for any
action, suit or proceeding in Delaware with respect to any matters to which it
has submitted to jurisdiction in this Section 10.17. Each of the parties
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the state and federal courts of Delaware, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum. This consent to jurisdiction
provision does not, in any way, limit the force and effect of the requirements
set forth in Article IX regarding resolution of Disputes.
SECTION 10.16 Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 10.17 Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Time.
SECTION 10.18 Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement and
Plan of Distribution to be duly executed as of the day and year first above
written.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
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<PAGE>
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
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<PAGE>
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of , 1998, among
Workflow Management, Inc., a Delaware corporation ("Workflow Management"),
School Specialty, Inc., a Delaware corporation ("School Specialty"), Aztec
Technology Partners, Inc., a Delaware corporation ("Aztec") and Navigant
International, Inc., a Delaware corporation ("Navigant"). Workflow Graphics,
School Specialty, Aztec and Navigant are hereinafter jointly referred to as the
"Companies."
WITNESSETH
WHEREAS, U.S. Office Products Company, a Delaware Corporation ("USOP") and
the Companies entered into an agreement dated as of , 1998 (the "Tax
Allocation Agreement") to allocate the Tax burdens and benefits of transactions
which occurred on or prior to the Distribution Date, and to provide for certain
other tax matters, including the assignment of responsibility for the
preparation and filing of Tax returns and the prosecution and defense of any Tax
controversies; and
WHEREAS, pursuant to Section 10 of the Tax Allocation Agreement, the
Companies are jointly and severally liable for and will jointly and severally
indemnify, defend and hold USOP harmless from and against any Losses with
respect to Taxes that result from or arise in connection with an Adverse Tax Act
of any of the Companies or any of their respective Subsidiaries.
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the Companies (each on its own behalf and on behalf of each of its Subsidiaries)
hereby agree as follows:
SECTION 1
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meaning:
"Adverse Company" shall mean a Company that has or whose Subsidiary has
committed an Adverse Tax Act.
"Adverse Tax Act" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Agreement" shall mean this Tax Indemnification Agreement.
"Aztec" shall have the meaning assigned to such term in the preamble to this
Agreement.
"Companies" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Losses" shall have the meaning assigned to such term in the Tax Allocation
Agreement.
"Market Capitalization" shall have the meaning assigned to such term in the
Tax Allocation Agreement.
"Navigant" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Non-Adverse Company" shall mean a Company that has not and whose
Subsidiaries have not committed an Adverse Tax Act.
"School Specialty" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Subsidiary" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax" or "Taxes" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax Allocation Agreement" shall have the meaning assigned to such term in
the recitals to this Agreement.
"USOP" shall have the meaning assigned to such term in the recitals to this
Agreement.
1
<PAGE>
"Workflow Management" shall have the meaning assigned to such term in the
preamble to this Agreement.
SECTION 2
INDEMNIFICATION
(a) Workflow Management Indemnification. Workflow Management shall be liable
for and shall indemnify, defend and hold the Non-Adverse Companies harmless from
and against an amount equal to that which each of the Non-Adverse Companies pays
to USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of Workflow Management or its Subsidiaries.
(b) School Specialty Indemnification. School Specialty shall be liable for
and shall indemnify, defend and hold the Non-Adverse Companies harmless from and
against an amount equal to that which each of the Non-Adverse Companies pays to
USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of School Specialty or its Subsidiaries.
(c) Aztec Indemnification. Aztec shall be liable for and shall indemnify,
defend and hold the Non-Adverse Companies harmless from and against an amount
equal to that which each of the Non-Adverse Companies pays to USOP pursuant to
Section 10 of the Tax Allocation Agreement as a result of an Adverse Tax Act of
Aztec or its Subsidiaries.
(d) Navigant Indemnification. Navigant shall be liable for and shall
indemnify, defend and hold the Non-Adverse Companies harmless from and against
an amount equal to that which each of the Non-Adverse Companies pays to USOP
pursuant to Section 10 of the Tax Allocation Agreement as a result of an Adverse
Tax Act of Navigant or its Subsidiaries.
(e) Right of Contribution. With respect to any Adverse Tax Act, the
Non-Adverse Companies shall have rights and obligations of contribution among
themselves to the extent necessary to cause the payments by each Non-Adverse
Company to USOP pursuant to Section 10 of the Tax Allocation Agreement as of any
date, adjusted for payments received from the Adverse Company under Section 2(a)
through 2(d) hereof and for payments made to, or received from, any other
Non-Adverse Company under this Section 2(e), to be in proportion to the
Non-Adverse Companies' respective Market Capitalizations.
SECTION 3
DISPUTE RESOLUTION
Any dispute, controversy or claim between the Companies or any of their
respective Subsidiaries arising out of or relating to this Agreement shall be
resolved (and costs shall be apportioned) pursuant to the procedures set forth
in Article IX of the Distribution Agreement.
SECTION 4
CHOICE OF LAW; SUCCESSORS AND ASSIGNS
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Delaware applicable to contracts made and to be
performed entirely within such state, without regard to the conflicts of law
principles of such state.
The provisions of this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the Companies and their respective successors and
permitted assigns.
2
<PAGE>
SECTION 5
ENTIRE AGREEMENT AND MODIFICATIONS
This Agreement contains the entire agreement among the Companies with
respect to the subject matter hereof and supersedes all prior written Tax
Indemnification agreements, memoranda, negotiations and oral understandings, if
any, and may not be amended, supplemented or discharged except by performance or
by an instrument in writing signed by all of the Companies.
SECTION 6
COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the Companies have duly executed this Agreement as of
the date first above written.
<TABLE>
<S> <C>
WORKFLOW MANAGEMENT, INC.
By
Name:
Title:
Seal
Attest:
SCHOOL SPECIALTY, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
AZTEC TECHNOLOGY PARTNERS, INC.
By
Name:
Title:
Seal
Attest:
NAVIGANT INTERNATIONAL, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
4
<PAGE>
EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT
This EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT dated as
of ___________, 1998 (the "Benefits Agreement"), between U.S. OFFICE PRODUCTS
COMPANY, a Delaware corporation (the "Company"), WORKFLOW MANAGEMENT, INC., a
Delaware corporation and wholly owned subsidiary of the Company ("Printco"),
SCHOOL SPECIALTY, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS, INC., a Delaware
corporation and wholly owned subsidiary of the Company ("Techco"), and
NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly owned
subsidiary of the Company ("Travelco") pursuant to the agreement and plan of
distribution dated as of ____________, 1998 (the "Distribution Agreement")
among Company, Printco, Schoolco, Techco, and Travelco.
WHEREAS, the Board of Directors of the Company has determined that it
is appropriate and desirable to enter into the Benefits Agreement as an
Ancillary Agreement under the Distribution Agreement; and
WHEREAS, each of the Company, Printco, Schoolco, Techco, and Travelco
has determined that it is necessary and desirable to allocate and assign
responsibility for certain employee benefit liabilities in respect of the
activities of the businesses of such entities on and following the Distribution
Date.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company, Printco, Schoolco, Techco, and Travelco agree as
follows:
1. PURPOSE AND DEFINITIONS
a. Purpose. The purpose of this Benefits Agreement is to set
forth the agreement of the Company, Printco, Schoolco, Techco, and Travelco
regarding the allocation and assignment of the respective rights and obligations
of each before and after the Distributions with respect to their current and
former employees and with respect to benefits and compensation matters.
b. Definitions. In addition to the terms defined elsewhere in
the text or in the Distribution Agreement, as used in this Benefits Agreement,
the following terms have the following meanings:
"Distributed Company Employees" shall mean the Printco
Employees, Schoolco Employees, Techco Employees, and Travelco Employees,
collectively.
<PAGE>
"Employee" shall mean, as to the Company and each
Distributed Company, an individual who is employed (including an individual who
is not actively employed because of an approved disability, lay-off with right
of recall or an authorized leave of absence (or who is receiving salary
continuation severance payments)) by the Company or the specified Distributed
Company or any of their respective Subsidiaries (other than, for the Company,
any Distributed Company or its Subsidiaries) immediately before the
Distribution.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
"Former Employee" shall mean a former employee of the
Company or the specified Distributed Company or any of their respective
Subsidiaries (other than, for the Company, any Distributed Company or its
Subsidiaries) whose employment terminated before the Distribution.
"Individual" shall mean each Employee and Former Employee.
Solely for purposes of Section 3(b), "Individual" shall also include
unsuccessful applicants for employment.
"Stand-Alone Plan" shall mean each benefit or compensation
plan, program, policy, or arrangement currently or formerly maintained for the
exclusive benefit of all or some Individuals with respect to the Company or the
applicable Distributed Company.
2. EMPLOYEES. Effective as of the Distribution Date and unless
otherwise provided by the Distribution Agreement, each Company Employee, Printco
Employee, Schoolco Employee, Travelco Employee, and Techco Employee will remain
an employee of his or her respective employer. Nothing contained in this Section
2 confers on any such person any right to continued employment, whether before
or after the Distribution Date, nor does it detract from or otherwise amend any
employment agreement currently in force, except as specifically noted.
3. GENERAL PRINCIPLES. Except as otherwise provided in this Benefits
Agreement, as of the Distribution Date:
a. Each party will remain or become responsible for its
respective Stand-Alone Plans.
b. The Company, Printco, Schoolco, Techco, and Travelco each
will be allocated Liability for employment-related claims regardless of when
filed (including, but not limited to, harassment and discrimination) based upon
whether the claimant was at the time the claim arose, respectively, a Company
Individual, Printco Individual, Schoolco Individual, Techco Individual, or
Travelco Individual.
c. Except as specifically provided herein, as of and after the
Distribution Date, all Liabilities with respect to employee benefit plans,
programs, or arrangements relating to
2
<PAGE>
(i) Company Former Employees that presently are Company liabilities will be
retained by the Company, (ii) Printco Former Employees that presently are
Company or Printco liabilities will be retained or assumed by Printco, as
applicable, (iii) Schoolco Former Employees that presently are Company or
Schoolco liabilities will be retained or assumed by Schoolco, as applicable,
(iv) Techco Former Employees that presently are Company or Techco liabilities
will be retained or assumed by Techco, as applicable, and (v) Travelco Former
Employees that presently are Company or Travelco liabilities will be retained or
assumed by Travelco, as applicable.
d. Except to the extent recognition of past service credit
would result in a duplication of benefits, the Company, Printco, Schoolco,
Techco, and Travelco each will give past service credit under its applicable
benefit plans, programs, policies and arrangements to participants therein to
the extent their past service credit was recognized under the comparable benefit
plan, program, policy, or arrangement of the Company or its Subsidiaries in
which the Employee participated immediately before the Distribution Date.
e. No provision of this Benefits Agreement requires any of the
parties to continue any plan, program, policy, or arrangement for any period of
time after the Distributions.
f. Each party will amend its respective plans, programs,
policies, and arrangements (whether newly established, assumed, or retained) to
the extent necessary to reflect the provisions of this Benefits Agreement.
g. Any Company Employee, Printco Employee, Schoolco Employee,
Techco Employee, or Travelco Employee who continues in employment with the
Company, Printco, Schoolco, Techco, or Travelco or any related Subsidiaries
following the Distribution Date will not be deemed to have terminated employment
solely as a result of the Distribution for purposes of any benefit or
compensation plan, program, policy, or arrangement maintained by the Company,
Printco, Schoolco, Techco, or Travelco.
h. The Company will release any third party beneficiary rights
it may have to enforce employment agreements assumed or retained by the
Distributed Companies (other than with respect to the Company's "Information,"
as defined in those agreements).
4. 401(k) PLAN
a. The Company will retain sponsorship of the U.S. Office
Products 401(k) Retirement Plan (the "Company 401(k) Plan").
b. Effective as of or as soon as practicable after the
Distribution, the Distributed Companies will each establish new qualified 401(k)
plans covering each Distributed Company and all or substantially all of its
Subsidiaries in the United States. Distributed Company Employees will cease
participation in the Company 401(k) Plan effective as close in time before the
Distribution Date as is reasonably practicable. Distributed Company Employees
who have outstanding participant loans under the Company 401(k) Plan will be
permitted to
3
<PAGE>
continue making loan payments to the Company 401(k) Plan until such time as the
loans are transferred to the Distributed Company's 401(k) Plan.
c. Upon receipt by the Company and each of the Distributed
Companies of favorable determination letters from the Internal Revenue Service
to the effect that a newly established plan meets the requirements for
qualification under Section 401(a) of the Code (or as the parties otherwise
mutually agree), the Company will cause to be transferred to the trusts
established under the newly-established 401(k) plans, the respective account
balances (including any related loans and qualified domestic relations orders)
and related assets of that employer's Employees. Upon such transfer, Printco,
Schoolco, Techco, and Travelco will assume the related liabilities.
5. MEDICAL PLANS
a. Effective as of the Distribution Date, each of the
Distributed Companies will assume or retain sponsorship of their respective
Stand-Alone Plans that are medical (including dental) plans and arrangements and
will assume or retain responsibility for continuation health coverage under
ERISA Section 601 et seq. with respect to their respective Individuals.
b. To the extent permitted under any applicable indemnity,
health maintenance organization or stop-loss contracts, any newly established
health plans will waive waiting periods, pre-existing conditions to the extent
waived or satisfied under the applicable Stand-Alone Plan, and credit
deductible/copayments satisfied by Employees, if any, who are transferring among
the respective employers in connection with the Distributions. The Company will
use its best efforts to assist the Distributed Companies in their negotiations
with any third parties to accomplish the waiver of such waiting periods and
pre-existing conditions and the crediting of such deductibles and co-payments.
6. CAFETERIA PLAN
a. The Company will amend the U.S. Office Products Cafeteria
Compensation Plan (the "Company Cafeteria Plan") to provide for spinning off to
each Distributed Company the portions of the Cafeteria Plan's obligations and
credits that apply to that Distributed Company.
b. Effective as of the Distribution Date, each Distributed
Company will adopt a cafeteria plan substantially identical to the Cafeteria
Plan to receive and implement the obligations and credits spun off from the
Cafeteria Plan.
c. Each Distributed Company will treat as remaining in effect
any elections the Distributed Company Employees made before the Distribution
with respect to the Health Care Reimbursement Plan Benefit, the Dependent Care
Assistance Program Benefit, the Health Insurance Benefit, and, to the extent
offered by the Distributed Company after the Distribution,
4
<PAGE>
the Dental Insurance Benefit (each "Benefit" having the meaning provided in the
Company Cafeteria Plan).
d. After the spinoffs described in this Section, Distributed
Company Employees will submit any claims for the plan year ending December 31,
1998 to their respective Distributed Company's plan and not to the Company
Cafeteria Plan.
7. SEVERANCE
Effective as of the Distribution Date, the Company, Printco, Schoolco,
Techco, and Travelco each will be liable for any severance pay and benefits
(including salary continuation) owing, as of or after the Distribution Date, to
Company Individuals, Printco Individuals, Schoolco Individuals, Techco
Individuals, and Travelco Individuals, respectively.
8. STOCK OPTIONS
a. The Company will retain the 1994 Amended and Restated USOP
Long-Term Incentive Plan (the "Company Stock Plan") and the obligations under
that plan with respect to stock options granted thereunder that are held by or
in respect of Company Employees.
b. The Distributed Companies will establish stock option plans
under which they will provide options to their respective Employees to replace
any options those employees hold under the Company Stock Plan and under which
they may offer additional options.
c. Any option granted by a Distributed Company in replacement
for an option under the Company Stock Plan will expressly provide that it is
being granted in full satisfaction of, and in substitution for, any and all
Company stock options with respect to which it relates.
9. FOREIGN PLANS
Subject to applicable local law requirements and to the extent
practicable, the respective rights and obligations of the Company, Printco,
Schoolco, Techco, and Travelco (and their respective Subsidiaries) with respect
to plans maintained by the Company and its Subsidiaries immediately before the
Distribution Date outside of the United States will be treated in a manner
consistent with the general principles described in Section 2 of this Benefits
Agreement; provided, however, that nothing herein shall be construed so as to
(A) modify the terms and conditions of employment of any Company Employee,
Printco Employee, Schoolco Employee, Techco Employee, or Travelco Employee who
is employed outside of the United States (a "Foreign Employee") or (B)
constitute an actual or constructive termination of any Foreign Employee's
employment with the Company, Printco, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable.
5
<PAGE>
10. COOPERATION
a. The Company and the Distributed Companies will cooperate in
providing each other and other necessary parties with such data as may be
necessary to administer their respective benefit plans in accordance with the
terms of this Agreement. To that end, each will share, and will cause their
affiliates to share, with each other and their respective agents and vendors
(without obtaining releases) all participant, plan design, and other information
necessary for the efficient and accurate administration of, compliance with laws
and regulations applicable to, and response to governmental authorities
regarding, their respective benefit plans, programs, and arrangements after the
Distribution. Each party to this agreement and their respective authorized
agents will, subject to applicable laws on confidentiality, be given reasonable
and timely access to, and may make copies of, all information relating to the
subjects of this Agreement in the custody of another party, to the extent
necessary for such administration.
b. The Company and the Distributed Companies agree to
cooperate in completing all necessary filings with the Internal Revenue Service,
Department of Labor, and Pension Benefit Guaranty Corporation with respect to
the matters provided herein and will apprise the other parties hereto of any
written or oral communication to or from any such agency with respect thereto
that may bear on such other parties' interests hereunder. The Company will make
all necessary Internal Revenue Service filings for the 1997 plan year and, if
applicable, any "short year" filings for the 1998 plan year, with respect to the
plans (other than Stand-Alone Plans) in which Distributed Company Employees
participated before the Distribution Date.
11. NO THIRD PARTY BENEFICIARIES.
Notwithstanding anything to the contrary herein, this Benefits
Agreement is solely for the benefit of the Company and the Distributed
Companies. There shall be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Company Individual, Printco
Individual, Schoolco Individual, Techco Individual, or Travelco Individual.
12. INCORPORATION BY REFERENCE.
This Benefits Agreement is part of the Distribution Agreement, and
shall be incorporated by reference into the Distribution Agreement as if set
forth fully therein. Without limiting the generality of the foregoing, the
parties acknowledge and agree that all provisions of the Distribution Agreement
relating to Indemnification, Dispute Resolution, Notices, and the other
provisions labeled "Miscellaneous" in the Distribution Agreement shall apply
with respect to the matters described herein as if such terms were incorporated
herein and a part hereof.
13. TAX DEDUCTIONS
Except as otherwise provided in Section 5 of the Tax Allocation
Agreement dated __________, 1998 between the Company, Printco, Schoolco, Techco
and Travelco, the parties intend that the party that actually bears the cost
(whether directly or indirectly) of making a
6
<PAGE>
payment with respect to, or (except as provided below) whose stock is used to
satisfy, a liability governed by this Agreement will be entitled to any and all
tax benefits associated therewith, including the benefit of taking an income tax
deduction with respect to such payment or satisfaction, and will be obligated to
satisfy all tax withholding obligations with respect there, and the parties
agree to take no action inconsistent with such intention. Notwithstanding that
intent, the parties recognize that it is possible that the Internal Revenue
Service or another taxing authority will take a different position. Therefore,
the parties agree that
if any of them is notified by the IRS or another taxing authority that
it is taking or proposes to take a different position, the party
receiving such notice will notify any others affected by the notice;
and
if, when, and to the extent that one party or its Subsidiary receives a
tax benefit as a result of a payment made by another party to satisfy a
liability governed by this Agreement, the benefiting party will pay or
cause its Subsidiary to pay the other party an amount equal to the "net
tax benefit" (as defined below) realized by the benefiting party, as
and when realized.
For this purpose, the "net tax benefit" to either party resulting from payment
or satisfaction of a liability will be deemed to equal the excess of (a) the
taxes that would have been paid by such party if such party had not paid or
satisfied such liability over (b) the taxes that the party actually pays.
14. MISCELLANEOUS
a. Complete Agreement; Construction. This Benefits Agreement, including
all Exhibits attached hereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all previous
negotiations, commitments, and writings with respect to such subject matter.
b. Supersession. In the event of any conflict between any of the terms
of this Benefits Agreement and the terms of either Distribution Agreement, the
terms of this Benefits Agreement will govern.
15. OTHER ACTIONS. The parties hereto shall take such other and further
actions as may be necessary or appropriate to carry out this Benefits Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Benefits Agreement to
be executed by their duly authorized officers as of the day and year first
written above.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
8
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
OF INCORPORATION OR
NAME ORGANIZATION
------------------------------------------------------ -------------------------------
<C> <S> <C>
1. RePrint, LLC Delaware
2. Sax Arts & Crafts, Inc. Delaware
3. Childcraft, Inc. New York
4. Bird-in-Hand Woodworks, Inc. Pennsylvania
5. Don Gresswell, Ltd. United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 13, 1998 (except
for Note 1 and the last paragraph of Note 3, which are as of May 14, 1998),
relating to the financial statements of School Specialty, Inc., as of April 30,
1996 and April 26, 1997 and for the four months ended April 30, 1996 and for the
fiscal year ended April 26, 1997, which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the period from January 1, 1996 to April 30, 1996 and for the year ended
April 26, 1997 listed as Exhibit 99.1 of this Registration Statement when such
schedule is read in conjunction with the financial statements referred to in our
report. The audits referred to in such report also included this schedule. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
May 14, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 2, 1996, with respect to the financial
statements of School Specialty, Inc. for the years ended December 31, 1995 and
1994 included in the Registration Statement on Form S-1 and related Prospectus
of School Specialty, Inc. for the registration of shares of its common stock. We
also consent to the application of such report to the Financial Statement
Schedule for the two years ended December 31, 1995 listed as Exhibit 99.1 of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
May 14, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement of School Specialty, Inc. on Form S-1 of our report dated
February 8, 1996, relating to the financial statements of The Re-Print
Corporation, which report appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the two years
ended December 31, 1995 listed as Exhibit 99.1 of this Registration Statement
when such schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included this
schedule. We also consent to the references to us under the heading "Experts" in
such Prospectus.
BDO SEIDMAN, LLP
Atlanta, Georgia
May 14, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Prospectus constituting part of this
Registration Statement on Form S-1 as amended of our report dated February 24,
1997, relating to the consolidated financial statements of American Academic
Suppliers Holding Corporation and Subsidiary, which appears in such Prospectus.
We also consent to the references to us under the heading "Experts".
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
May 14, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 3, 1998,
relating to the financial statements of Sax Arts and Crafts, Inc. as of December
15, 1995 and December 25, 1996 and for each of the three years in the period
ended December 25, 1996 which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements of the Company included in the Registration
Statment on Form S-1 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-START> MAY-1-1996
<PERIOD-END> APR-26-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,703
<ALLOWANCES> (471)
<INVENTORY> 24,461
<CURRENT-ASSETS> 52,024
<PP&E> 19,067
<DEPRECIATION> (4,589)
<TOTAL-ASSETS> 87,685
<CURRENT-LIABILITIES> 37,564
<BONDS> 33,792
0
0
<COMMON> 0
<OTHER-SE> 16,329
<TOTAL-LIABILITY-AND-EQUITY> 87,685
<SALES> 191,746
<TOTAL-REVENUES> 191,746
<CGS> 136,577
<TOTAL-COSTS> 136,577
<OTHER-EXPENSES> 45,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,197
<INCOME-PRETAX> 5,720
<INCOME-TAX> (2,412)
<INCOME-CONTINUING> 8,132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,132
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.80
</TABLE>
<PAGE>
EXHIBIT 99.1
SCHOOL SPECIALTY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE TWO YEARS ENDED DECEMBER 31, 1994, 1995, THE FOUR MONTHS ENDED
APRIL 30, 1996 AND THE FISCAL YEAR ENDED APRIL 26, 1997
FINANCIAL STATEMENT SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER
DESCRIPTION DATE OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS DATE
- ----------------------------- ---------------- ----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful January 1, 1994 $ 137,000 $ 121,000 $ $ (19,000)(a) December 31, 1994
accounts................... January 1, 1995 239,000 2,000 243,000(b) (30,000)(a) December 31, 1995
January 1, 1996 211,000 10,000 (19,000)(a) April 30, 1996
May 1, 1996 202,000 27,000 (1,000)(a) April 26, 1997
Accumulated amortization of January 1, 1994 1,540,000 757,000 (781,000)(c) December 31, 1994
intangibles................ January 1, 1995 2,297,000 1,098,000 (59,000)(c) December 31, 1995
January 1, 1996 2,614,000 203,000 April 30, 1996
May 1, 1996 2,817,000 566,000 April 26, 1997
<CAPTION>
BALANCE
AT END OF
DESCRIPTION PERIOD
- ----------------------------- -----------
<S> <C>
Allowance for doubtful $ 239,000
accounts................... 211,000
202,000
471,000
Accumulated amortization of 2,297,000
intangibles................ 2,614,000
2,817,000
3,324,000
</TABLE>
- ------------------------
(a) Represents (write-offs)/recoveries of uncollectible accounts receivable.
(b) Allowance for doubtful accounts acquired in purchase acquisitions.
(c) Represents (write-offs)/recoveries of fully amortized intangible assets.
