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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED APRIL 25, 1998
COMMISSION FILE NUMBER 000-24385
SCHOOL SPECIALTY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 39-0971239
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
1000 NORTH BLUEMOUND DRIVE 54914
APPLETON, WI (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (920) 734-2756
Securities registered pursuant to Section 12(b) of the Act:
NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes____ No_X_
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. _X_
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of July 17, 1998 was $202,007,352.
As of July 17, 1998, 14,572,784 shares of the Registrant's common stock,
$.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
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DESCRIPTION PAGE
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Part I
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 7
Item 3. Legal Proceedings................................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 7
Part II
Item 5. Market for the Company's Common Equity and Related Shareholder Matters........................... 8
Item 6. Selected Financial Data.......................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
Item 8. Financial Statements and Supplementary Data...................................................... 21
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 48
Part III
Item 10. Directors and Executive Officers of the Registrant.............................................. 48
Item 11. Executive Compensation.......................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 55
Item 13. Certain Relationships and Related Transactions.................................................. 56
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 57
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PART I
THIS ANNUAL REPORT ON FORM 10-K (THE "ANNUAL REPORT") CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED
HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL"
AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO SCHOOL SPECIALTY, INC.
("SCHOOL SPECIALTY" OR THE "COMPANY") OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR IMPLIED
BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-- FACTORS AFFECTING
THE COMPANY'S BUSINESS." THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company 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 17 companies since May 1996. For the fiscal
year ended April 25, 1998, the Company's revenues aggregated $310.5 million and
operating income aggregated $16.2 million, which represented compound annual
increases of 35.8% and 122.8%, 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 Re-Print LLC ("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 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.
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
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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.
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. School Speciality's
wholly-owned subsidiary, The Re-Print Corp., was acquired by U.S. Office
Products in July 1996 and has been in operation since 1921. In connection with
the Strategic Restructuring Plan (defined below), The Re-Print Corp. was
reorganized as Re-Print LLC. 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. On June 9,
1998, U.S. Office Products distributed the shares of School Specialty to the
stockholders of U.S. Office Products (the "School Specialty Distribution"). The
School Specialty Distribution was part of a comprehensive restructuring plan
adopted by the U.S. Office Products Board of Directors (the "Strategic
Restructuring Plan") in which U.S. Office Products spun-off (the
"Distributions") all of the shares of School Specialty and three other companies
that operate in the print management, technology solutions and corporate travel
services business (the "Spin Off Companies").
COMPANY GROWTH STRATEGY
School Specialty's objective is to further enhance its position as the
leading distributor of non-textbook educational supplies through the continued
implementation of the following strategies:
PURSUE ACQUISITIONS AGGRESSIVELY. The Company believes that there are
extensive acquisition opportunities among the over 3,400 school distributors in
the U.S. The Company intends to pursue two types of acquisitions: (i) general
school supply and furniture companies in geographic markets in which the Company
has a limited presence, and (ii) specialty companies focusing on disciplines
such as physical education, science, technology and music. School Specialty
believes it can improve the margins of acquired entities through its efficient
integration process to achieve economies of scale. Although the Company is the
largest distributor in the industry, its share of the $6.1 billion school supply
market is less than 6%, giving the Company substantial growth opportunities.
In furtherance of its acquisition strategy, School Specialty routinely
reviews and conducts investigations of potential acquisitions of school supply
businesses. When School Specialty believes a favorable opportunity exists, it
enters into discussion with the owners of such businesses regarding the
possibility of an acquisition by School Specialty.
IMPROVE PROFITABILITY. School Specialty improved its operating margin from
1.5% in 1995 to 5.3% for the fiscal year ended April 25, 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
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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.
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 new product line will offer
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 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 1998. 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
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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.
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.
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1995 1996 1997 1998
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(PROJECTED)
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
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Total.......................................... 3,546,000 3,782,750 5,259,250 6,942,000
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(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.
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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 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
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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.
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 to meet information standards for Year 2000 compliance. See "
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors Affecting the Company's Business."
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 April 25, 1998, School Specialty had 1,220 full-time employees, 272 of
whom were employed primarily in management and administration, 416 in regional
warehouse and distribution operations, and 532 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 April 25, 1998, approximately 43 of
School Specialty's employees were members of the Teamsters Labor
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Union at Sax Arts & Crafts' New Berlin, Wisconsin facility. School Specialty
considers its relations with its employees to be very good.
ITEM 2. PROPERTIES
School Specialty's corporate headquarters are located at 1000 North
Bluemound Drive, Appleton, Wisconsin, a combined office and warehouse facility
of approximately 120,000 square feet. School Specialty's lease on the Appleton
headquarters expires on December 31, 2001. School Specialty leases or owns the
following distribution facilities.
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APPROXIMATE
SQUARE OWNED/ LEASE
LOCATIONS FOOTAGE LEASED EXPIRATION
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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 --
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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.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of these legal
proceedings will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration
during the quarter ended April 25, 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) The Company's common stock (the "Common Stock") has traded on the Nasdaq
National Market since June 10, 1998 under the symbol "SCHS." There was no market
for the Company's Common Stock prior to that date.
The number of record holders of the Company's Common Stock as of July 17,
1998 was 3,940. The Company believes that a substantially larger number of
beneficial owners hold such shares of Common Stock in depository or nominee
form.
The Company has not declared or paid any cash dividends on the Company's
Common Stock to date and does not anticipate paying any cash dividends on its
shares of Common Stock in the foreseeable future because it intends to retain
its earnings, if any, to finance the expansion of its business and for general
corporate purposes. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Company's Board of Directors deems relevant. Further, the
Company's credit facility restricts the Company's ability to pay dividends to
the extent that there is a default under the credit facility.
(b) On June 9, 1998, the Company's registration statement (the "Registration
Statement") on Form S-1 filed pursuant to the Securities Act of 1933, as amended
(file number 333-47509) was declared effective by the Commission. The
Registration Statement related to an offering (the "Offering") of 2,125,000
shares of the Common Stock, par value $.001 of the Company at an aggregate
offering price of $32,937,500. Additionally, School Specialty registered 318,750
shares to cover over-allotments. On June 10, 1998, School Specialty sold
2,125,000 shares of Common Stock. The underwriters for the Offering were
Goldman, Sachs & Co., NationsBanc Montgomery Securities LLC, Salomon Smith
Barney and Piper Jaffray, Inc. In addition, the Company sold 250,00 shares
directly to Daniel P. Spalding, the Chariman of the Board and its Chief
Executive Officer, David J. Vander Zanden, its President and Chief Operating
Officer, and Donald Ray Pate, Jr., its Executive Vice President for Re-Print.
The shares were sold at a price of $14.415 for aggregate consideration of
$3,603,750. The sale of these shares was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
The total proceeds to the Company of the Offering, net of underwriting
discounts and commissions of $2,305,625, were $30,631,875. In addition, the
Company incurred approximately $1,500,000 of expenses in connection with the
Offering, consisting primarily of the costs of registering the Offering under
the Securities Act of 1993, as amended, and with the National Association of
Securities Dealers, Inc., printing fees and professional expenses. The net
proceeds to the Company of the Offering were approximately $29,131,875. None of
such payments were made to directors or officers of the Company or their
associates or to persons owning 10% or more of any class of equity securities of
the Company or to affiliates of the Company. None of the proceeds were received
prior to April 25, 1998. The net proceeds were used to reduce indebtedness
outstanding under the Company's credit facility. The debt under the credit
facility had been incurred to pay debt of U.S. Office Products allocated to the
Company in connection with the Distributions. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," all of which appear elsewhere in this Annual Report.
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The historical Selected Financial Data for the fiscal years ended April 25,
1998 and April 26, 1997, the four months ended April 30, 1996, and the years
ended December 31, 1995 and 1994 have been derived from School Specialty's
consolidated financial statements that have been audited. The historical
Selected Financial Data for the fiscal years ended April 25, 1998 and April 26,
1997, the four months ended April 30, 1996, and the year ended December 31, 1995
are included elsewhere in the Annual Report. The historical Selected Financial
Data for the year ended December 31, 1993 have been derived from unaudited
consolidated financial statements which are not included elsewhere in this
Annual Report. 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 historical financial information of
Old School and Re-Print has 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 Purchased Companies is
included from the dates of their respective acquisitions.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED
FISCAL YEAR ENDED ENDED DECEMBER
---------------------- ------------- 31,
APRIL 25, APRIL 26, APRIL 30, ----------
1998 1997 1996 1995
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................................................................... $ 310,455 $ 191,746 $ 28,616 $ 150,482
Cost of revenues............................................................... 219,313 136,577 20,201 105,757
---------- ---------- ------------- ----------
Gross profit................................................................. 91,142 55,169 8,415 44,725
Selling, general, and administrative expenses.................................. 71,403 43,462 10,307 39,869
Non-recurring acquisition costs................................................ 1,792 1,122
Restructuring costs............................................................ 2,491 194 2,532
Strategic restructuring costs.................................................. 1,000
---------- ---------- ------------- ----------
Operating income............................................................. 16,248 9,721 (3,014) 2,324
Interest expense............................................................... 5,505 4,197 1,461 5,536
Interest income................................................................ (132) (6)
Other (income) expense......................................................... 156 (196) 67 (18)
---------- ---------- ------------- ----------
Income (loss) before provision for income taxes................................ 10,719 5,720 (4,536) (3,194)
Provision for (benefit from) income taxes (1).................................. 5,480 (2,412) 139 173
---------- ---------- ------------- ----------
Net income (loss).............................................................. $ 5,239 $ 8,132 $ (4,675) $ (3,367)
---------- ---------- ------------- ----------
---------- ---------- ------------- ----------
Net income (loss) per share:
Basic........................................................................ $ 0.40 $ 0.81 $ (0.54) $ (0.51)
Diluted...................................................................... $ 0.39 $ 0.80 $ (0.53) $ (0.50)
Weighted average shares outstanding:
Basic........................................................................ 13,284 10,003 8,611 6,562
Diluted...................................................................... 13,547 10,196 8,789 6,669
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues....................................................................... $ 119,510 $ 76,926
Cost of revenues............................................................... 87,750 56,280
---------- ---------
Gross profit................................................................. 31,760 20,646
Selling, general, and administrative expenses.................................. 27,281 18,294
Non-recurring acquisition costs................................................
Restructuring costs............................................................
Strategic restructuring costs..................................................
---------- ---------
Operating income............................................................. 4,479 2,352
Interest expense............................................................... 3,007 1,845
Interest income................................................................
Other (income) expense......................................................... (86) 228
---------- ---------
Income (loss) before provision for income taxes................................ 1,558 279
Provision for (benefit from) income taxes (1).................................. 218 199
---------- ---------
Net income (loss).............................................................. $ 1,340 $ 80
---------- ---------
---------- ---------
Net income (loss) per share:
Basic........................................................................ $ 0.26 $ 0.02
Diluted...................................................................... $ 0.26 $ 0.02
Weighted average shares outstanding:
Basic........................................................................ 5,062 4,918
Diluted...................................................................... 5,078 4,918
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
31,
APRIL 25, APRIL 26, APRIL 30, ----------
1998 1997 1996 1995
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ 47,791 $ 14,491 $ (3,663) $ (1,052)
Total assets................................................................... 223,729 87,685 54,573 54,040
Long-term debt, less current portion........................................... 315 566 15,031 15,294
Long-term payable to U.S. Office Products...................................... 62,699 33,266
Stockholders' (deficit) equity................................................. 106,466 16,329 (4,267) (620)
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................... $ 3,512 $ 1,140
Total assets................................................................... 44,267 23,190
Long-term debt, less current portion........................................... 11,675 7,175
Long-term payable to U.S. Office Products......................................
Stockholders' (deficit) equity................................................. 1,827 545
</TABLE>
- ------------------------
(1) Results for the fiscal year ended April 26, 1997 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,
9
<PAGE>
1997. The valuation allowance had been established in 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operation of the company should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere in this annual report.
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 $310.5 million for the fiscal year ended April 25, 1998. This
increase resulted primarily from 16 acquisitions, 14 of which occurred during
fiscal 1997 and 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.
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 an effective income tax rate of 46.0% is more
representative of future effective income tax rates.
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.
10
<PAGE>
In the first quarter of fiscal 1999, the Company will record a compensation
charge of approximately $1.1 million, representing (i) non-cash compensation
related to certain employees of School Specialty who tendered in the U.S. Office
Products equity self-tender offer options that were previously granted by U.S.
Office Products and (ii) the difference between the amount which Messrs.
Spalding, Vander Zanden and Pate paid for the 250,000 shares of Common Stock
purchased directly from the Company in connection with the Company's initial
public offering 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. The charge related to the equity self-tender was
incurred solely as a result of the tender of options into the equity self-tender
and was incurred prior to the School Specialty Distribution.
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.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues on
a historical basis for fiscal 1997 and 1998 and the year ended December 31,
1995.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FOR THE YEAR
ENDED ENDED ENDED
APRIL APRIL DECEMBER
25, 1998 26, 1997 31, 1995
----------- ----------- ---------------
<S> <C> <C> <C>
Revenues.......................................................... 100.0% 100.0% 100.0%
Cost of revenues.................................................. 70.6 71.2 70.3
----- ----- -----
Gross profit...................................................... 29.4 28.8 29.7
Selling, general and administrative expenses...................... 23.0 22.7 26.5
Non-recurring acquisition costs................................... 0.9
Restructuring costs............................................... 1.1 0.1 1.7
----- ----- -----
Operating income.................................................. 5.3 5.1 1.5
Interest expense, net............................................. 1.8 2.2 3.7
Other (income) expense............................................ 0.1 (0.1)
----- ----- -----
Income (loss) before provision for income taxes................... 3.4 3.0 (2.2)
Provision for (benefit from) income taxes......................... 1.8 (1.3) 0.1
----- ----- -----
Net income (loss)................................................. 1.6% 4.3% (2.3)%
----- ----- -----
----- ----- -----
</TABLE>
11
<PAGE>
CONSOLIDATED HISTORICAL RESULTS OF OPERATIONS
YEAR ENDED APRIL 25, 1998 COMPARED TO YEAR ENDED APRIL 26, 1997
Consolidated revenues increased 61.9%, from $191.7 million in fiscal 1997,
to $310.5 million in fiscal 1998. This increase was primarily due to the
inclusion of revenues from the eight companies acquired in business combinations
accounted for under the purchase method during fiscal 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"
and together with the Fiscal 1998 Purchased Companies, the "Purchased
Companies") for the entire 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 65.2%, from $55.2 million, or 28.8% of revenues, for
fiscal 1997 to $91.1 million, or 29.4% of revenues, for fiscal 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 fiscal 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 64.3%, from
$43.5 million, or 22.7% of revenues, for fiscal 1997 to $71.4 million, or 23.0%
of revenues, for fiscal 1998. The increase in selling, general and
administrative expenses as a percentage of revenues was due primarily to the
purchase acquisition of three specialty companies during fiscal 1998, which
typically have higher operating expenses as a percentage of revenue, partially
offset by the 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 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 net income for the fiscal year ended April 25, 1998 would have been
reduced by approximately $0.8 million or 15.3%.
The Company recorded in the fourth quarter of fiscal 1998 approximately $2.5
million of one-time non-recurring costs, primarily consisting of a write-down of
deferred catalog costs, employee severance and asset impairment costs, and $1.0
million of the transaction costs allocated to the Company under the Distribution
Agreement. The Company incurred non-recurring acquisition costs of $1.8 million
in fiscal 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
12
<PAGE>
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 U.S. Office Products' 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 "Factors Affecting the Company's Business--Risks Related to Inability to Use
Pooling-of-Interests Method to Account for Future Acquisitions".
Since U.S. Office Products' acquisition of the 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 28.0%, from $4.2 million for fiscal 1997 to $5.4 million for
fiscal 1998. The increase was due primarily to higher amounts payable to U.S.
Office Products incurred as a result of the acquisition of the eight companies
acquired in fiscal 1998.
Provision for income taxes increased from a tax benefit of $2.4 million for
fiscal 1997 to $5.5 million for fiscal 1998. The high effective income tax rate
of 51.1% for fiscal 1998, compared to the federal statutory rate of 35.0%, was
primarily due to state income taxes, non-deductible goodwill amortization and
USOP share distribution costs. In 1995, the Company recorded a valuation
allowance of $5.3 million on a 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 primarily 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.
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.
13
<PAGE>
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 net income for the fiscal year ended April 26, 1997 would have been
reduced by approximately $0.7 million or 9.2%.
The Company incurred non-recurring acquisition costs of $1.8 million in
fiscal 1997, in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal, investment-banking fees, real estate and environmental
assessments and appraisals and various regulatory fees.
The Company incurred restructuring costs of $2.5 million and $194,000 during
1995 and fiscal 1997, respectively. These costs represent the external costs and
liabilities to close redundant Company facilities, severance costs related to
the Company's employees and other costs associated with the Company's
restructuring plans. The Company expects to incur similar costs in the future as
the Company continues to review its operations, with the intention of continuing
to eliminate redundant facilities.
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 primarily 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.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to the acquisition by U.S. Office Products of the Pooled
Companies and prior to the School Specialty 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 April 25, 1998, the Company had working capital of $47.8 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 April 25, 1998 was
$169.5 million.
During fiscal 1998, net cash provided by operating activities was $3.7
million. Net cash used in investing activities was $99.7 million, including
$95.7 million for acquisitions and $4.0 million for additions to property and
equipment. Net cash provided by financing activities was $96 million, including
$95.7 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, $81.3 million of which was
14
<PAGE>
considered a contribution of capital by U.S. Office Products, partially offset
by $8.4 million used to repay indebtedness.
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.
On June 9, 1998, the Company closed on a five year $250 million revolving
credit facility (the "Credit Facility") from NationsBank, N.A. Interest on
borrowings under the Credit Facility will accrue at a rate of, at the Company's
option, either LIBOR plus 1.00% or the lender's base rate, 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 0% to .250% (depending on the Company's leverage ratio of funded debt
to EBITDA). Indebtedness is secured by substantially all of the assets of the
Company. The Credit Facility is subject to terms and conditions typical of
facilities of such size and includes certain financial covenants. The Company
made borrowings of $83.3 million under the Credit Facility to repay the U.S.
Office Products debt which it was obligated under the Distribution Agreement to
repay. On June 15, 1998, School Specialty used net proceeds of approximately
$32.7 million 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 borrowed under the Credit Facility. After such repayment, the Company
had approximately $50 million borrowed under the Credit Facility, with the
remaining $200 million available under the Credit Facility (subject to
compliance with the financial covenants), for general corporate purposes,
including working capital, and for acquisitions.
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.
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 fiscal 1997 and 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
15
<PAGE>
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
and second quarters of the fiscal year. On a calendar year basis, the most
profitable three months (July through September) fall in the third quarter.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 25, 1998
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
Revenues................................................ $ 87,029 $ 111,460 $ 49,391 $ 62,575 $ 310,455
Gross profit............................................ 26,090 33,619 11,670 19,763 91,142
Operating income (loss)................................. 11,872 12,155 (4,048) (3,731) 16,248
Net income (loss)....................................... 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic................................................. 0.49 0.49 (0.20) (0.24) 0.40
Diluted............................................... 0.48 0.47 (0.20) (0.24) 0.39
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 26, 1997
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
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
Per share amounts:
Basic................................................... 0.21 0.28 (0.11) 0.40 0.81
Diluted................................................. 0.21 0.27 (0.11) 0.39 0.80
</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 1 to "Selected Financial Data."
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the fiscal years ended April 25, 1998 and April 26,
1997 or the year ended December 31, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued Statement of
Financial Accounting Standards ("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.
16
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
FACTORS AFFECTING THE COMPANY'S BUSINESS
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS. In connection
with the School Specialty Distribution, U.S. Office Products entered into a tax
allocation agreement with School Specialty and the other Spin-Off Companies (the
"Tax Allocation Agreement") which provides that the Spin-Off Companies will
jointly and severally indemnify U.S. Office Products for any losses associated
with taxes related to the Distributions ("Distribution Taxes") if an action or
omission (an "Adverse Tax Act") of any of the Spin-Off Companies materially
contributes to a final determination that any or all of the Distributions are
taxable. School Specialty also entered 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 Distribution, but also any of the other Distributions.
RISKS RELATED TO ALLOCATION OF CERTAIN LIABILITIES. The Company, U.S.
Office Products and the other Spin-Off Companies entered into an agreement (the
"Distribution Agreement") relating to the School Specialty Distribution. Under
the Distribution Agreement, if one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, 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 such liabilities for
which the Company may be liable is, however, limited to $1.75 million.
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
17
<PAGE>
effect on School Specialty's operations and financial condition. Furthermore,
although School Specialty conducts due diligence and generally requires
representations, warranties, and indemnifications from the former owners of
acquired companies, there can be no assurance that such owners will have
accurately represented the financial and operating conditions of their
companies. If an acquired company's financial or operating results were
misrepresented, the acquisition could have a material adverse effect on the
results of operations and financial condition of School Specialty.
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. Furthermore, the Company's ability to pay
for acquisitions with stock may be materially limited in the two-year period
following the School Specialty Distribution.
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 School Specialty, including
issuances in connection with an acquisition of another business by School
Specialty, will not create a tax liability for U.S. Office Products. This
limitation could adversely affect the pace of School Specialty's acquisitions
and its ability to issue Common Stock for other purposes, including equity
offerings.
School Specialty entered into the Tax Allocation Agreement and the Tax
Indemnification Agreement pursuant to which School Specialty 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.
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-
18
<PAGE>
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.
SEASONALITY: FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. School
Specialty's business is subject to seasonal influences, with sales and
profitability substantially higher from May to October due to increased school
orders during these months. As a result of this seasonality, historically,
School Specialty has earned more than 100% of its annual net income in the first
six months of its fiscal year and has historically operated at a loss in its
third fiscal quarter. Also, quarterly results may be materially affected by the
timing of acquisitions and the timing and magnitude of acquisition assimilation
costs. Therefore, operating results for any quarter are not necessarily
indicative of the results that may be achieved for any subsequent fiscal quarter
or full fiscal year. Fluctuations caused by variations in quarterly results may
adversely affect the market price of the School Specialty Common Stock.
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 executive officers, but most of the Companies' executive
officers and senior management do not have employment contracts with School
Specialty. 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 serves as a
director and an employee of School Specialty and provides services to School
Specialty pursuant to an employment agreement with School Specialty. Mr. Ledecky
also serves 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 integrated 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
19
<PAGE>
eleven of its regional distribution acquisitions have occurred since June 1996.
There can be no assurance that School Specialty's management and financial
controls, personnel, computer systems, and other corporate support systems will
be adequate to manage the increased size and scope of School Specialty's
operations as a result of School Specialty's recently completed acquisitions.
Prior to the School Specialty Distribution, certain general and
administrative functions relating to School Specialty's business (including
legal, accounting, purchasing and management information services) were handled
by U.S. Office Products. School Specialty's future performance will depend on
its ability to function as a stand-alone entity, to finance and manage its
expanding operations and to adapt its information systems to changes in its
business. As a result, School Specialty's expenses are likely to be higher than
when it was a part of U.S. Office Products, and School Specialty may experience
disruptions 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 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.
MATERIAL AMOUNT OF GOODWILL. Approximately $99.6 million, or 44.5%, of
School Specialty's pro forma total assets as of April 25, 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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Statements:
Reports of Independent Accountants...................................................................... 22-24
Consolidated Balance Sheets at April 25, 1998 and April 26, 1997........................................ 25
Consolidated Statements of Income for the fiscal years ended April 25, 1998 and April 26, 1997, the four
months ended April 30, 1996 and the year ended December 31, 1995...................................... 26
Consolidated Statements of Stockholder's (Deficit) Equity for the fiscal years ended April 25, 1998 and
April 26, 1997, the four months ended April 30, 1996 and the year ended December 31, 1995............. 27
Consolidated Statements of Cash Flows for the fiscal years ended April 25, 1998 and April 26, 1997, the
four months ended April 30, 1996 and the year ended December 31, 1995................................. 28
Notes to Consolidated Financial Statements.............................................................. 30
Financial Statement Schedules
For the fiscal years ended April 25, 1998 and April 26, 1997, the four months ended April 30, 1996 and
the year ended December 31, 1995.....................................................................
II--Valuation and Qualifying Accounts--Exhibit 99.1...................................................
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of School Specialty, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of School Specialty, Inc. (the "Company") and its subsidiaries at April
25, 1998 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 years ended April
26, 1997 and April 25, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
June 24, 1998
22
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
School Specialty, Inc.
We have audited the accompanying consolidated statements of operations,
stockholder's (deficit) equity and cash flows of School Specialty, Inc. (the
Company) for the year ended December 31, 1995. 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 for the year ended
December 31, 1995. 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit 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 year December
31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 2, 1996
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Re-Print Corporation
Birmingham, Alabama
We have audited the accompanying balance sheet of The Re-Print Corporation
as of December 31, 1995, and the related statements of income, stockholders'
equity, and cash flows for the year ended December 31, 1995 (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 audit.
We conducted our audit 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 financial position of The Re-Print Corporation at
December 31, 1995, 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
24
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ $
Accounts receivable, less allowance for doubtful accounts of $716 and $471,
respectively........................................................................... 38,719 17,232
Inventories.............................................................................. 49,307 24,461
Prepaid expenses and other current assets................................................ 13,503 10,331
---------- ---------
Total current assets................................................................. 101,529 52,024
Property and equipment, net................................................................ 22,553 14,478
Intangible assets, net..................................................................... 99,613 20,824
Other assets............................................................................... 34 359
---------- ---------
Total assets......................................................................... $ 223,729 $ 87,685
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt.......................................................................... $ 11 $ 262
Short-term payable to U.S. Office Products............................................... 20,277 26,692
Accounts payable......................................................................... 23,788 9,091
Accrued compensation..................................................................... 4,458 860
Other accrued liabilities................................................................ 5,204 628
---------- ---------
Total current liabilities............................................................ 53,738 37,533
Long-term debt............................................................................. 315 566
Long-term payable to U.S. Office Products.................................................. 62,699 33,226
Deferred income taxes...................................................................... 511 31
---------- ---------
Total liabilities.................................................................... 117,263 71,356
Commitments and contingencies
Stockholder's equity:
Divisional equity........................................................................ 104,883 19,985
Retained earnings (deficit).............................................................. 1,583 (3,656)
---------- ---------
Total stockholder's equity........................................................... 106,466 16,329
---------- ---------
Total liabilities and stockholder's equity........................................... $ 223,729 $ 87,685
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR ENDED FOUR MONTHS FOR THE
---------------------- ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 310,455 $ 191,746 $ 28,616 $ 150,482
Cost of revenues............................................ 219,313 136,577 20,201 105,757
---------- ---------- ------------ ------------
Gross profit............................................ 91,142 55,169 8,415 44,725
Selling, general and administrative expenses................ 71,403 43,462 10,307 39,869
Restructuring costs......................................... 2,491 194 2,532
Strategic restructuring costs............................... 1,000
Non-recurring acquisition costs............................. 1,792 1,122
---------- ---------- ------------ ------------
Operating income (loss)................................. 16,248 9,721 (3,014) 2,324
Other (income) expense:
Interest expense.......................................... 5,505 4,197 1,461 5,536
Interest income........................................... (132) (6)
Other..................................................... 156 (196) 67 (18)
---------- ---------- ------------ ------------
Income (loss) before provision for (benefit from) income
taxes..................................................... 10,719 5,720 (4,536) (3,194)
Provision for (benefit from) income taxes................... 5,480 (2,412) 139 173
---------- ---------- ------------ ------------
Net income (loss)........................................... $ 5,239 $ 8,132 $ (4,675) $ (3,367)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Weighted average shares outstanding:
Basic..................................................... 13,284 10,003 8,611 6,562
Diluted................................................... 13,547 10,196 8,789 6,669
Net income (loss) per share:
Basic..................................................... $ 0.40 $ 0.81 $ (0.54) $ (0.51)
Diluted................................................... $ 0.39 $ 0.80 $ (0.53) $ (0.50)
</TABLE>
See accompanying notes to consolidated financial statements.
26
<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, 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
Issuances of U.S. Office Products Company common stock in conjunction with
acquisitions............................................................ 3,566 3,566
Capital contribution by U.S. Office Products.............................. 81,332 81,332
Net income................................................................ 5,239 5,239
---------- --------- -------------
Balance at April 25, 1998................................................... $ 104,883 $ 1,583 $ 106,466
---------- --------- -------------
---------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
SCHOOL SPECIALTY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR ENDED FOR THE FOUR FOR THE
-------------------- MONTHS ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 5,239 $ 8,132 $ (4,675) $ (3,367)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization expense................. 4,561 2,106 674 2,927
Non-recurring acquisition costs....................... 1,792 1,122
Other................................................. 78 115 118 277
Changes in current assets and liabilities (net of
assets acquired and liabilities
assumed in business combinations accounted for under
the purchase method):
Accounts receivable............................... (3,586) 1,277 3,727 2,666
Inventory......................................... (6,666) 2,737 (4,376) (2,523)
Prepaid expenses and other current assets......... (717) (2,361) (443) (338)
Accounts payable.................................. 5,256 (6,969) 3,459 2,642
Accrued liabilities............................... (441) (5,911) (784) 2,544
--------- --------- ------------- -------------
Net cash provided by (used in) operating
activities.................................... 3,724 918 (1,178) 4,828
--------- --------- ------------- -------------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received........... (95,670) (7,734) (5,389)
Additions to property and equipment....................... (3,558) (7,216) (120) (881)
Other..................................................... (514) 414 178
Payments of non-recurring acquisition costs............... (1,792) (1,122)
--------- --------- ------------- -------------
Net cash used in investing activities........... (99,742) (16,742) (828) (6,092)
--------- --------- ------------- -------------
Cash flows from financing activities:
Payments of long-term debt................................ (6,270) (16,962) (194) (1,488)
Proceeds from (payments of) short-term debt, net.......... (2,102) (29,908) 1,263 655
Advances from U.S. Office Products Company................ 23,058 59,919
Capital contribution by U.S. Office Products.............. 81,332
Proceeds from issuance of common stock.................... 1,979 1,080 500
Proceeds from issuance of long-term debt.................. 750 1,715
Payments of dividends at Pooled Companies................. (138) (134)
Purchase of treasury stock at Pooled Company.............. (92)
--------- --------- ------------- -------------
Net cash provided by financing activities....... 96,018 15,788 2,011 1,156
--------- --------- ------------- -------------
Net increase (decrease) in cash and cash equivalents........ (46) 5 (108)
Cash and cash equivalents at beginning of period............ 46 41 149
--------- --------- ------------- -------------
Cash and cash equivalents at end of period.................. $ $ $ 46 $ 41
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 35 $ 456 $ 1,461 $ 5,564
Income taxes paid (refunded).............................. $ 1,148 $ (132) $ (3) $ 9
</TABLE>
See accompanying notes to consolidated financial statements.
28
<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 fiscal years ended
April 25, 1998 and April 26, 1997 and the year ended December 31, 1995. 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 FISCAL FOR THE
YEAR ENDED FOUR MONTHS FOR THE
-------------------- ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Accounts receivable............................................ $ 17,900 $ 5,381 $ $ 1,589
Inventories.................................................... 18,180 6,922 1,823
Prepaid expenses and other current assets...................... 2,431 2,371 502
Property and equipment......................................... 6,379 1,155 4,536
Intangible assets.............................................. 80,359 14,248 3,268
Other assets................................................... 346 29 156
Short-term debt................................................ (1,850) (4,283) (191)
Accounts payable............................................... (9,400) (4,012) (274)
Accrued liabilities............................................ (9,089) (1,846) (225)
Long-term debt................................................. (6,020) (1,746) (5,795)
--------- --------- ------------ ------------
Net assets acquired................................ $ 99,236 $ 18,219 $ $ 5,389
--------- --------- ------------ ------------
--------- --------- ------------ ------------
The acquisitions were funded as follows:
U.S. Office Products common stock.............................. $ 3,566 $ 10,485 $ $
Cash paid, net of cash acquired................................ 95,670 7,734 5,389
--------- --------- ------------ ------------
Total.............................................. $ 99,236 $ 18,219 $ $ 5,389
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<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 was a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office Products")
at April 25, 1998. On June 9, 1998, U.S. Office Products spun-off its
Educational Supplies and Products Division (the "Education Division") as an
independent publicly owned company. This transaction was effected through the
distribution of shares of the Company to U.S. Office Products' shareholders (the
"Distribution"). Prior to the Distribution, U.S. Office Products contributed its
equity interests in certain wholly-owned subsidiaries associated with the
Education Division to the Company. U.S. Office Products and the Company entered
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 sold 2.1 million shares (2.4 million shares
if the over-allotment is sold) in an initial public offering (the "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 was to be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 9 for further discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
30
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DEFINITION OF FISCAL YEAR
As used in these consolidated financial statements and related notes to
consolidated financial statements, "fiscal 1998" and "fiscal 1997" refer to the
Company's fiscal year ended April 25, 1998 and April 26, 1997, respectively.
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 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
31
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment. Property and equipment leased under capital leases is being amortized
over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method and non-compete 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 recorded as a reduction in the cost of inventory and
recognized as a reduction in cost of revenues when such inventory is sold.
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.
32
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED CATALOG COSTS
Deferred catalog costs are amortized in amounts proportionate to revenues
over the life of the catalog, which is typically one to two years. Amortization
expense related to deferred catalog costs is included in the consolidated
statement of income as a component of selling, general and administrative
expenses. Such amortization expense for the year ended December 31, 1995, the
four months ended April 30, 1996, the fiscal years ended April 26, 1997 and
April 25, 1998 was $4,395, $832, $3,621 and $6,934, 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)."
STRATEGIC RESTRUCTURING COSTS
Strategic restructuring costs represent the Company's portion of the costs
incurred by U.S. Office Products as a result of U.S. Office Products' recently
completed comprehensive restructuring.
NET INCOME PER SHARE
Net income per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
33
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the 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 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. Implementation of this disclosure standard
will not affect the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 in
fiscal 1999. Implementation of this disclosure standard will not affect the
Company's financial position or results of operations.
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 issued approximately 12.2 million shares of
its common stock to U.S. Office Products, which then distributed 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
34
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
Companies reported on years ending on December 31. Upon completion of the
acquisitions of the Pooled Companies, their year-ends were changed to U.S.
Office Products' year-end of the last Saturday in April.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
SCHOOL POOLED
SPECIALTY COMPANIES COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
For the year ended April 26, 1997
Revenues............................................... $ 181,420 $ 10,326 $ 191,746
Net income............................................. $ 7,791 $ 341 $ 8,132
For the four months ended April 30, 1996
Revenues............................................... $ $ 28,616 $ 28,616
Net loss............................................... $ $ (4,675) $ (4,675)
For the year ended December 31, 1995
Revenues............................................... $ $ 150,482 $ 150,482
Net loss............................................... $ $ (3,367) $ (3,367)
</TABLE>
PURCHASE METHOD
In fiscal 1998, the Company made eight acquisitions accounted for under the
purchase method for an aggregate purchase price of $99,236, consisting of
$95,670 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 $125,595,
including goodwill of $80,359. The results of these acquisitions have been
included in the Company's results from their respective dates 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.
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.
The following presents the unaudited pro forma results of operations of the
Company for the fiscal year ended April 25, 1998 and April 26, 1997 and includes
the Company's consolidated financial statements, which give retroactive effect
to the acquisitions of the Pooled Companies for all periods presented, and the
results of the companies acquired in purchase acquisitions as if all such
purchase acquisitions had been made at the beginning of fiscal 1997. The results
presented below include certain pro forma adjustments to reflect the
amortization of intangible assets, adjustments in executive compensation
35
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
of $573 and $124 for the fiscal years ended April 25, 1998 and 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>
APRIL 25, APRIL 26,
1998 1997
---------- ----------
Revenues........................................................... $ 381,242 $ 350,760
Net income......................................................... 7,538 11,714
Net income per share:
Basic............................................................ $ 0.57 $ 1.17
Diluted.......................................................... 0.56 1.15
</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.
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 for the periods ended April 30, 1996, April 26, 1997 and
April 25, 1998:
<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
Additions............................. 728 214 1,550 2,491
Utilizations.......................... (728) (1,443) (2,170)
----- ----- ----------- ---------
Balance at April 25, 1998............... $ $ 214 $ 258 $ 472
----- ----- ----------- ---------
----- ----- ----------- ---------
</TABLE>
36
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
--------- ---------
<S> <C> <C>
Deferred catalog costs.................................................. $ 7,206 $ 5,740
Deferred income taxes................................................... 1,886 2,055
Notes Receivable........................................................ 1,558 1,643
Other................................................................... 2,853 893
--------- ---------
Total prepaid expenses and other current assets..................... $ 13,503 $ 10,331
--------- ---------
--------- ---------
</TABLE>
Deferred catalog costs represent costs which have been paid to produce
Company catalogs which will be used in future periods. These deferred catalog
costs will be expensed in the periods the catalogs are used.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
--------- ---------
<S> <C> <C>
Land.................................................................... $ 1,144 $ 729
Buildings............................................................... 10,064 6,488
Furniture and fixtures.................................................. 6,725 6,502
Warehouse equipment..................................................... 7,052 3,163
Leasehold improvements.................................................. 3,341 2,185
--------- ---------
28,326 19,067
Less: Accumulated depreciation.......................................... (5,773) (4,589)
--------- ---------
Net property and equipment.............................................. $ 22,553 $ 14,478
--------- ---------
--------- ---------
</TABLE>
Depreciation expense (which includes capital lease amortization) for the
fiscal years ended April 25, 1998 and April 26, 1997, the four months ended
April 30, 1996 and the year ended December 31, 1995 was $2,499, $1,540, $470 and
$1,645, respectively.
NOTE 8--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
---------- ---------
<S> <C> <C>
Goodwill............................................................... $ 102,487 $ 22,128
Other.................................................................. 2,487 2,020
---------- ---------
104,974 24,148
Less: Accumulated amortization......................................... (5,361) (3,324)
---------- ---------
Net intangible assets................................................ $ 99,613 $ 20,824
---------- ---------
---------- ---------
</TABLE>
37
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INTANGIBLE ASSETS (CONTINUED)
Amortization expense for the fiscal years ended April 25, 1998 and April 26,
1997, the four months ended April 30, 1996 and the year ended December 31, 1995
was $2,061, $566, $204 and $1,098, respectively.
NOTE 9--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
----------- -----------
<S> <C> <C>
Other.................................................................... $ $ 30
Current maturities of long-term debt..................................... 11 232
--- -----
Total short-term debt.................................................. $ 11 $ 262
--- -----
--- -----
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
----------- -----------
<S> <C> <C>
Other.................................................................... $ 310 $ 483
Capital lease obligations................................................ 16 315
----- -----
326 798
Less: Current maturities of long-term debt............................... (11) (232)
----- -----
Total long-term debt................................................... $ 315 $ 566
----- -----
----- -----
</TABLE>
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1999................................................................. $ 11
2000................................................................. 181
2001................................................................. 92
2002................................................................. 36
2003................................................................. 6
Thereafter...........................................................
---------
Total maturities of long-term debt................................. $ 326
---------
---------
</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
38
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--CREDIT FACILITIES (CONTINUED)
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
Payments of long-term debt of acquired companies................. 822
Funding of acquisitions and payment of acquisition costs......... 20,706
Allocated corporate expenses..................................... 7,145
Normal operating costs paid by U.S. Office Products.............. 800
---------
Balance at April 25, 1998.......................................... $ 62,699
---------
---------
</TABLE>
The average outstanding long-term payable to U.S. Office Products during the
fiscal years ended April 25, 1998 and April 26, 1997 was $52,207 and $27,269,
respectively.
Interest has been allocated to the Company based upon the Company's average
outstanding payable (short-term 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 U.S.
Office Products totaling $5,414 and $3,839 during the fiscal years ended April
25, 1998 and April 26, 1997, respectively.
The Distribution Agreement allocated a specified amount of U.S. Office
Products' debt outstanding under its credit facilities to each Spin-Off Company
and required 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 one additional
acquisition completed by the Company. Prior to the Distribution, the Company
entered into the credit facility and at the time of the Distribution borrowed
$83,300 under the facility to pay off debt of U.S. Office Products.
39
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE FOR THE
FISCAL YEAR ENDED FOUR MONTHS FOR THE
---------------------- ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
----------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal................................... $ 3,646 $ 71 $ $ (66)
State..................................... 907 99
----------- --------- ----- -----
4,553 170 (66)
----------- --------- ----- -----
Deferred income tax expense
(benefit)................................. 927 (2,582) 139 239
----------- --------- ----- -----
Total provision for (benefit from) income
taxes................................... $ 5,480 $ (2,412) $ 139 $ 173
----------- --------- ----- -----
----------- --------- ----- -----
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 25, APRIL 26,
1998 1997
----------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.............................................................. $ 743 $ 265
Allowance for doubtful accounts........................................ 164 193
Net operating loss carryforward........................................ 851 3,069
Accrued liabilities.................................................... 128 421
Prepaid catalog advertising/restructuring.............................. (1,893)
----------- ---------
Total current deferred tax assets.................................... 1,886 2,055
----------- ---------
Long-term deferred tax assets (liabilities):
Property and equipment................................................... (591) (289)
Intangible assets........................................................ 80 258
----------- ---------
Total long-term deferred tax liabilities............................. (511) (31)
----------- ---------
Net deferred tax assets.............................................. $ 1,375 $ 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.
40
<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 FOR THE
FISCAL YEAR ENDED FOUR MONTHS FOR THE
------------------------ ENDED YEAR ENDED
APRIL 25, APRIL 26, APRIL 30, DECEMBER 31,
1998 1997 1996 1995
----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate................. 34.0% 35.0% 35.0% 34.0%
State income taxes, net of federal income
tax benefit for fiscal 1997............... 6.6 1.0
Net benefit for current year net operating
loss...................................... (32.8) (34.0)
Reversal of valuation allowance............. (84.8)
Nondeductible goodwill...................... 6.0 1.6 (2.2)
Nondeductible acquisition costs............. 3.3 5.0
Tax on separate company income not offset
against other company's loss.............. (3.0) (5.4)
Other....................................... 1.2
--- ----- ----- -----
Effective income tax rate................... 51.1% (42.2)% (3.0 )% (5.4 )%
--- ----- ----- -----
--- ----- ----- -----
</TABLE>
At April 25, 1998, the Company has available for tax purposes net operating
loss carryforwards of approximately $2,500. These carryforwards expire in the
years ending 2002-2011. The net operating loss caryforwards are subject to
certain limitations pursuant to IRS Code Section 382.
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>
1999..................................................................... $ 12 $ 1,556
2000..................................................................... 6 1,183
2001..................................................................... 1,027
2002..................................................................... 659
2003..................................................................... 323
Thereafter...............................................................
--- -----------
Total minimum lease payments............................................. 18 $ 4,748
--- -----------
-----------
Less: Amounts representing interest...................................... (2)
---
Present value of net minimum lease payments.............................. $ 16
---
---
</TABLE>
Rent expense for the fiscal years ended April 25, 1998 and April 26, 1997,
the four months ended April 30, 1996 and the year ended December 31, 1995 was
$3,389, $1,817, $600 and $1,947, respectively.
41
<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 25, 1998 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
Under the Distribution Agreement, the Company was 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 9.
At the date of the Distribution, School Specialty, U.S. Office Products and
the other Spin-Off Companies entered into the Distribution Agreement, the Tax
Allocation Agreement, and the Employee Benefits Agreement and the Spin-Off
Companies entered into the Tax Indemnification Agreement and may enter into
other agreements, including agreements relating to referral of customers to one
another. These agreements provide, among other things, for U.S. Office Products
and School Specialty to indemnify each other from tax and other liabilities
relating to their respective businesses prior to and following the 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 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 were established
by U.S. Office Products in consultation with School Specialty's management prior
to the Distribution while School Specialty was 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 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 four months ended April 30,
1996 and
42
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--EMPLOYEE BENEFIT PLANS (CONTINUED)
the year ended December 31, 1995, the subsidiaries incurred expenses totaling $6
and $105, respectively, related to these plans.
NOTE 14--STOCKHOLDER'S EQUITY
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 requires the dual presentation of basic and diluted EPS on
the face of the consolidated statement of income. Basic EPS excludes dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS No. 128 during fiscal 1998 and has restated all
prior period EPS data. The following information presents the Company's
computations of basic and diluted EPS for the periods presented in the
consolidated statement of income.
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
FISCAL 1998:
Basic EPS.............................................................. $ 5,239 13,284,003 $ 0.40
-----------
-----------
Effect of dilutive employee stock options.............................. 263,461
------------ -------------
Diluted EPS............................................................ $ 5,239 13,547,464 $ 0.39
------------ ------------- -----------
------------ ------------- -----------
FISCAL 1997:
Basic EPS.............................................................. $ 8,132 10,002,875 $ 0.81
-----------
-----------
Effect of dilutive employee stock options.............................. 192,766
------------ -------------
Diluted EPS............................................................ $ 8,132 10,195,641 $ 0.80
------------ ------------- -----------
------------ ------------- -----------
FOUR MONTHS ENDED APRIL 30, 1996:
Basic EPS.............................................................. $ (4,675) 8,611,240 $ (0.54)
-----------
-----------
Effect of dilutive employee stock options.............................. 177,702
------------ -------------
Diluted EPS............................................................ $ (4,675) 8,788,942 $ (0.53)
------------ ------------- -----------
------------ ------------- -----------
YEAR ENDED DECEMBER 31, 1995:
Basic EPS.............................................................. $ (3,367) 6,562,210 $ (0.51)
-----------
-----------
Effect of dilutive employee stock options.............................. 107,199
------------ -------------
Diluted EPS............................................................ $ (3,367) 6,669,409 $ (0.50)
------------ ------------- -----------
------------ ------------- -----------
</TABLE>
43
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS
During the fiscal year ended April 25, 1998, U.S. Office Products
contributed $81,332 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
The Company currently has stock options outstanding under the U.S. Office
Products 1994 Long-Term Compensation Plan. 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. In
order to keep the option holders in the same economic position immediately
before and after the Distribution, the number of U.S. Office Products options
held by Company personnel was multiplied by 0.903 and the exercise price of
those options was divided by 0.903 for purposes of the replacement options. The
vesting provisions and option period of the original grants were not changed.
All option data reflected below has been retroactively restated to reflect the
effects of the Distribution. The Company accounts for options issued 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 has been recognized for the options granted. Had compensation cost for
the Company's stock options been recognized based upon the fair value of the
stock options on the grant date under the methodology prescribed by SFAS 123,
the Company's net income and net income per share would have been impacted as
indicated in the following table.
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR ENDED
------------------------
<S> <C> <C>
APRIL 25, APRIL 26,
1998 1997
----------- -----------
Net income:
As reported............................................................ $ 5,239 $ 8,132
Pro Forma.............................................................. 4,436 7,383
Net income per share:
As reported:
Basic................................................................ 0.40 0.81
Diluted.............................................................. 0.39 0.80
Pro Forma:
Basic................................................................ 0.33 0.74
Diluted.............................................................. 0.33 0.72
</TABLE>
44
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact) is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
FISCAL YEAR ENDED
------------------------
<S> <C> <C>
APRIL 25, APRIL 26,
1998 1997
----------- -----------
Expected life of option.................................................. 7 years 7 years
Risk free interest rate.................................................. 6.35% 6.66%
Expected volatility of stock............................................. 44.10% 44.00%
</TABLE>
The weighted-average fair value of options granted was $9.75 and $15.31 for
fiscal 1998 and 1997, respectively.
A summary of option transactions follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ------------------------
<S> <C> <C> <C> <C>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ----------- ----------- -----------
Balance at April 30, 1995.......................
Granted.......................................
Exercised.....................................
Canceled......................................
Balance at April 30, 1996.......................
Granted....................................... 225,445 $ 27.03
Exercised.....................................
Canceled...................................... (14,565) 28.37
---------- -----------
Balance at April 26, 1997....................... (210,880) 26.93
Granted....................................... 257,020 18.01
Exercised.....................................
Canceled...................................... (25,606) 25.45
---------- -----------
Balance at April 25, 1998....................... 442,294 $ 21.83 46,319 $ 27.14
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
45
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--STOCKHOLDER'S EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at April 25, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
WEIGHTED- AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ---------------------------------- ----------- ------------- ----------- ----------- -----------
$16.80-$21.77..................... 257,020 9.23 $ 18.01
$24.36-$29.43..................... 185,274 8.17 27.14 46,319 $ 27.14
----------- ----------- ----------- -----------
$16.80-$29.43..................... 442,294 8.79 $ 21.83 46,319 $ 27.14
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Non-qualified options granted to employees are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of 25% of
the shares under option and generally expire ten years from the date of grant.
Under a services agreement entered into with Jonathan J. Ledecky, the Board
of Directors of U.S. Office Products agreed that Jonathan J. Ledecky would
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 covers
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 has 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 granted 850,083 options covering 7% 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 were granted under the 1998 Stock Incentive
Plan (the "Plan") and 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 are equal to 20.0% of the
outstanding shares of the Company's common stock immediately following the
Distribution and the IPO, including the options to be granted to Mr. Ledecky on
that date.
46
<PAGE>
SCHOOL SPECIALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
fiscal years ended April 25, 1998 and April 26, 1997:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 25, 1998
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
Revenues.................................... $ 87,029 $ 111,460 $ 49,391 $ 62,575 $ 310,455
Gross profit................................ 26,090 33,619 11,670 19,763 91,142
Operating income (loss)..................... 11,872 12,155 (4,048) (3,731) 16,248
Net income (loss)........................... 5,804 5,965 (2,934) (3,596) 5,239
Per share amounts:
Basic..................................... 0.49 0.49 (0.20) (0.24) 0.40
Diluted................................... 0.48 0.47 (0.20) (0.24) 0.39
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 26, 1997
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- ---------- --------- --------- ----------
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
Per share amounts:
Basic..................................... 0.21 0.28 (0.11) 0.40 0.81
Diluted................................... 0.21 0.27 (0.11) 0.39 0.80
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
CREDIT FACILITY
On June 9, 1998, the Company received a five year $250,000 revolving credit
facility from NationsBank, N.A. 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, 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 0% to .250%
(depending on the Company's leverage ratio of funded debt to EBITDA).
Indebtedness is secured by substantially all of the assets of the Company. The
credit facility is subject to terms and conditions typical of facilities of such
size and includes certain financial covenants. The Company has made borrowings
under the credit facility to repay the US Office Products debt which it was
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.
47
<PAGE>
ITEM 9:CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of School Specialty as of July 17, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Daniel P. Spalding..................... 43 Chairman of the Board and Chief Executive Officer
David J. Vander Zanden................. 43 President, Chief Operating Officer, and Director
Donald J. Noskowiak.................... 40 Executive Vice President and Chief Financial Officer
Douglas Moskonas....................... 53 Executive Vice President for School Specialty Divisions
Melvin D. Hilbrown..................... 50 Executive Vice President for Gresswell
Richard H. Nagel....................... 57 Executive Vice President for Sax Arts & Crafts
Donald Ray Pate, Jr.................... 35 Executive Vice President for Re-Print
Ronald E. Suchodolski.................. 52 Executive Vice President for Childcraft
Michael J. Killoren.................... 41 Vice President for School Specialty Divisions
Lillian R. Kellogg..................... 45 President for Education Access Division
Jonathan J. Ledecky.................... 40 Director
Leo C. McKenna (1)..................... 64 Director
Rochelle Lamm Wallach (1).............. 50 Director
</TABLE>
- ------------------------
(1) Member of Audit and Compensation Committees
DANIEL P. SPALDING became Chairman of the Board and Chief Executive Officer
of School Specialty in February 1998. Mr. Spalding has served as President of
the Educational Supplies and Products Division of U.S. Office Products since
1996. Prior to that time, he served as President, Chief Executive Officer, and a
director of Old School since 1988. Prior to 1988, Mr. Spalding was an officer of
JanSport, a manufacturer of sports apparel and backpacking equipment. Mr.
Spalding was a co-founder of JanSport, and served as President and Chief
Executive Officer from 1977 to 1984. Mr. Spalding has been a director of the
National School Supply and Equipment Association since 1992 and completed his
term as the association's Chairman in November 1997. Mr. Spalding is Michael J.
Killoren's cousin.
DAVID J. VANDER ZANDEN became the Chief Operating Officer of School
Specialty in March 1998. Prior to that time, he served as President of Ariens
Company since 1992, a manufacturer of outdoor lawn and garden equipment.
DONALD J. NOSKOWIAK has served as Chief Financial Officer of School
Specialty since 1997. In February 1998, Mr. Noskowiak became an Executive Vice
President of School Specialty. He was Vice President, Treasurer and Principal
Financial Officer of Old School since 1994. From 1992 through 1994 he was the
Corporate Controller of Old School.
DOUGLAS MOSKONAS has served as Executive Vice President of School Specialty
for School Specialty Divisions since completion of the School Specialty
Distribution on June 1998. Mr. 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.
48
<PAGE>
MELVIN D. HILBROWN has served as Executive Vice President of School
Specialty for Greswell since completion of the School Specialty Distribution in
June 1998. Mr. 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.
RICHARD H. NAGEL has served as Executive Vice President of School Specialty
for Sax Arts & Crafts since completion of the School Specialty Distribution in
June 1998. Mr. 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.
DONALD RAY PATE, JR. has served as Executive Vice President of School
Specialty for Re-Print since completion of the School Speciality Distribution in
June 1998. Mr. Pate 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.
RONALD E. SUCHODOLSKI has served as Executive Vice President of School
Specialty for Childcraft since completion of the School Speciality Distribution
in June 1998. Mr. 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.
MICHAEL J. KILLOREN has served as Vice President of School Specialty for
School Speciality Divisions since completion of the School Specialty
Distribution in June 1998. Mr. 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.
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 has served as a director and an employee of School
Specialty since completion of the School Specialty Distribution in June 1998. 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, served as its Chairman of the Board until the June 1998 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
49
<PAGE>
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.
COMMITTEES OF THE BOARD
The Audit Committee of the Board of Directors 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 Compensation Committee of the Board of Directors is charged with
determining the compensation of executive officers of School Specialty and
administering the Company's stock option plan.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by School Specialty for services rendered during the years ended April 26,
1997 and April 25, 1998 to the Chief Executive Officer and to each of the four
other most highly compensated officers of School Specialty (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
--------------------- OPTIONS(#) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding.................................. 1997 $ 178,846 $ 34,200 135,484 --
Chairman of the Board, CEO and Director 1998 212,104 --
Ronald E. Suchodolski(2)............................ 1997 $ 141,535 $ 30,000 -- --
Executive Vice President for Childcraft 1998 157,646 154,633 18,065 --
Richard H. Nagel(2)(3).............................. 1997 $ 118,000 $ 29,500 -- $ 32,000
Executive Vice President for Sax Arts & Crafts 1998 130,660 29,500 18,065 --
Donald Ray Pate, Jr.(2)............................. 1997 $ 220,901 -- -- --
Executive Vice President for Re-Print 1998 117,000 -- --
Douglas Moskonas.................................... 1997 $ 97,266 $ 44,500 13,548 --
Executive Vice President for School Specialty 1998 139,525 -- 18,065 --
Division
</TABLE>
- ------------------------
(1) Options were issued by U.S. Office Products to acquire U.S. Office Products
common stock and options remaining after U.S. Office Products' tender offer
were replaced with options to acquire School Speciality Common Stock in
connection with the School Specialty Distribution. The number of options set
forth in the table represents the number of options for School Specialty
Common Stock the officer would have been granted if all U.S. Office Products
options granted during the year were replaced with School Specialty 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.
50
<PAGE>
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire School Speciality 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 options remaining after
U.S. Office Products' tender offer were replaced with options to acquire School
Specialty Common Stock, utilizing the option conversion formula applied in
connection with the School Specialty Distribution, which affected the number of
shares issuable upon exercise of the options and the exercise price of the
options. The number of options and exercise prices set forth below represent the
number of options (and exercise price of options) for School Specialty Common
Stock that the officer would have been granted if all U.S. Office Products
options granted during the fiscal year were replaced with School Specialty
options.
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 25, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF
TOTAL OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN FOR OPTION TERM(3)
GRANTED FISCAL EXERCISE EXPIRATION --------------------------
NAME (1) YEAR(2) PRICE(2) DATE 5% 10%
- ---------------------------------------------- --------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Spalding............................ 135,484 52.7% $ 16.80 4/28/07 $ 1,431,447 $ 3,627,567
Ronald E. Suchodolski......................... 18,065 7.0% 19.93 12/12/07 226,424 573,804
Richard H. Nagel.............................. 18,065 7.0% 19.93 12/12/07 226,424 573,804
Donald Ray Pate, Jr........................... -- -- -- -- -- --
Douglas Moskonas.............................. 18,065 7.0% 19.93 12/12/07 226,424 573,804
</TABLE>
- ------------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant, beginning one year from the date
of grant in cumulative yearly amounts of 25% of the shares and expire ten
years from the date of grant. The options become fully exercisable upon a
change in control, as defined in the Incentive Plan.
(2) Total options granted refers to options to acquire U.S. Office Products
common stock given to all employees of the Educational Supplies and Products
Division of U.S. Office Products during fiscal 1998.
(3) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
51
<PAGE>
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 options remaining after U.S. Office Products' tender offer were replaced
with options to acquire shares of School Specialty Common Stock, utilizing the
option conversion formula applied in connection with the School Speciality
Distribution. The number of options set forth below represents the number of
options for School Specialty Common Stock that the officer would have held at
the end of the fiscal year if all U.S. Office Products options held on that date
(prior to the U.S. Office Products tender offer) were replaced with School
Specialty options.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN- THE-MONEY
NUMBER UNEXERCISED OPTIONS OPTIONS AT
FISCAL YEAR
SHARES HELD AT APRIL 25, 1998 (#) END ($)(1)
ACQUIRED ON VALUE ------------------------------ -------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------- ----------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel P. Spalding...................... -- $ -- -- 135,484 $ --
Ronald E. Suchodolski................... -- -- -- 18,065 --
Richard H. Nagel........................ -- -- -- 18,065 --
Donald Ray Pate, Jr..................... -- -- -- -- --
Douglas Moskonas........................ -- -- -- 31,613 --
<CAPTION>
NAME UNEXERCISABLE
- ---------------------------------------- -------------
<S> <C>
Daniel P. Spalding...................... N/A
Ronald E. Suchodolski................... N/A
Richard H. Nagel........................ N/A
Donald Ray Pate, Jr..................... N/A
Douglas Moskonas........................ N/A
</TABLE>
- ------------------------
(1) At the end of fiscal 1998, School Specialty Common Stock was not traded.
Therefore it is not possible to determine the value of unexercised
in-the-money options as of that date.
1998 STOCK INCENTIVE PLAN
The purpose of the 1998 Stock Incentive Plan (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 incentive stock options, non-qualified
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 received 914,079 stock options for Company Common Stock, which
is equal to 7.5% of the outstanding Company Common Stock determined as of June
9, 1998, without regard to the public offering that closed on June 15,1998. The
options are intended to compensate Mr. Ledecky for his services to School
Specialty as an employee. The option has a per share exercise price equal to
$15.50. Based on the exercise price of $15.50 and an assumed trading volatility
index of the School Specialty Common Stock of 35.0%, the estimated value of the
option is approximately $2.6 million, net of taxes at an assumed 40% rate. Mr.
Ledecky's option is fully vested when granted but will not be exercisable until
June 9, 1999. 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 substantially
all management options. All unexercised portions of the option will expire ten
years after its date of grant or, if applicable, as of the date Mr. Ledecky
violates his non-competition agreement with School Specialty.
52
<PAGE>
As of June 10, 1998 Daniel P. Spalding received an option (the "Spalding
Option") pursuant to the Plan for 228,519 shares, which is equal to 1.9% of the
outstanding Common Stock as of that date. The Spalding Option has the same terms
as Mr. Ledecky's option, including an exercise price equal to $15.50. Based on
the exercise price of $15.50 an assumed trading volatility index of the School
Specialty Common Stock of 35.0%, the estimated value of the option is
approximately $0.7 million, net of taxes at an assumed 40% rate. In addition,
certain executive officers of the Company received options for in aggregate
621,564 shares (approximately 5.1% of the Common Stock) on June 10, 1998 also at
an exercise price of $15.50.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
School Specialty granted each non-management director 15,000 options to
purchase School Specialty Common Stock upon their initial election as members of
the Board of Directors. The Company intends to grant options to acquire 5,000
shares for each additional year of service. Non-management directors are paid an
annual retainer of $20,000 and $1,000 for each additional special meeting
attended and will also be reimbursed for all out-of-pocket expenses related to
their service as directors.
The Company entered into an employment agreement with Mr. Ledecky effective
as of June 10, 1998 that implemented certain portions of an agreement (the
"Ledecky Services Agreement") that Mr. Ledecky had previously entered into with
U.S. Office Products. Under the employment agreement, Mr. Ledecky reports to the
Board of Directors and senior management of the Company. In such capacity, Mr.
Ledecky provides 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 is also subject to the generally applicable personnel
policies of the Company and is eligible for such benefit plans in accordance
with their terms. The Company pays Mr. Ledecky an annual salary of $48,000 for
up to two years. The Company may terminate Mr. Ledecky's employment with
"cause", where cause consists of (i) his conviction of or guilty or nolo
contendere plea to a felony demonstrably and materially injurious to the
Company, or (ii) his violation of the non-competition provision as it relates to
the Company.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue until the later of June 10, 2000 or
one year after Mr. Ledecky leaves School Specialty's employ. These provisions
generally restrict Mr. Ledecky from, among other things, investing in or working
for or on behalf of any business selling any products or services in direct
competition with U.S. Office Products or the Spin-Off Companies (collectively,
the "U.S. Office Products Companies"), within 100 miles of any location where
the relevant U.S. Office Products Company regularly maintains an office with
employees. (For this purpose, "products or services" includes products or
services offered by School Specialty.) 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) businesses selling,
supplying, or distributing janitorial or sanitary products or services; (ii)
businesses managing or servicing equipment (other than computers); (iii)
businesses providing internet services; (iv) UniCapital Corporation's current
businesses (which include equipment leasing); or (v) U.S. Marketing Services'
shelf-stocking and merchandising and point-of-purchase display creation
business. The Ledecky Services Agreement prohibits Mr. Ledecky from trying to
hire away managerial employees of School Specialty or from calling upon
customers of the School Specialty to solicit or sell products or services in
direct competition with School Specialty. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by School Specialty.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
School Specialty has entered into employment agreements with the following
four of its Named Officers: Daniel P. Spalding (Chairman and Chief Executive
Officer), Donald Ray Pate, Jr. (Executive Vice
53
<PAGE>
President and President of Re-Print), Richard H. Nagel (Executive Vice President
and President of Sax Arts & Crafts) and David J. Vander Zanden, (President and
Chief Operating Officer).
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 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. The Company expects to enter into an amendment to Mr. Spalding's
employment 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 and incentive bonus plan based upon the
attainment of profit and revenue objectives. 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. Mr. Pate was granted options on June 10, 1998 to purchase 45,703 shares
with the same terms as Mr. Ledeckys' options, including an excercise price of
$15.50 (See "--1998 Stock Incentive Plan").
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 an executive compensation program and an incentive bonus plan
based upon the attainment of profit and revenue objectives. 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. Mr. Nagel was granted
options on June 10, 1998 to purchase 45,703 shares with the same terms as Mr.
Ledecky's options, including an excercise price of $15.50. (See "--1998 Stock
Incentive Plan").
David J. Vander Zanden became President and Chief Operating Officer in March
1998. After the School Specialty Distribution, School Specialty entered into a
two-year employment contract with Mr. Vander Zanden, 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. The employment contract provides
for a base salary of $225,000 and participation in an incentive bonus plan based
upon the attainment of profit and revenue objectives. The employment contract
also contains a covenant not to compete upon termination of the agreement, and
provides Mr. Vander Zanden the right to terminate the agreement upon a change of
control in School Specialty, defined in the agreement. Mr. Vander Zanden was
granted options
54
<PAGE>
on June 10, 1998 to purchase 228,519 shares with the same terms as Mr. Ledecky's
options, including an excercise price of $15.50. (See "--1998 Stock Incentive
Plan").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Mr. McKenna and Ms. Wallach. No
member of the Compensation Committee has ever been an officer of School
Specialty or any of its subsidiaries and no executive officer of the Company has
served on the Compensation Committee or the board of directors of any company of
which any director of the Company is an executive officer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 17, 1998, the number and
percentage of outstanding shares of School Specialty Common Stock beneficially
owned by (i) all persons known by School Specialty to own beneficially more than
5% of the Common Stock, (ii) each director, (iii) the Chief Executive Officer
and each of the four other most highly compensated executive officers of the
Company (the "Named Executive Officers"), and (iv) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED SHARES
- -------------------------------------------------------------------- ---------- ---------------
<S> <C> <C>
Daniel P. Spalding (1).............................................. 199,219 1.4%
Ronald Suchodolski.................................................. -- --
Jonathan J. Ledecky (2)............................................. 207,100 1.4
Richard H. Nagel.................................................... -- --
Donald Ray Pate, Jr. (3)............................................ 158,444 1.1
Douglas Moskonas (1)................................................ 6,500 *
Leo C. McKenna...................................................... 5,016 *
David J. Vander Zanden.............................................. 50,000 *
Rochelle Lamm Wallach............................................... 1,950 *
All current executive officers and directors as a group (13 persons)
(1)............................................................... 645,251 4.4
5% STOCKHOLDERS (4)
FMR Corp............................................................ 1,342,687 9.2
82 Devonshire Street
Boston, MA 02109
Gardner-Lewis Asset Mgmt............................................ 899,292 6.2
285 Wilmington Westchester Pike
Chadd-Ford, PA 19317
</TABLE>
- ------------------------
* Less than 1%.
(1) Share amounts include options currently exercisable, or exercisable within
60 days after July 17, 1998, in the amount of 52,001, 5,200 and 67,601 for
Mr. Spalding, Mr. Moskonas and all executive officers and directors as a
group.
(2) Does not include shares underlying Mr. Ledecky's options described under
"Executive Compensation--1998 Stock Incentive Plan," none of which are
exercisable within the next twelve months.
(3) Mr. Pate has entered into hedging arrangements that place a ceiling and a
floor on the price of certain of his shares of U.S. Office Products common
stock.
(4) Share amounts were determined by the Company from sources the Company
believes to be reliable.
55
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 576,923
shares (as adjusted for a one for four reverse stock split) 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 (77,441 shares as adjusted), and an
additional 7,504 shares (as adjusted) through an IRA for his benefit), Michael
J. Killoren (6,754 shares as adjusted), and Donald J. Noskowiak (6,754 shares as
adjusted). In addition, John S. Spalding (Daniel P. Spalding's father) received
162 shares (as adjusted) and an additional 15,008 shares (as adjusted) through
an IRA for his benefit, the Patricia M. Spalding Revocable Trust received 17,731
shares (as adjusted), Joanne Lee Killoren received 15,076 shares (as adjusted),
Donald Killoren (Michael J. Killoren's father) received 15,194 shares (as
adjusted) and Leo C. McKenna received 69,501 shares (as adjusted). 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 were 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 487,500 shares (as adjusted) of U.S. Office Products common stock as
consideration. In that transaction, Donald Ray Pate, Jr., President of Re-Print,
received 269,007 shares (as adjusted) 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 (7,560 shares as adjusted), Phillip S. Pate (21,338 shares as
adjusted), Richard K. Pate (18,480 shares as adjusted), and Mary K. Pate (29,126
shares as adjusted). 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 were 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 this transaction was as favorable
as could be negotiated with third parties.
For a discussion of transactions between the Company and Mr. Ledecky, see
"Item 11--Executive Compensation."
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, EXHIBITS AND SCHEDULES
1. FINANCIAL STATEMENTS (See Item 8 hereof.)
2. FINANCIAL STATEMENT SCHEDULES (See Item 8 hereof.)
3. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1* Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec Consulting,
Inc., Navigant International, Inc., and School Specialty, Inc.
10.2* 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 Employment Agreement between David Vander Zanden and School Specialty, Inc.
10.9 Employment Agreement between School Specialty, Inc. and Jonathan J. Ledecky
10.10* Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products and Jonathan J.
Ledecky
10.11 1998 Stock Incentive Plan
10.12 Credit Agreement dated as of June 9, 1998 among School Specialty, Inc., the lenders named therein and
Nationsbank, N.A.
10.13** Asset Purchase Agreement dated as of June 10, 1998 by and among School Specialty, Inc., Hammond and
Stephens Co. and Roger D. Pannier and Pamela S. Pannier
21* Subsidiaries of Registrant
27 Financial data schedule
99.1 Schedule II--Valuation and Qualifying Accounts
</TABLE>
- ------------------------
* Incorporated by reference herein from School Specialty's Registration
Statement on Form S-1 initially filed with the Securities and Exchange
Commission on February 19, 1996, as amended (File No. 333-46357).
** Incorporated by reference herein from School Specialty's Current Report on
Form 8-K filed July 15, 1998.
(b) REPORTS ON FORM 8-K. During the last quarter of the fiscal year covered by
this report, the Company filed no Current Reports on Form 8-K.
57
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Appleton,
Wisconsin on July 24, 1998.
SCHOOL SPECIALTY, INC.
BY: /S/ DANIEL P. SPALDING
-----------------------------------------
Name: Daniel P. Spalding
TITLE: CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Each person whose signature appears below hereby appoints Daniel P. Spalding
and Donald J. Noskowiak, and both of them either of whom may act without the
joinder of the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and
all other documents in connection therewith, with the Commission, granting unto
said attorneys-in-fact and agents full power and authority to perform each and
every act and thing appropriate or necessary to be done, as fully and for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- ---------------
/s/ DANIEL P. SPALDING
- ------------------------------
Daniel P. Spalding Chairman of the Board, July 22, 1998
Chief Executive Officer and
Director (Principal
Executive Officer)
/s/ DAVID J. VANDER ZANDEN
- ------------------------------
David J. Vander Zanden Director July 23, 1998
/s/ DONALD J. NOSKOWIAK
- ------------------------------
Donald J. Noskowiak Executive Vice President July 22, 1998
and Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ JONATHAN J. LEDECKY
- ------------------------------
Jonathan J. Ledecky Director July 24, 1998
/s/ LEO C. MCKENNA
- ------------------------------
Leo C. McKenna Director July 23, 1998
/s/ ROCHELLE LAMM WALLACH
- ------------------------------
Rochelle Lamm Wallach Director July 23, 1998
58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
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NUMBER DESCRIPTION
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3.1* Restated Certificate of Incorporation
3.2* Amended and Restated Bylaws
10.1* Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Aztec Consulting,
Inc., Navigant International, Inc., and School Specialty, Inc.
10.2* 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 Employment Agreement between David Vander Zanden and School Specialty, Inc.
10.9 Employment Agreement between School Specialty, Inc. and Jonathan J. Ledecky
10.10* Amended Services Agreement dated as of June 8, 1998 between U.S. Office Products and Jonathan J.
Ledecky
10.11 1998 Stock Incentive Plan
10.12 Credit Agreement dated as of June 9, 1998 among School Specialty, Inc., the lenders named therein and
Nationsbank, N.A.
10.13* Asset Purchase Agreement dated as of June 10, 1998 by and among School Specialty, Inc., Hammond and
Stephens Co. and Roger D. Pannier and Pamela S. Pannier
21* Subsidiaries of Registrant
27 Financial data schedule
99.1 Schedule II - Valuation and Qualifying Accounts
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* Incorporated by reference herein from School Specialty's Registration
Statement on Form S-1 initially filed with the Securities and Exchange
Commission on February 19, 1996, as amended (File No. 333-46357).
** Incorporated by reference herein from School Specialty's Current Report on
Form 8-K filed July 15, 1998.
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, dated as of this 15 day of July, 1998, is by and
between SCHOOL SPECIALTY, INC., a Wisconsin corporation (the "Company") and
DAVID VANDER ZANDEN ("Employee").
RECITALS
The Company desires to continue to employ Employee and to have the benefit
of his skills and services, and Employee desires to accept employment with the
Company, on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, terms, covenants
and conditions set forth herein, and the performance of each, the parties
hereto, intending legally to be bound, hereby agree as follows:
AGREEMENTS
1. EMPLOYMENT AND DUTIES. The Company hereby agrees to employ the Employee
and the Employee hereby accepts employment as the Chief Operating
Officer of the Company and agrees to devote his full business time and
efforts to the diligent and faithful performance of his duties as Chief
Operating Office hereunder under the direction of the CEO of the
Company. Such duties shall be performed from headquarters in the
Appleton, Wisconsin area. Through out the term of this Agreement, the
Employee shall be recommended by management of the Company to its
shareholders as a suitable candidate for a position on the Board of
Directors of the Company.
2. TERM OF EMPLOYMENT. Unless sooner terminated as hereinafter provided,
the term of the Employee's employment hereunder shall commence with and
only with the date of this agreement and shall continue for a period of
two (2) years. This Agreement may be terminated prior to the end of the
Term in the manner provided herein. In the event that this agreement is
not terminated pursuant to the terms of this Agreement, following the
first year of the initial term of two (2) years and any renewal terms
thereof, said agreement shall extend for successive renewal terms of two
(2) years each measured from the date of renewal, unless either party
shall notify the other party of their desire to not renew the term of
this agreement, with said notice to be made no later than ninety (90)
days prior to the expiration of the first year of the initial term of
this agreement or any then effective renewal term thereof.
3. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
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(a) BASE SALARY. Effective on the date hereof, the base salary payable to
Employee shall be Two Hundred Twenty Five Thousand Dollars
($225,000.00) per year or such greater amount as determined from time
to time by the Board of Directors of the Company (but not reviewed
less frequently than on an annual basis), payable on a regular basis
in accordance with the Company's standard payroll procedures, but not
less than monthly. It is understood that the base salary is a minimum
amount, and shall not be reduced during the term of this Agreement.
(b) INCENTIVE BONUS. During the initial term and any extensions thereof,
Employee shall be eligible to receive an incentive bonus based upon
his participation in the Company's senior management bonus program as
specified in Exhibit A as attached hereto. The first and last years
of employment will be prorated.
(c) PERQUISITES, BENEFITS, AND OTHER COMPENSATION. During the initial
term and any extensions thereof, Employee shall be entitled to
receive all perquisites and benefits as are customarily provided by
the Company to its executive employees, subject to such changes,
additions, or deletions as the Company may make generally from time
to time, as well as such other perquisites or benefits as may be
specified from time to time by the Board or the Chief Executive
Officer of the Company.
(d) STOCK OPTIONS.
The Employee shall be granted a combination of options granted
under the School Specialty, Inc, 1998 Stock Incentive Plan
Incentive Stock Option Agreement ("ISO") (as defined and qualified
under section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")) and School Specialty, Inc, 1998 Stock Incentive Plan
Nonqualified Stock Option Agreement ("NSO") in a total amount of
230,620 shares of common stock of the Company (the "Option
Shares"). The Option Shares shall be composed of the maximum
amount of shares permitted to be issued under the terms of the ISO
with the balance to be issued under the terms of the NSO. The
ability to purchase the Option Shares shall have the following
characteristics: (i) an exercise price equal to $15.50 per share;
(ii) expiration date of June 10, 2008; (iii) fully vested when
granted but with no right to exercise before June 10, 1999 (unless
the Compensation Committee of the Board of Directors of the
Company provides otherwise before such date); and (iv) subject to
forfeiture on conditions as provided in the ISO and/or NSO
documents.
4. COVENANTS AND CONDITIONS.
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(a) The Employee will acquire information and knowledge respecting the
intimate and confidential affairs of the Company in the various
phases of its business. Accordingly, the Employee agrees that he
shall not for the period he receives severance pay under the terms of
this Employment Agreement from the Company, use for himself or
disclose to any person not employed by the Company any such knowledge
or information heretofore acquired or acquired during the term of
this employment hereunder including but not limited to the
prescribed requirements of Section 134.90 of the Wisconsin Statutes,
as hereinafter amended from time to time. Nothing in this agreement
shall be construed to limit or supersede the common law of torts or
statutory or other protection of trade secrets where such law
provides the Company with greater protections or protections for a
longer duration than that provided in this section 4 of this
Agreement.
(b) The Employee agrees that all memoranda, notes, records, papers, or
other documents and all copies thereof relating to the Company's
operations or business, some of which may be prepared by him, and all
objects associated therewith (such as models and samples) in any way
obtained by him shall be the Company's property. This shall
include, but is not limited to, documents and objects concerning
any process, apparatus, or product manufactured, used, developed,
investigated, or considered by the Company. The Employee shall
not, except for Company use, copy or duplicate any of the
aforementioned documents or objects, nor remove them from the
Company's facilities, nor use any information concerning them
except for the Company's benefit, either during his employment or
thereafter. The Employee agrees that he will deliver all of the
aforementioned documents and objects that may be in his possession
to the Company on termination of his employment, or at any other
time on the Company's request, together with his written
certification of compliance, except for those documents and
objects received as a director of the Company.
5. DEATH OR DISABILITY OF THE EMPLOYEE. The Employee's employment shall
terminate immediately upon his death. In the event the Employee becomes
physically or mentally disabled so as to become unable, for a period of
more than one hundred twenty (120) consecutive working days or for more
than one hundred twenty (120) working days in the aggregate during any
twelve (12) month period, to perform his duties hereunder on a
substantially full-time basis, the Company may at its option terminate
his employment upon not less than thirty (30) days written notice. The
Company's right to terminate the Employee's employment pursuant to the
preceding sentence shall cease in the event the notice of termination
provided for therein shall not be given during the period of the
Employee's disability or within ninety (90) days after such disability
ceases. In the event of termination, the Company shall be obligated to
pay the Employee's salary under paragraph 3 hereof, net of the gross
amount of Long Term disability benefits received by the Employee,
through the
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balance of the term of this Agreement and any then currently effective
extension thereof.
6. TERMINATION AND SEVERANCE COMPENSATION. The Company reserves the right
to terminate the Employee's employment under this agreement should any
of the following occur:
(a) The Employee's commission of a felony that is an act which, in the
opinion of the Board of Directors, is either abhorrent to the
community or is an intentional act, which the Board of Directors
considers materially damaging to the reputation of the Company or
its successors or assigns.
(b) The Employee's breach of or failure to perform his obligations in
accordance with the terms and conditions of this agreement.
(c) The death or disability of the Employee.
Should the term of the Employee's employment with the Company be
terminated pursuant to the terms of Section 6(b), (c) and 7 herein, the
Company shall pay to the Employee the Base Salary described in Section
3(a) for the balance of the then effective term of this Agreement.
7. RIGHTS AND OBLIGATIONS OF SUCCESSORS. In the event that any of the
following events occur a "Change in Control" shall be deemed to occur
for the purpose of this Agreement: (a) any person or group of persons
acting in concert becomes the beneficial owner, directly or
indirectly (excluding ownership by or through employee benefit
plans), of securities of the Company representing fifty percent (50%)
or more of the combined voting power of the Company's then
outstanding securities; (b) the Company is combined (by merger, share
exchange, consolidation, or otherwise) with another corporation and
as a result of such combination less than seventy five percent (75%)
of the outstanding securities of the surviving or resulting
corporation are owned in the aggregate by the former shareholders of
the Company; or (c) any person or group of persons acting in concert
obtains direct or indirect control of the Board of Directors of the
Company, other than the current shareholders of the Company. The
Employee shall have the right to terminate his employment under the
terms of this Agreement for a period of Sixty (60) days following the
Change in Control. In the event that the Employee shall not so elect
to terminate this Agreement, then this agreement shall be assignable
and transferable by the Company to any subsidiary or affiliate or to
any subsidiary or affiliate of the Company affiliated with the Change
in Control and shall inure to the benefit of and be binding upon the
Employee and his heirs and personal representatives and the Company
and its successors and assigns. In the event the Employee elects to
terminate employment, the Employee shall be paid through the term of
this Agreement and any then currently effective extension thereof.
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8. COVENANT NOT TO COMPETE. In consideration of the employment hereunder,
the Employee hereby agrees that during the term of his employment by the
Company and for the period that severance pay is paid under the terms of
this Agreement by the Company to the Employee, the Employee will not
either directly or indirectly own, have proprietary interest (except for
less then 5% of any listed company or company traded in the
over-the-counter market) of any kind in, be employed by, or serve as a
consultant to or in any other capacity for any firm, other than the
Company and its subsidiaries, engaged in the manufacture and
distribution of school supplies, equipment, furniture or other products
made and distributed by the Company or any of the Company's present or
future subsidiary corporations (acquired during the term of this
Agreement) during the period of the Employee's employment in the area
where they are engaged in business without the express written consent
of the Company. The Employee agrees that a breach of the covenant
contained herein will result in irreparable and continuing damage to the
Company for which there will be no adequate remedy at law and in the
event of any breach of such agreement, the Company shall be entitled to
injunctive and such other and further relief including damages as may be
proper.
9. NOTICE. All notices, demands and other communications hereunder shall be
deemed to have been duly given, if delivered by hand or mailed,
certified or registered mail with postage prepaid:
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To the Company: School Specialty, Inc.
1000 North Bluemound Drive
P.O. Box 1579
Appleton, WI 54913-1579
Attention: Mr. Daniel P. Spalding
Fax: (920) 734-6276
With a copy to: Joseph F. Franzoi IV, Esq.
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, WI 54952
Fax: (920) 725-0998
To Employee: David Vander Zanden
W2810 Oakridge Drive
Appleton, WI 54915
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or to such other address as the person to whom notice is to be given may
have specified in a notice duly given to the sender as provided herein.
Such notice, request, claim, demand, waiver, consent, approval or other
communication shall be deemed to have been given as of the date so
delivered, telefaxed, mailed or dispatched and,
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if given by any other means, shall be deemed given only when actually
received by the addressees.
10. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including any
documents referred to herein) sets forth the entire understanding of the
parties hereto with respect to the subject matter contemplated hereby.
Any and all previous agreements and understandings between or among the
parties regarding the subject matter hereof, whether written or oral,
are superseded by this Agreement. This Agreement shall not be amended or
modified except by a written instrument duly executed by each of the
parties hereto. Any extension or waiver by any party of any provision
hereto shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
11. EXPENSES. The Company will pay all fees, expenses and disbursements of
their agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement, and its
enforcement.
12. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Wisconsin, without regard to its
conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be duly
executed as of the date first written above.
COMPANY: School Specialty, Inc.
/s/ Daniel P. Spalding
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Daniel P. Spalding, Chairman and Chief
Executive Office
EMPLOYEE:
/s/ David Vander Zanden
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David Vander Zanden, Individually
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Exhibit 10.9
EXECUTION COPY
|__| Employee's Copy
|__| Employer's Copy
School Specialty, Inc.
Employment Agreement
To Jonathan J. Ledecky:
This Agreement establishes the terms of your employment with School
Specialty, Inc., a Delaware corporation (the "Company"), as of June 10, 1998.
This Agreement is contingent on and subject to the closing of the distribution
(the "Distribution") to the U.S. Office Products Company ("USOP") stockholders
of the Company's stock. If the Distribution does not close by September 30,
1998, this Agreement will have no force or effect.
Duties You agree to serve as a senior consultant to the Company
providing strategic business advice and high level acquisition
negotiations. In that capacity, you will report to the Company's
senior management and its Board of Directors (the "Board"). The
Board can require such reports of your activities on the
Company's behalf as it reasonably deems appropriate. It can
require your services to the extent consistent with your other
contractual employment obligations to Consolidation Capital
Corporation ("CCC"), USOP, and the other subsidiaries ("Other
Spincos") of USOP whose common stock will be distributed to the
USOP stockholders concurrent with the Company's stock, with the
specific timing of your services to be mutually agreed. You agree
to comply with the Company's generally applicable personnel
policies to the extent applicable to a person working on your
schedule and consistent with your obligations in this Agreement.
Term The term of this Agreement runs from the day following the
effective date of the Distribution (the "Closing Date") through
June 30, 2000, unless earlier terminated as provided in this
Agreement.
Salary You will receive an annual salary of $48,000 from the Closing
Date, payable in accordance with the Company's payroll policies.
Benefits You are eligible for participation in the Company's generally
applicable benefit plans and programs (including its 401(k) Plan)
to the extent you satisfy their terms for participation.
Expenses The Company will make available to you, on an as needed and
as mutually agreed basis, office space, secretarial assistance,
and supplies for the direct performance of your services to the
Company. It will pay or reimburse you for reasonable business
expenses relating to the direct
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performance of such services, subject to limits to be mutually
agreed in advance, upon proper and timely substantiation.
Options You are receiving options for the Common Stock of the Company
in consideration for services as an employee of the Company.
Option Your options will cover 7.5% of the Company's outstanding
common stock determined as of the Distribution Date (excluding
the stock under the Company's initial public offering), with no
anti-dilution provisions in the event of issuance of additional
shares of common stock (other than with respect to stock splits
or reverse stock splits).
Term Your option will expire ten years from the Closing Date.
Price Your option will have a per share exercise price equal to the
offering price in the Company's initial public offering, or if no
initial public offering commences on the Closing Date, at the
fair market value of the Company's common stock, as determined
under the Company's option plan, for the date of grant.
Schedule Your option will be fully vested when granted, but may not be
exercised until the first anniversary of the Closing Date.
Your option will become exercisable before that first anniversary
if and to the extent that the Company accelerates the
exercisability of the options for substantially all management
optionholders.
All unexercised portions of your options will expire if, as
finally determined by a court, you violate the No Competition
provision.
Disgorging If a court finds that you violated the No Competition provision,
Option you agree that your unexercised options are retroactively
Gain forfeited as of the date of the violation and that, if you have
exercised the options since the violation began, you will
promptly pay the Company any Option Gain, net of any taxes
actually paid on the options. For purposes of this Agreement, the
"Option Gain" per share you received on exercise of options on or
after the violation is
Stock for stock you have sold, the greater of (i) the spread
Sold between closing price on the date of exercise and the
exercise price paid ("Exercise Spread") and (ii)the spread
between the price at which you sold the stock and the
exercise price paid, and
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Stock for stock you have retained, the greater of (i) Exercise
Retained Spread and (ii) the spread between the closing price on the
date of the court's final determination and the exercise
price paid.
All unexpired options will vest and be exercisable at your death.
Termination The Company can terminate your employment under this Agreement
only for "cause." "Cause" means your (i) conviction of or guilty
or nolo contendere plea to a felony demonstrably and materially
injurious to the Company's business, and resulting in a sentence
of imprisonment, or (ii), as finally determined by a court,
violation of the No Competition provision as it applies to the
Company, provided that the Company will give you 10 days to
resolve the violation before attempting to invoke this
termination provision. For a termination under (ii), you agree to
repay any salary you received from the Company between the date
of the violation and the date of the court's determination.
Severance If your employment ends because you resign or are properly
terminated for cause, you will not receive severance or
termination pay and your salary will end. Except to the extent
the law or the terms of an applicable plan requires otherwise,
neither you nor your beneficiary or estate will have any rights
or claims under this Agreement or otherwise to receive severance
or any other compensation or to participate in any other plan,
arrangement, or benefit, after your termination of employment,
other than with respect to your options.
No Competition Consistent with certain of your prior obligations to USOP, you
will not, until after the end of the Restricted Period, for any
reason whatsoever, directly or indirectly, for yourself or on
behalf of or in conjunction with any other person, persons,
company, partnership, corporation, or business of whatever
nature:
Competition (i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor, consultant,
or advisor, or as a sales representative, in any business
(other than an Excluded Business, as defined below) selling
any products or services in direct competition with the
Company within 100 miles of where the Company or where any
of the Company's subsidiaries or affiliates regularly
maintains any of its or their offices with employees (the
"Territory"), where "products or services" are determined
for this clause with respect to products or services offered
on or before January 13, 1998 by the Company and/or any of
its subsidiaries or the predecessor companies combined to
form the Company in
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connection with Distribution and where the geographic
limitation is determined with reference to the Company and
its subsidiaries and not to USOP or the other Spincos (e.g.,
competition with respect to the Company is determined by
reference to the location where the Company or its
subsidiary has an office with employees and not to the
locations of offices of other Spincos);
Employees (ii) call upon any person who is, at that time, within the
Territory, an employee of the Company (including the
respective subsidiaries and/or affiliates thereof) in a
managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the Company's
employ (including the respective subsidiaries and/or
affiliates thereof) other than a member of your immediate
family; or
Customers (iii) call upon any person or entity that is, at that time,
or that has been, within one year prior to that time, a
customer of the Company (including the respective
subsidiaries and/or affiliates thereof) within the Territory
for the purpose of soliciting or selling products or
services in direct competition with the Company (including
the respective subsidiaries and/or affiliates thereof)
within the Territory other than on behalf of an Excluded
Business.
For purposes of this Agreement, the "Restricted Period"
ends, on the later of the second anniversary of the Closing
Date and the date one year after you leave employment with
the Company and its subsidiaries and affiliates.
For purposes of this Agreement, the "Excluded Businesses"
are the following:
(i) any electrical contracting business that, at the
time of its creation or acquisition and at all later
times, derives more than 50% of its revenues from
electrical contracting and maintenance services,
without regard to whether it would otherwise violate
the No Competition clause because it is also engaged
in a business directly competitive with the Aztec
Technology Partners, Inc. or any of its subsidiaries
(together, "Aztec"), provided that this exclusion
does not permit the business to engage in any of the
lines of business described under "Consulting and
Engineering Services," "Systems and Network Design
and Implementation Services," and "Software
Development and Implementation Services" in the
Aztec Form S-1 filed on June 3, 1998 (the
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"Aztec Specified Businesses") other than as
provided under (ii) or (vi) in the Excluded
Businesses;
(ii) any business whose revenue from activities that
compete with Aztec and its subsidiaries, at the time
of the business's creation or acquisition and at all
later times, is less than $15 million per year,
provided that this exclusion does not permit the
business to engage in the Aztec Specified Businesses
other than (i) as provided under (vi) in the
Excluded Businesses or (ii) through the pending CCC
acquisitions of National Network Systems in Denver,
Colorado and of Chambers Electronics Communications
in Phoenix, Arizona;
(iii) any business engaged, and only to the extent
it is so engaged, in computer monitoring for
facilities management;
(iv) any business engaged, and only to the extent
that it is so engaged, in the business of selling,
supplying, or distributing janitorial or sanitary
products or services;
(v) any business engaged, and only to the extent it
is so engaged, in the managing or servicing of
office equipment (other than computers);
(vi) any business engaged, and only to the extent it
is so engaged, in providing internet access services
and activities supportive of such services;
(vii) UniCapital Corporation's business as described
in its prospectus as of the date of this Agreement;
and
(viii) U.S. Marketing Services, Inc.'s ("USM")
shelf-stocking and merchandising, point of purchase
display creation, and incentive marketing
businesses, as described in its registration
statement filed on the date of this Agreement, so
long as you are solely an investor in USM and not an
officer, director, or employee of, or consultant to,
USM; provided, however, that your service as a
director will not violate the foregoing requirement
as long as you cease to be a director no later than
the 90th day after the effective date of the
registration of USM's initial public offering;
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provided, that in each case you are engaged in such business
only in a policy making role and not in the entity's
business in a manner that would involve you in direct
personal competition with the Company (and its
subsidiaries), provided further that this proviso does not
prevent your activities in furtherance of acquisitions of
Excluded Businesses, and provided further that you will
comply with your fiduciary duties as a director of the
Company in connection with the Excluded Businesses.
To the extent permitted by your obligations to the relevant
Excluded Business, as an employee and/or director of the
Company (or its subsidiaries), you will inform the relevant
entity of any opportunities for it associated with any of
the Excluded Businesses.
In addition to (and not in lieu of) the restriction
contained in the Employees clause above, you agree that,
during the period that the restrictions contained in this No
Competition provision remain in effect, and so long as you
are employed by, or otherwise affiliated with, CCC, you will
not, directly or indirectly, offer employment with CCC to,
or otherwise allow CCC to employ, any person who
is employed by the Company or a subsidiary of the
Company at the time; or
was so employed by the Company or a subsidiary of
the Company within one year prior to such time.
Notwithstanding the above, the foregoing covenant shall not
be deemed to prohibit you from acquiring capital stock in
CCC or any Excluded Business or serving as an officer,
director or employee or consultant to CCC, or acquiring as
an investment not more than 4.9% of the capital stock of a
competing business, whose stock is traded on a national
securities exchange or over-the-counter, provided that such
actions do not otherwise breach your obligations hereunder;
and provided further that actions of CCC after you have
ceased to be a director, officer, and employee of CCC will
not constitute a breach of this covenant, despite your
continued stock ownership, so long as you are not then
directly assisting any competitive actions.
Because of the difficulty of measuring economic losses to
the Company as a result of a breach of the foregoing
covenant, and because of the immediate and irreparable
damage that could be caused to the Company for which it
would have no other adequate remedy, you agree that the
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Company may enforce the No Competition provisions by
injunctions and restraining orders.
You and the Company agree that you will not be in violation
of the No Competition provisions by virtue of your
investment in or other relationship to USOP, any of the
Spincos, or their respective subsidiaries, even if one of
those entities engages in direct competition with another.
You and the Company agree that CCC's acquisition or
retention of Wilson Electric Company, Inc. ("Wilson") and
Wilson's engaging in any lines of business in place as of
the Closing Date do not violate the No Competition
provision.
You and the Company agree that the No Competition provisions
impose a reasonable restraint on you in light of the
Company's activities and business (including the Company's
subsidiaries and/or affiliates) on the date of the execution
of this Agreement.
The Company agrees to consider reasonably and within two
weeks of receipt any requests you make for a waiver from the
No Competition provisions for a particular acquisition.
You and the Company further agree that, if you enter into a
business or pursue other activities not in competition with
the Company (including the Company's subsidiaries), or
similar activities or business in locations the operation of
which, under such circumstances, does not violate the
Competition clause of this No Competition provision, and in
any event such new business, activities, or location is not
in violation of this No Competition provision or of your
obligations under this No Competition provision, if any, you
will not be chargeable with a violation of this provision if
the Company (including the Company's subsidiaries) shall
thereafter enter the same, similar, or a competitive (i)
business, (ii) course of activities, or (iii) location, as
applicable.
The covenants in this No Competition provision are
severable and separate, and the unenforceability of any
specific covenant does not affect the provisions of any
other covenant. Moreover, if any court of competent
jurisdiction shall determine that the scope, time, or
territorial restrictions set forth are unreasonable, then
it is the intention of the parties that such restrictions
be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed.
All of the covenants in this No Competition provision shall
be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim
or cause of action by you against the
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Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the
enforcement by the Company of such covenants. It is
specifically agreed that the Restricted Period, during
which your agreements and covenants made in this
provision shall be effective, is computed by excluding
from such computation any time during which you are in
violation of any provision of the No Competition
provision.
Notwithstanding any of the foregoing, if any applicable law
reduces the time period during which you are prohibited from
engaging in any competitive activity described in this
provision, you agree that the period for prohibition shall
be the maximum time permitted by law.
You specifically agree that USOP and the Company have
provided you with sufficient consideration for the
enforcement of the No Competition obligations for the
Restricted Period and for the assumption of such benefits by
the Company. You specifically consent to USOP's assignment
to the Company of the right to enforce the No Competition
provisions of the Amended Ledecky Services Agreement, as
those provisions are incorporated in this Agreement.
Other The Company acknowledges that you are also employed by
Employment CCC, USOP, and the Other Spincos, and agrees that such dual
employment does not breach this Agreement, unless and to the
extent that you thereby violate the No Competition
provisions.
Return of All records, designs, patents, business plans, financial
Company statements, manuals, memoranda, lists and other property
Property delivered to or compiled by you by or on behalf of the
Company (including the respective subsidiaries thereof) or
their representatives, vendors, or customers that pertain to
the business of the Company (including the respective
subsidiaries thereof) shall be and remain the property of
the Company, and be subject at all times to its discretion
and control. Likewise, you will make reasonably available at
the Company's request during business hours all
correspondence, reports, records, acquisition materials,
charts, advertising materials and other similar data
pertaining to the business, activities, or future plans of
the Company that you have collected or obtained.
Trade Secrets You agree that you will not, during or after the term of
this Agreement with the Company, disclose the specific terms
of the Company's (including the respective subsidiaries
thereof) relationships or agreements with its or their
respective significant vendors or customers or any other
significant and material trade secret of the Company
(including the respective subsidiaries thereof) whether in
existence or proposed, to any
<PAGE>
person, firm, partnership, corporation or business for
any reason or purpose whatsoever. For CCC or any other
businesses with which you are affiliated or in which you
are a stockholder, you may reach agreement on comparable
terms with significant vendors to the Company, so long as
you do not provide copies of or otherwise disclose the
specific terms of the Company's relationships or
agreements.
Indemnification If you are made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by the Company against you), by reason of the fact
that you are or were performing services under this
Agreement then the Company must indemnify you against all
expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, as actually and reasonably
incurred by you in connection therewith to the fullest
extent provided by Delaware law and in accordance with the
Company's Bylaws.
No Prior You hereby represent and warrant to the Company that your
Agreements execution of this Agreement, your services to the Company,
and the performance of your agreements hereunder will not
violate or be a breach of any agreement with a former or
current employer, client, or any other person or entity.
Further, you agree to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses
of investigation, by any such third party that such third
party may now have or may hereafter come to have against the
Company based upon or arising out of any non-competition
agreement, invention, or secrecy agreement between you and
such third party that was in existence as of the date of
this Agreement.
Complete This Agreement is not a promise of future employment. You
Agreement have no oral representations, understandings, or agreements
with the Company or any of its officers, directors, or
representatives covering the same subject matter as this
Agreement. This written Agreement is the final, complete,
and exclusive statement and expression of the agreement
between the Company and you with respect to all the terms
of this Agreement, and it cannot be varied, contradicted,
or supplemented by evidence of any prior or
contemporaneous oral or written agreements. This written
Agreement may not be later modified except by a further
writing signed by a duly authorized officer of the
Company and you, and no term of this Agreement may be
waived except by writing signed by the party waiving the
benefit of such term.
<PAGE>
Notice Whenever any notice is required hereunder, it shall be given
in writing addressed as follows:
To the Company: School Specialty, Inc.
Attention: Chief Executive Officer
1000 North Bluemond Drive
Appleton, Wisconsin 54914
To Employee: Jonathan J. Ledecky
1400 34th St., N.W.
Washington, D.C. 20007
Notice shall be deemed given and effective three days after
the deposit in the U.S. mail of a writing addressed as above
and sent first class mail, certified, return receipt
requested, or when actually received. Either party may
change the address for notice by notifying the other party
of such change in accordance with this Notice provision.
Severability If any portion of this Agreement is held invalid or
inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and
possible, effect shall be given to the intent manifested by
the portion held invalid or inoperative. This severability
provision shall be in addition to, and not in place of, the
comparable provisions in the No Competition provision.
Governing Law This Agreement shall in all respects be construed according
to the laws of the State of Delaware, other than those
relating to conflicts of laws. Any decision as to breaches
of this Agreement or any provision herein shall be made
pursuant to a final, nonappealable decision of a court.
Binding Effect This Agreement binds and benefits the Company, each of its
and Assignment successors or assigns, and your heirs and the personal
representatives of your estate. Without the Company's prior
written consent, you may not assign or delegate this
Agreement or any or all rights, duties, obligations, or
interests under it.
<PAGE>
Superseding Contingent upon the Closing and effective only in that
Effect event, this Agreement supersedes any prior oral or written
employment or severance agreements between you and the
Company (specifically excluding your options to purchase
Company stock). Except as set forth above, this Agreement
supersedes all prior or contemporaneous negotiations,
commitments, agreements, and writings with respect to the
subject matter of this Agreement. All such other
negotiations, commitments, agreements, and writings will
have no further force or effect; and the parties to any such
other negotiation, commitment, agreement, or writing will
have no further rights or obligations thereunder.
Negotiated You agree that you have consulted with counsel of your own
Agreement selection and have negotiated the terms of this Agreement
with the Company. You and the Company agree that this
Agreement should not be construed against either party as
the "drafter."
SCHOOL SPECIALTY, INC.
Date: June 9, 1998 By: /s/ Daniel P. Spalding
-------------- ----------------------------------
Daniel P. Spalding
Chief Executive Officer
I agree to and accept these terms, specifically including the assignment of the
No Competition provision.
Date: June 9, 1998 /s/ Jonathan J. Ledecky
-------------- ---------------------------------
Jonathan J. Ledecky
<PAGE>
SCHOOL SPECIALTY, INC.
1998 STOCK INCENTIVE PLAN
PURPOSE
SCHOOL SPECIALTY, INC., a Delaware corporation (the "COMPANY"), wishes to
recruit, reward, and retain employees and outside directors. To further these
objectives, the Company hereby sets forth the School Specialty, Inc. 1998 Stock
Incentive Plan (the "PLAN") to provide options ("OPTIONS") or direct grants
("STOCK GRANTS" and, together with the Options, "AWARDS") to employees and
outside directors with respect to shares of the Company's common stock (the
"COMMON STOCK"). The Plan is effective as of the effective date (the "EFFECTIVE
DATE") of the Company's registration under Section 12 of the Securities Exchange
Act of 1934 (the "EXCHANGE ACT") with respect to its initial public offering
("IPO").
PARTICIPANTS
All Employees of the Company and any Eligible Subsidiaries are eligible for
Options and Stock Grants under this Plan, as are the directors of the Company
and the Eligible Subsidiaries who are not employees ("ELIGIBLE DIRECTORS").
Eligible employees and directors become "OPTIONEES" when the Administrator
grants them an option under this Plan or "RECIPIENTS" when they receive a direct
grant of Common Stock. (Optionees and recipients are referred to collectively as
"PARTICIPANTS." The term PARTICIPANT also includes, where appropriate, a person
authorized to exercise an Award in place of the original optionee.) The
Administrator may also grant Options or make Stock Grants to consultants and
other service providers.
EMPLOYEE means any person employed as a common law employee of the
Company or an Eligible Subsidiary.
ADMINISTRATOR
The ADMINISTRATOR will be the Compensation Committee of the Board of
Directors of the Company (the "COMPENSATION COMMITTEE"), unless the board
specifies another committee. The Board may also act under the Plan as though it
were the Compensation Committee. The Board of Directors of U.S. Office Products
Company ("U.S. OFFICE PRODUCTS"), directly or through a committee of directors,
may act as Administrator before U.S. Office Products distributes the Common
Stock to U.S. Office Products' stockholders (the "DISTRIBUTION").
The Administrator is responsible for the general operation and
administration of the Plan and for carrying out its provisions and has
full discretion in interpreting and administering the provisions of the
Plan. Subject to the express provisions of the Plan, the Administrator
may exercise such powers and authority of the Board as the Administrator
may find necessary or appropriate to carry out its functions. The
Administrator may delegate its functions (other than those described in
the GRANTING OF AWARDS section) to officers or other employees of the
Company.
The Administrator's powers will include, but not be limited to, the power
to amend, waive, or extend any provision or limitation of any Award. The
Administrator may act through meetings of a majority of its members or by
unanimous consent.
GRANTING OF AWARDS
Subject to the terms of the Plan, the Administrator will, in its sole
discretion, determine
the participants who receive Awards,
the terms of such Awards,
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the schedule for exercisability or nonforfeitability (including any
requirements that the participant or the Company satisfy performance
criteria),
the time and conditions for expiration of the Award, and
the form of payment due upon exercise, if any.
The Administrator's determinations under the Plan need not be uniform and
need not consider whether possible participants are similarly situated.
Options granted to employees may be nonqualified stock options ("NQSOS") or
"incentive stock options" ("ISOS") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended from time to time (the "CODE"), or the
corresponding provision of any subsequently enacted tax statute. Options granted
to Eligible Directors, including Formula Options, must be NQSOs. The
Administrator will not grant ISOs unless the stockholders either have already
approved the granting of ISOs or give such approval within 12 months after the
grant.
The Administrator may impose such conditions on or charge such price for the
Stock Grants as it deems appropriate.
SUBSTITUTIONS. The Administrator may also grant awards in substitution for
options or other equity interests held by individuals (i) as a result of their
employment by or services to U.S. Office Products before the Distribution or
(ii) who become Employees of the Company or of an Eligible Subsidiary as a
result of the Company's acquiring or merging with the individual's employer or
acquiring its assets. If necessary to conform the Awards to the interests for
which they are substitutes, the Administrator may grant substitute Awards under
terms and conditions that vary from those the Plan otherwise requires. Awards in
substitution for U.S. Office Products' options in connection with the
Distribution will retain their pre-Distribution exercise schedule and terms
(including Change of Control provisions) and expiration date.
DIRECTOR FORMULA OPTIONS
Each Eligible Director will receive a formula stock option ("FORMULA
OPTION") as of the Effective Date with respect to 15,000 shares of Common Stock,
as will each Eligible Director later appointed or elected to the Board (with the
grant made as of the date of his first election or appointment). Each Eligible
Director serving on the Board at each annual meeting of the Company's
shareholders (beginning with the meeting at least six months after the Effective
Date of the IPO) will receive a Formula Option as of that meeting with respect
to 5,000 shares of Common Stock. The Exercise Price for Formula Options will be
the Fair Market Value on the Date of Grant.
EXERCISE SCHEDULE Unless the Administrator specifies otherwise, each
Formula Option will become exercisable as to 20% of the covered shares on the
first anniversary of its Date of Grant, an additional 30% on the second
anniversary, and the remaining 50% on or after the third anniversary. A Formula
Option will become exercisable in its entirety upon the director's death,
disability, or attainment of age 70. Options will be forfeited to the extent
they are not then exercisable if a director resigns or fails to be reelected as
a director.
DATE OF GRANT
The DATE OF GRANT will be the date as of which this Plan or the
Administrator grants an Award to a participant, as specified in the Plan or in
the Administrator's minutes.
EXERCISE PRICE
The EXERCISE PRICE is the value of the consideration that a participant must
provide in exchange for one share of Common Stock. The Administrator will
determine the Exercise Price under each Award and may
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set the Exercise Price without regard to the Exercise Price of any other Awards
granted at the same or any other time. The Company may use the consideration it
receives from the participant for general corporate purposes.
The Exercise Price per share for NQSOs may not be less than 100% of the
Fair Market Value of a share on the Date of Grant. If an Option is intended
to be an ISO, the Exercise Price per share may not be less than 100% of the
Fair Market Value (on the Date of Grant) of a share of Common Stock covered
by the Option; PROVIDED, HOWEVER, that if the Administrator decides to grant
an ISO to someone covered by Sections 422(b)(6) and 424(d) (as a
more-than-10%-stock-owner), the Exercise Price of the Option must be at
least 110% of the Fair Market Value (on the Date of Grant).
The Administrator may satisfy any state law requirements regarding
adequate consideration for Stock Grants by (i) issuing Common Stock held as
treasury stock or (ii) charging the recipients at least the par value for
the shares covered by the Stock Grant. The Administrator may designate that
a recipient may satisfy (ii) either by direct payments or by the
Administrator's withholding from other payments due to the recipient.
FAIR MARKET VALUE
FAIR MARKET VALUE OF A SHARE OF COMMON STOCK FOR PURPOSES OF THE PLAN WILL
BE DETERMINED AS FOLLOWS:
if the Common Stock trades on a national securities exchange, the
closing sale price on that date;
if the Common Stock does not trade on any such exchange, the closing
sale price as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq") for such date;
if no such closing sale price information is available, the average of
the closing bid and asked prices that Nasdaq reports for such date; or
if there are no such closing bid and asked prices, the average of the
closing bid and asked prices as reported by any other commercial service for
such date.
For any date that is not a trading day, the Fair Market Value of a share of
Common Stock for such date shall be determined by using the closing sale
price or the average of the closing bid and asked prices, as appropriate,
for the immediately preceding trading day.
The Fair Market Value will be deemed equal to the IPO price for any Options
granted as of the date on which the IPO's underwriters price the IPO or
granted on the following day before trading opens in the Common Stock.
EXERCISABILITY
The Administrator will determine the times and conditions for the
exercise of or purchase under each Award but may not extend the period for
exercise beyond the tenth anniversary of its Date of Grant (or five years
for ISOs granted to 10% owners covered by Code Sections 422(b)(6) and
424(d)).
Awards will become exercisable at such times and in such manner as the
Administrator determines and the Award agreement, if any, indicates;
PROVIDED, HOWEVER, that the Administrator may, on such terms and conditions
as it determines appropriate, accelerate the time at which the participant
may exercise any portion of an Award or at which restrictions on Stock
Grants lapse. For Stock Grants, "exercise" refers to acceptance of the Award
or lapse of restrictions, as appropriate in context.
If the Administrator does not specify otherwise, Options will become
exercisable and restrictions on Stock Grants will lapse as to one-fourth of
the covered shares on each of the first four anniversaries of the Date of
Grant.
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No portion of an Award that is unexercisable at a participant's termination
of employment will thereafter become exercisable, unless the Award Agreement
provides otherwise, either initially or by amendment.
CHANGE OF CONTROL
Upon a Change of Control (as defined below), all Options held by current
Employees and directors will become fully exercisable and all restrictions
on Stock Grants will lapse. A CHANGE OF CONTROL for this purpose means the
occurrence, after the Company's IPO, of any one or more of the following
events:
a person, entity, or group (other than the Company, any Company
subsidiary, any Company benefit plan, or any underwriter temporarily
holding securities for an offering of such securities) acquires ownership
of more than 50% of the undiluted total voting power of the Company's
then-outstanding securities eligible to vote to elect members of the
Board ("COMPANY VOTING SECURITIES");
consummation of a merger or consolidation of the Company into any other
entity--unless the holders of the Company Voting Securities outstanding
immediately before such consummation, together with any trustee or other
fiduciary holding securities under a Company benefit plan, hold
securities that represent immediately after such merger or consolidation
at least 50% of the combined voting power of the then outstanding voting
securities of either the Company or the other surviving entity or its
parent; or
the stockholders of the Company approve (i) a plan of complete
liquidation or dissolution of the Company or (ii) an agreement for the
Company's sale or disposition of all or substantially all the Company's
assets, AND such liquidation, dissolution, sale, or disposition is
consummated.
Even if other tests are met, a Change of Control has not occurred under
any circumstance in which the Company files for bankruptcy protection or
is reorganized following a bankruptcy filing.
The ADJUSTMENT UPON CHANGES IN CAPITAL STOCK provisions will also apply if
the Change of Control is a SUBSTANTIAL CORPORATE CHANGE (as defined in those
provisions).
LIMITATION ON ISOS
An Option granted to an employee will be an ISO only to the extent that
the aggregate Fair Market Value (determined at the Date of Grant) of the
stock with respect to which ISOs are exercisable for the first time by the
optionee during any calendar year (under the Plan and all other plans of the
Company and its subsidiary corporations, within the meaning of Code Section
422(d)), does not exceed $100,000. This limitation applies to Options in the
order in which such Options were granted. If, by design or operation, the
Option exceeds this limit, the excess will be treated as an NQSO.
METHOD OF EXERCISE
To exercise any exercisable portion of an Award, the participant must:
Deliver a written notice of exercise to the Secretary of the Company (or to
whomever the Administrator designates), in a form complying with any rules the
Administrator may issue, signed by the participant, and specifying the number of
shares of Common Stock underlying the portion of the Award the participant is
exercising;
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Pay the full Exercise Price, if any, by cashier's or certified check for the
shares of Common Stock with respect to which the Award is being exercised,
unless the Administrator consents to another form of payment (which could
include the use of Common Stock); and
Deliver to the Administrator such representations and documents as the
Administrator, in its sole discretion, may consider necessary or advisable.
Payment in full of the Exercise Price need not accompany the written notice
of exercise provided the notice directs that the stock certificates for the
shares issued upon the exercise be delivered to a licensed broker acceptable to
the Company as the agent for the individual exercising the option and at the
time the stock certificates are delivered to the broker, the broker will tender
to the Company cash or cash equivalents acceptable to the Company and equal to
the Exercise Price.
If the Administrator agrees to allow an optionee to pay through tendering
Common Stock to the Company, the individual can only tender stock he has held
for at least six months at the time of surrender. Shares of stock offered as
payment will be valued, for purposes of determining the extent to which the
participant has paid the Exercise Price, at their Fair Market Value on the date
of exercise. The Administrator may also, in its discretion, accept attestation
of ownership of Common Stock and issue a net number of shares upon Option
exercise.
AWARD EXPIRATION
No one may exercise an Award more than ten years after its Date of Grant (or
five years, for an ISO granted to a more-than-10% shareholder). Unless the Award
Agreement provides otherwise, either initially or by amendment, no one may
exercise an Award after the first to occur of:
EMPLOYMENT TERMINATION The 90th day after the date of termination of
employment (other than for death or Disability), where termination of employment
means the time when the employer-employee or other service-providing
relationship between the employee and the Company ends for any reason, including
retirement. Unless the Award Agreement provides otherwise, termination of
employment does not include instances in which the Company immediately rehires a
common law employee as an independent contractor. The Administrator, in its sole
discretion, will determine all questions of whether particular terminations or
leaves of absence are terminations of employment;
DISABILITY For disability, the earlier of (i) the first anniversary of the
participant's termination of employment for disability and (ii) 30 days after
the participant no longer has a disability, where "DISABILITY" means the
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or that has lasted or can be expected to last for a continuous
period of not less than twelve months; or
DEATH The date 24 months after the participant's death.
If exercise is permitted after termination of employment, the Award will
nevertheless expire as of the date that the former service provider violates any
covenant not to compete in effect between the Company and the former employee.
In addition, an optionee who exercises an Option more than 90 days after
termination of employment with the Company and/or the Eligible Subsidiaries will
only receive ISO treatment to the extent permitted by law, and becoming or
remaining an employee of another related company (that is not an Eligible
Subsidiary) or an independent contractor to the Company will not prevent loss of
ISO status because of the formal termination of employment.
Nothing in this Plan extends the term of an Award beyond the tenth
anniversary of its Date of Grant, nor does anything in this AWARD EXPIRATION
section make an Award exercisable that has not otherwise become exercisable.
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AWARD AGREEMENT
Award Agreements will set forth the terms of each Award and will include
such terms and conditions, consistent with the Plan, as the Administrator may
determine are necessary or advisable. To the extent the agreement is
inconsistent with the Plan, the Plan will govern. The Award Agreements may
contain special rules. The Administrator may, but is not required to, issue
agreements for Stock Grants.
STOCK SUBJECT TO PLAN
Except as adjusted below under CORPORATE CHANGES, the aggregate number of
shares of Common Stock that may be issued under the Awards (whether ISOs, NQSOs,
or Stock Grants) may not exceed 20% percent of the total number of shares of
Common Stock outstanding, determined immediately after the grant of the Award;
the maximum number of shares that may be subject to ISOs may not
exceed 600,000;
and the maximum number of shares that may be granted under Awards
for a single individual in a calendar year may not exceed
1,200,000. (The individual maximum applies only to Awards first
made under this Plan and not to Awards made in substitution of a
prior employer's options or other incentives, except as Code
Section 162(m) otherwise requires.)
The Common Stock will come from either authorized but unissued shares or
from previously issued shares that the Company reacquires, including shares it
purchases on the open market. If any Award expires, is canceled, or terminates
for any other reason, the shares of the Common Stock available under that Award
will again be available for the granting of new Awards (but will be counted
against that calendar year's limit for a given individual).
No adjustment will be made for a dividend or other right for which the
record date precedes the date of exercise.
The participant will have no rights of a stockholder with respect to the
shares of stock subject to an Award except to the extent that the Company has
issued certificates for, or otherwise confirmed ownership of, such shares upon
the exercise of the Award.
The Company will not issue fractional shares pursuant to the exercise of an
Award, but the Administrator may, in its discretion, direct the Company to make
a cash payment in lieu of fractional shares.
PERSON WHO MAY EXERCISE
During the participant's lifetime, only the participant or his duly
appointed guardian or personal representative may exercise the Awards. After his
death, his personal representative or any other person authorized under a will
or under the laws of descent and distribution may exercise any then exercisable
portion of an Award. If someone other than the original recipient seeks to
exercise any portion of an Award, the Administrator may request such proof as it
may consider necessary or appropriate of the person's right to exercise the
Award.
ADJUSTMENTS UPON CHANGES IN CAPITAL STOCK
Subject to any required action by the Company (which it shall promptly take)
or its stockholders, and subject to the provisions of applicable corporate law,
if, after the Date of Grant of an Award,
the outstanding shares of Common Stock increase or decrease or
change into or are exchanged for a different number or kind of
security because of any recapitalization, reclassification, stock
split, reverse stock split, combination of shares, exchange of
shares, stock dividend, or other distribution payable in capital
stock, or
some other increase or decrease in such Common Stock occurs without
the Company's receiving consideration, the Administrator may make a
proportionate and appropriate adjustment in the number of shares of
Common Stock underlying each Award, so that proportionate interest
of the participant immediately following such event will, to the
extent practicable, be the same as immediately before such event.
(This
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adjustment does not apply to Common Stock that the optionee has
already purchased nor to Stock Grants that are already
nonforfeitable, except to the extent of similar treatment for most
stockholders.) Unless the Administrator determines another
method would be appropriate, any such adjustment to an Award
will not change the total price with respect to shares of Common
Stock underlying the unexercised portion of the Award but will
include a corresponding proportionate adjustment in the Award's
Exercise Price.
The Administrator will make a commensurate change to the maximum number and
kind of shares provided in the Stock Subject to Plan section.
Any issue by the Company of any class of preferred stock, or securities
convertible into shares of common or preferred stock of any class, will not
affect, and no adjustment by reason thereof will be made with respect to, the
number of shares of Common Stock subject to any Award or the Exercise Price
except as this ADJUSTMENTS section specifically provides. The grant of an Award
under the Plan will not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, or to merge or to consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or assets.
SUBSTANTIAL CORPORATE CHANGE
Upon a SUBSTANTIAL CORPORATE CHANGE, the Plan and any unexercised Awards
will terminate unless provision is made in writing in connection with such
transaction for
the assumption or continuation of outstanding Awards, or
the substitution for such options or grants of any options or
grants covering the stock or securities of a successor employer
corporation, or a parent or subsidiary of such successor, with
appropriate adjustments as to the number and kind of shares of
stock and prices, in which event the Awards will continue in the
manner and under the terms so provided.
Unless the Board determines otherwise, if an Award would otherwise terminate
under the preceding sentence, participants who are then employees or directors
of the Company will have the right, at such time before the consummation of the
transaction causing such termination as the Board reasonably designates, to
exercise any unexercised portions of the Award, whether or not they had
previously become exercisable. However, unless the Board determines otherwise,
the acceleration will not occur if it would render unavailable "pooling of
interest" accounting for any reorganization, merger, or consolidation of the
Company.
A SUBSTANTIAL CORPORATE CHANGE means the
dissolution or liquidation of the Company,
merger, consolidation, or reorganization of the Company with one
or more corporations in which the Company is not the surviving
corporation,
the sale of substantially all of the assets of the Company to
another corporation, or
any transaction (including a merger or reorganization in which the
Company survives) approved by the Board that results in any person
or entity (other than any affiliate of the Company as defined in
Rule 144(a)(1) under the Securities Act, any Company Subsidiary,
any Company benefit plan, or any underwriter temporarily holding
securities for an offering of such securities) owning 100% of
the combined voting power of all classes of stock of the Company.
SUBSIDIARY EMPLOYEES
Employees of Company Subsidiaries will be entitled to participate in the
Plan, except as otherwise designated by the Board of Directors or the Committee.
Eligible Subsidiary means each of the Company's Subsidiaries, except as the
Board otherwise specifies. For ISO grants, SUBSIDIARY means any corporation
(other than the Company) in an unbroken chain of corporations beginning with the
Company if, at the time an ISO is granted to a Participant under the Plan, each
corporation (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in another corporation in such chain. For ISO purposes, SUBSIDIARY also
includes a single-member limited liability company included
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within the chain described in the preceding sentence. For NQSOs, the Board or
the Administrator can use a different definition of Subsidiary in its
discretion.
LEGAL COMPLIANCE
The Company will not issue any shares of Common Stock under an Award until
all applicable requirements imposed by Federal and state securities and other
laws, rules and regulations, and by any applicable regulatory agencies or stock
exchanges, have been fully met. To that end, the Company may require the
participant to take any reasonable action to comply with such requirements
before issuing such shares. No provision in the Plan or action taken under it
authorizes any action that is otherwise prohibited by Federal or state laws.
The Plan is intended to conform to the extent necessary with all provisions
of the Securities Act of 1933 ("SECURITIES ACT") and the Securities Exchange Act
of 1934 and all regulations and rules the Securities and Exchange Commission
issues under those laws. Notwithstanding anything in the Plan to the contrary,
the Administrator must administer the Plan, and Awards may be granted and
exercised, only in a way that conforms to such laws, rules, and regulations. To
the extent permitted by applicable law, the Plan and any Awards will be deemed
amended to the extent necessary to conform to such laws, rules, and regulations.
PURCHASE FOR INVESTMENT AND OTHER RESTRICTIONS
Unless a registration statement under the Securities Act covers the shares
of Common Stock a participant receives upon exercise of his Award, the
Administrator may require, at the time of such exercise or receipt of a grant,
that the participant agree in writing to acquire such shares for investment and
not for public resale or distribution, unless and until the shares subject to
the Award are registered under the Securities Act. Unless the shares are
registered under the Securities Act, the participant must acknowledge:
that the shares purchased on exercise of the Award are not so
registered,
that the participant may not sell or otherwise transfer the shares
unless
the shares have been registered under the Securities Act in
connection with the sale or transfer thereof, or
counsel satisfactory to the Company has issued an opinion
satisfactory to the Company that the sale or other transfer of such
shares is exempt from registration under the Securities Act, and
such sale or transfer complies with all other applicable laws, rules,
and regulations, including all applicable Federal and state
securities laws, rules, and regulations.
Additionally, the Common Stock, when issued upon the exercise of an Award,
will be subject to any other transfer restrictions, rights of first refusal, and
rights of repurchase set forth in or incorporated by reference into other
applicable documents, including the Company's articles or certificate of
incorporation, by-laws, or generally applicable stockholders' agreements.
The Administrator may, in its sole discretion, take whatever additional
actions it deems appropriate to comply with such restrictions and applicable
laws, including placing legends on certificates and issuing stop-transfer orders
to transfer agents and registrars.
TAX WITHHOLDING
The participant must satisfy all applicable Federal, state, and local income
and employment tax withholding requirements before the Company will deliver
stock certificates upon the exercise of an Award. The Company may decide to
satisfy the withholding obligations through additional withholding on
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<PAGE>
salary or wages. If the Company does not or cannot withhold from other
compensation, the participant must pay the Company, with a cashier's check or
certified check, the full amounts required by withholding. Payment of
withholding obligations is due before the Company issues shares with respect to
the Award. If the Administrator so determines, the participant may instead
satisfy the withholding obligations by directing the Company to retain shares
from the Award exercise, by tendering previously owned shares, or by attesting
to his ownership of shares (with the distribution of net shares).
TRANSFERS, ASSIGNMENTS, AND PLEDGES
Unless the Administrator otherwise approves in advance in writing for estate
planning or other purposes, an Award may not be assigned, pledged, or otherwise
transferred in any way, whether by operation of law or otherwise or through any
legal or equitable proceedings (including bankruptcy), by the participant to any
person, except by will or by operation of applicable laws of descent and
distribution. If Rule 16b-3 then applies to an Award, the participant may not
transfer or pledge shares of Common Stock acquired under a Stock Grant or upon
exercise of an Option until at least six months have elapsed from (but
excluding) the Date of Grant, unless the Administrator approves otherwise in
advance in writing. The Administrator may, in its discretion, expressly provide
that a participant may transfer his Award without receiving consideration to (i)
members of his immediate family (children, grandchildren, or spouse); (ii)
trusts for the benefit of such family members; or (iii) partnerships where the
only partners are such family members.
AMENDMENT OR TERMINATION OF PLAN AND OPTIONS
The Board may amend, suspend, or terminate the Plan at any time, without the
consent of the participants or their beneficiaries; PROVIDED, HOWEVER, that no
amendment will deprive any participant or beneficiary of any previously declared
Award. Except as required by law or by the CORPORATE CHANGES section, the
Administrator may not, without the participant's or beneficiary's consent,
modify the terms and conditions of an Award so as to adversely affect the
participant. No amendment, suspension, or termination of the Plan will, without
the participant's or beneficiary's consent, terminate or adversely affect any
right or obligations under any outstanding Awards.
PRIVILEGES OF STOCK OWNERSHIP
No participant and no beneficiary or other person claiming under or through
such participant will have any right, title, or interest in or to any shares of
Common Stock allocated or reserved under the Plan or subject to any Award except
as to such shares of Common Stock, if any, already issued to such participant.
EFFECT ON OTHER PLANS
Whether exercising or receiving an Award causes the participant to accrue or
receive additional benefits under any pension or other plan is governed solely
by the terms of such other plan.
LIMITATIONS ON LIABILITY
Notwithstanding any other provisions of the Plan, no individual acting as a
director, employee, or agent of the Company shall be liable to any participant,
former participant, spouse, beneficiary, or any other person for any claim,
loss, liability, or expense incurred in connection with the Plan, nor shall such
individual be personally liable because of any contract or other instrument he
executes in such other capacity. The Company will indemnify and hold harmless
each director, employee, or agent of the Company to whom any duty or power
relating to the administration or interpretation of the Plan has been or will be
delegated, against any cost or expense (including attorneys' fees) or liability
(including any sum
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<PAGE>
paid in settlement of a claim with the Board's approval) arising out of any act
or omission to act concerning
this Plan unless arising out of such person's own fraud or bad faith.
NO EMPLOYMENT CONTRACT
Nothing contained in this Plan constitutes an employment contract between
the Company and the participants. The Plan does not give any participant any
right to be retained in the Company's employ, nor does it enlarge or diminish
the Company's right to end the participant's employment.
APPLICABLE LAW
The laws of the State of Delaware (other than its choice of law provisions)
govern this Plan and its interpretation.
DURATION OF PLAN
Unless the Board extends the Plan's term, the Administrator may not grant
Awards after June 8, 2008. The Plan will then terminate but will continue to
govern unexercised and unexpired Awards.
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Exhibit 10.12
CREDIT AGREEMENT
Dated as of June 9, 1998
among
SCHOOL SPECIALTY, INC.
as Borrower,
Certain Subsidiaries and Affiliates,
as Guarantors,
THE LENDERS NAMED HEREIN
AND
NATIONSBANK, N.A.,
as Administrative Agent
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS ...................................................... 1
1.1 Definitions ................................................... 1
1.2 Computation of Time Periods ................................... 24
1.3 Accounting Terms .............................................. 24
SECTION 2 CREDIT FACILITIES ................................................ 25
2.1 Revolving Loans ............................................... 25
2.2 Letter of Credit Subfacility .................................. 26
2.3 Swingline Loan Subfacility .................................... 31
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITIES ................... 33
3.1 Default Rate .................................................. 33
3.2 Extension and Conversion ...................................... 34
3.3 Prepayments ................................................... 34
3.4 Termination and Reduction of Commitments ...................... 35
3.5 Fees .......................................................... 35
3.6 Capital Adequacy .............................................. 36
3.7 Inability To Determine Interest Rate .......................... 36
3.8 Illegality .................................................... 37
3.9 Requirements of Law ........................................... 37
3.10 Taxes ......................................................... 38
3.11 Indemnity ..................................................... 40
3.12 Pro Rata Treatment ............................................ 41
3.13 Sharing of Payments ........................................... 42
3.14 Payments, Computations, Etc. .................................. 42
3.15 Evidence of Debt .............................................. 44
3.16 Certain Rules Relating to the Payment of
Additional Amounts ........................................... 45
SECTION 4 GUARANTY ......................................................... 46
4.1 The Guarantee ................................................. 46
4.2 Obligations Unconditional ..................................... 46
4.3 Reinstatement ................................................. 47
4.4 Certain Additional Waivers .................................... 48
4.5 Remedies ...................................................... 48
4.6 Rights of Contribution ........................................ 48
4.7 Continuing Guarantee .......................................... 49
SECTION 5 CONDITIONS ....................................................... 49
5.1 Conditions to Closing ......................................... 49
5.2 Conditions to All Extensions of Credit ........................ 51
5.3 Conditions Subsequent to Closing .............................. 52
SECTION 6 REPRESENTATIONS AND WARRANTIES.................................... 53
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6.1 Financial Condition ........................................... 53
6.2 No Changes or Restricted Payments ............................. 53
6.3 Organization; Existence; Compliance with Law .................. 53
6.4 Power; Authorization; Enforceable Obligations ................. 54
6.5 No Legal Bar .................................................. 54
6.6 No Material Litigation ........................................ 54
6.7 No Default .................................................... 55
6.8 Ownership of Property; Liens .................................. 55
6.9 Intellectual Property ......................................... 55
6.10 No Burdensome Restrictions .................................... 55
6.11 Taxes ......................................................... 55
6.12 ERISA ......................................................... 56
6.13 Governmental Regulations, Etc. ................................ 57
6.14 Subsidiaries .................................................. 58
6.15 Purpose of Extensions of Credit ............................... 58
6.16 Environmental Matters ......................................... 58
SECTION 7 AFFIRMATIVE COVENANTS ............................................ 59
7.1 Financial Statements .......................................... 59
7.2 Certificates; Other Information ............................... 60
7.3 Notices ....................................................... 61
7.4 Payment of Obligations ........................................ 63
7.5 Conduct of Business and Maintenance of Existence .............. 63
7.6 Maintenance of Property; Insurance ............................ 63
7.7 Inspection of Property; Books and Records; Discussions ........ 63
7.8 Environmental Laws ............................................ 64
7.9 Financial Covenants ........................................... 64
7.10 Agency Fees ................................................... 65
7.11 Additional Guaranties and Stock Pledges ....................... 65
7.12 Ownership of Subsidiaries ..................................... 66
7.13 Use of Proceeds ............................................... 66
SECTION 8 NEGATIVE COVENANTS ............................................... 67
8.1 Indebtedness .................................................. 67
8.2 Liens ......................................................... 69
8.3 Nature of Business ............................................ 69
8.4 Consolidation, Merger, Sale or Purchase of Assets, Etc. ....... 69
8.5 Advances, Investments and Loans ............................... 70
8.6 Transactions with Affiliates .................................. 71
8.7 Ownership of Equity Interests ................................. 71
8.8 Fiscal Year ................................................... 71
8.9 Prepayments of Indebtedness, Etc. ............................. 71
8.10 Restricted Payments ........................................... 71
8.11 No Further Negative Pledges ................................... 72
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<PAGE>
SECTION 9 EVENTS OF DEFAULT ................................................ 72
9.1 Events of Default ............................................. 72
9.2 Acceleration; Remedies ........................................ 74
SECTION 10 AGENCY PROVISIONS ............................................... 75
10.1 Appointment .................................................. 75
10.2 Delegation of Duties ......................................... 76
10.3 Exculpatory Provisions ....................................... 76
10.4 Reliance on Communications ................................... 77
10.5 Notice of Default ............................................ 77
10.6 Non-Reliance on Administrative Agent and Other Lenders ....... 77
10.7 Indemnification .............................................. 78
10.8 Administrative Agent in its Individual Capacity .............. 78
10.9 Successor Administrative Agent ............................... 79
SECTION 11 MISCELLANEOUS ................................................... 79
11.1 Notices ...................................................... 79
11.2 Right of Set-Off ............................................. 81
11.3 Benefit of Agreement ......................................... 81
11.4 No Waiver; Remedies Cumulative ............................... 84
11.5 Payment of Expenses, Etc. .................................... 84
11.6 Amendments, Waivers and Consents ............................. 85
11.7 Counterparts ................................................. 86
11.8 Headings ..................................................... 86
11.9 Survival ..................................................... 86
11.10 Governing Law; Submission to Jurisdiction; Venue ............. 86
11.11 Severability ................................................. 87
11.12 Entirety ..................................................... 87
11.13 Binding Effect; Termination .................................. 88
11.14 Confidentiality .............................................. 88
11.15 Source of Funds .............................................. 89
11.16 Conflict ..................................................... 89
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<PAGE>
SCHEDULES
Schedule 2.1(a) Lenders and Commitments
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Revolving Note
Schedule 2.2(b)-1 Existing Letters of Credit
Schedule 2.2(b)-2 Form of Notice of Request for Letter of Credit
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 5.1(i)(v) Form of Secretary's Certificate
Schedule 6.6 Description of Legal Proceedings
Schedule 6.8 Liens
Schedule 6.14 Subsidiaries
Schedule 7.2(b) Form of Officer's Compliance Certificate
Schedule 7.11 Form of Joinder Agreement
Schedule 8.1 Indebtedness
Schedule 8.5 Existing Investments
Schedule 11.1 Lenders and Addresses
Schedule 11.3(b) Form of Assignment and Acceptance
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<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of June 9, 1998 (the "Credit
Agreement"), is by and among SCHOOL SPECIALTY, INC., a Delaware corporation (the
"Borrower"), the subsidiaries and affiliates identified on the signature pages
hereto and such other subsidiaries and affiliates as may from time to time
become Guarantors hereunder in accordance with the provisions hereof (the
"Guarantors"), the lenders named herein and such other lenders as may become a
party hereto (the "Lenders"), and NATIONSBANK, N.A., as Administrative Agent (in
such capacity, the "Administrative Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a $250
million credit facility for the purposes hereinafter set forth;
WHEREAS, the Lenders have agreed to make the requested credit facility
available to the Borrower on the terms and conditions hereinafter set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall
have the meanings specified below unless the context otherwise requires:
"Additional Credit Party" means each Person that becomes a
Guarantor after the Closing Date by execution of a Joinder Agreement.
"Administrative Agent" shall have the meaning assigned to such
term in the heading hereof, together with any successors or assigns.
"Administrative Agent Fees" shall have the meaning assigned to
such term in Section 3.5(c).
"Administrative Agent's Fee Letter" means that certain letter
agreement, dated as of April 1, 1998, between the Agent and the
Borrower, as amended, modified, supplemented or replaced from time to
time.
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<PAGE>
"Affiliate" means, with respect to any Person, any other
Person (i) directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person or (ii) directly or
indirectly owning or holding five percent (5%) or more of the equity
interest in such Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative
to the foregoing. Notwithstanding anything to the contrary in this
Agreement, no Affiliate of Jonathan J. Ledecky shall be deemed to be an
Affiliate of any member of the Consolidated Group solely because of Mr.
Ledecky's status as an officer, director or employee of a member of the
Consolidated Group.
"Agency Services Address" means NationsBank, N.A.,
NC1-001-15-04, 101 North Tryon Street, Charlotte, North Carolina 28255,
Attn: Agency Services, or such other address as may be identified by
written notice from the Administrative Agent to the Borrower.
"Aggregate Revolving Committed Amount" means the aggregate
amount of Revolving Commitments in effect from time to time, being
initially TWO HUNDRED FIFTY MILLION DOLLARS ($250,000,000).
"Applicable Percentage" means for any day, the rate per annum
set forth below opposite the applicable Consolidated Leverage Ratio
then in effect, it being understood that the Applicable Percentage for
(i) Base Rate Loans shall be the percentage set forth under the column
"Base Rate Margin", (ii) Eurodollar Loans shall be the percentage set
forth under the column "Eurodollar Margin and Letter of Credit Fee",
(iii) the Letter of Credit Fee shall be the percentage set forth under
the column "Eurodollar Margin and Letter of Credit Fee" and (iv) the
Commitment Fee shall be the percentage set forth under the column
"Commitment Fee":
<TABLE>
<CAPTION>
Eurodollar
Margin
Consolidated and
Pricing Leverage Base Rate Letter of Commitment
Level Ratio Margin Credit Fee Fee
----- ----- ------ ---------- ---
<S> <C> <C> <C> <C>
I Less than or equal to 2.25 0% .625% .20%
II Greater than 2.25 but less than or equal to 2.75 0% .875% .25%
III Greater than 2.75 but less than or equal to 3.25 0% 1.125% .25%
IV Greater than 3.25 but less than or equal to 3.75 .125% 1.375% .25%
V Greater than 3.75 .250% 1.625% .325%
</TABLE>
The Applicable Percentage shall be determined and adjusted periodically
on the date (each a "Rate Determination Date") five (5) Business Days
after the date by which the
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<PAGE>
annual and quarterly compliance certificates and related financial
statements and information are required in accordance with the
provisions of Sections 7.1(a) and (b) and Section 7.2(b), as
appropriate; provided that:
(i) the initial Applicable Percentages shall be 1.0%
in the case of the Eurodollar Margin and Letter of Credit Fee,
0% in the case of the Base Rate Margin, and .25% in the case
of the Commitment Fee and shall remain in effect until the
earlier of (A) the date six months from the Closing Date or
(B) the date of any Material Acquisition; and
(ii) in the event an annual or quarterly compliance
certificate and related financial statements and information
are not delivered timely to the Agency Services Address by the
date required by Sections 7.1(a) and (b) and Section 7.2(b),
as appropriate, the Applicable Percentages shall be based on
Pricing Level V until such time as an appropriate compliance
certificate and related financial statements and information
are delivered, whereupon the applicable Pricing Level shall be
adjusted based on the information contained in such compliance
certificate and related financial statements and information.
Each Applicable Percentage shall be effective from a Rate Determination
Date until the next such Rate Determination Date. The Administrative
Agent shall determine the appropriate Applicable Percentages in the
pricing matrix promptly upon receipt of the quarterly or annual
compliance certificate and related financial information and shall
promptly notify the Borrower and the Lenders of any change thereof.
Such determinations by the Administrative Agent shall be conclusive
absent manifest error. Adjustments in the Applicable Percentages shall
be effective as to existing Extensions of Credit as well as new
Extensions of Credit made thereafter.
"Asset Disposition" means, other than a Securitization
Transaction, (i) the sale, lease or other disposition of any property
or asset by any member of the Consolidated Group, other than any such
sale permitted by Sections 8.4(b) and other than to the extent
permitted by Section 8.5, and (ii) receipt by any member of the
Consolidated Group of any cash insurance proceeds or condemnation award
payable by reason of theft, loss, physical destruction or damage,
taking or similar event with respect to any of their property or
assets.
"Attributed Principal Amount" means, on any day, with respect
to any Securitization Transaction entered into by any member of the
Consolidated Group, the aggregate amount (with respect to any such
transaction, the "Invested Amount") paid to, or borrowed by, such
Person as of such date under such Securitization Transaction, minus the
aggregate amount received by the applicable Receivables Financier and
applied to the reduction of the Invested Amount under such
Securitization Transaction.
"Bankruptcy Code" means the Bankruptcy Code in Title 11 of the
United States Code, as amended, modified, succeeded or replaced from
time to time.
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<PAGE>
"Bankruptcy Event" means, with respect to any Person, the
occurrence of any of the following with respect to such Person: (i) a
court or governmental agency having jurisdiction in the premises shall
enter a decree or order for relief in respect of such Person in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of such Person or for any substantial part of its Property or
ordering the winding up or liquidation of its affairs; or (ii) there
shall be commenced against such Person an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or any case, proceeding or other action for the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of such Person or for any substantial part of its
Property or for the winding up or liquidation of its affairs, and such
involuntary case or other case, proceeding or other action shall remain
undismissed, undischarged or unbonded for a period of sixty (60)
consecutive days; or (iii) such Person shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in
an involuntary case under any such law, or consent to the appointment
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of such Person or for any
substantial part of its Property or make any general assignment for the
benefit of creditors; or (iv) such Person shall be unable to, or shall
admit in writing its inability to, pay its debts generally as they
become due.
"Base Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest whole multiple of 1/100 of 1%)
equal to the greater of (a) the Federal Funds Rate in effect on such
day plus 1/2 of 1% or (b) the Prime Rate in effect on such day. If for
any reason the Administrative Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is
unable after due inquiry to ascertain the Federal Funds Rate for any
reason, including the inability or failure of the Administrative Agent
to obtain sufficient quotations in accordance with the terms hereof,
the Base Rate shall be determined without regard to clause (a) of the
first sentence of this definition until the circumstances giving rise
to such inability no longer exist. Any change in the Base Rate due to a
change in the Prime Rate or the Federal Funds Rate shall be effective
on the effective date of such change in the Prime Rate or the Federal
Funds Rate, respectively.
"Base Rate Loan" means any Loan bearing interest at a rate
determined by reference to the Base Rate.
"Borrower" means School Specialty, Inc., a Delaware
corporation, as referenced in the opening paragraph, its successors and
permitted assigns.
"Business Day" means a day other than a Saturday, Sunday or
other day on which commercial banks in Charlotte, North Carolina or New
York, New York are authorized or required by law to close, except that,
when used in connection with a Eurodollar Loan, such day shall also be
a day on which dealings between banks are carried on in U.S. dollar
deposits in London, England.
4
<PAGE>
"Capital Expenditures" means, for any period, without
duplication, all expenditures (whether paid in cash or other
consideration) during such period that, in accordance with GAAP, are or
should be included in additions to property, plant and equipment or
similar items reflected in the consolidated statement of cash flows for
such period; provided, that Capital Expenditures shall not include, for
purposes hereof, (i) expenditures of proceeds of insurance settlements,
condemnation awards and other settlements in respect of lost,
destroyed, damaged or condemned assets, equipment or other property to
the extent such expenditures are made to replace or repair such lost,
destroyed, damaged or condemned assets, equipment or other property or
otherwise to acquire assets or properties useful in the business of the
members of the Consolidated Group within 12 months of receipt of such
proceeds.
"Capital Lease" means, as applied to any Person, any lease of
any Property (whether real, personal or mixed) by that Person as lessee
which, in accordance with GAAP, is or should be accounted for as a
capital lease on the balance sheet of that Person.
"Capital Lease Obligation" means the capital lease obligations
relating to a Capital Lease determined in accordance with GAAP.
"Cash Equivalents" means (a) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and
credit of the United States of America is pledged in support thereof)
having maturities of not more than twelve months from the date of
acquisition, (b) U.S. dollar denominated time deposits and certificates
of deposit of (i) any Lender, or (ii) any domestic commercial bank of
recognized standing (y) having capital and surplus in excess of
$500,000,000 and (z) whose short-term commercial paper rating from S&P
is at least A-1 or the equivalent thereof or from Moody's is at least
P-1 or the equivalent thereof (any such bank being an "Approved Bank"),
in each case with maturities of not more than 270 days from the date of
acquisition, (c) commercial paper and variable or fixed rate notes
issued by any Approved Bank (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic
corporation rated A-1 (or the equivalent thereof) or better by S&P or
P-1 (or the equivalent thereof) or better by Moody's and maturing
within six months of the date of acquisition, (d) repurchase agreements
entered into by a Person with a bank or trust company (including any of
the Lenders) or recognized securities dealer having capital and surplus
in excess of $500,000,000 for direct obligations issued by or fully
guaranteed by the United States of America in which such Person shall
have a perfected first priority security interest (subject to no other
Liens) and having, on the date of purchase thereof, a fair market value
of at least 100% of the amount of the repurchase obligations, (e)
obligations of any State of the United States or any political
subdivision thereof, the interest with respect to which is exempt from
federal income taxation under Section 103 of the Code, having a long
term rating of at least AA- or Aa-3 by S&P or Moody's, respectively,
and maturing within three years from the date of acquisition thereof,
(f) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the equivalent
thereof) or better by Moody's and (ii)
5
<PAGE>
with dividends that reset at least once every 365 days and (g)
Investments, classified in accordance with GAAP as current assets, in
money market investment programs registered under the Investment
Company Act of 1940, as amended, which are administered by reputable
financial institutions having capital of at least $100,000,000 and the
portfolios of which are limited to Investments of the character
described in the foregoing subdivisions (a) through (f).
"Change of Control" means the occurrence of any of the
following events: (i) any Person or two or more Persons acting in
concert shall have acquired beneficial ownership, directly or
indirectly, of, or shall have acquired by contract or otherwise, or
shall have entered into a contract or arrangement that, upon
consummation, will result in its or their acquisition of or control
over, Voting Stock of the Borrower (or other securities convertible
into such Voting Stock) representing 35% or more of the combined voting
power of all Voting Stock of the Borrower, or (ii) during any period of
up to 24 consecutive months, commencing after the Closing Date,
individuals who at the beginning of such 24 month period were directors
of the Borrower (together with any new director whose election by the
Borrower's Board of Directors or whose nomination for election by the
Borrower's shareholders was approved by a vote of at least a majority
of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the directors of the Borrower then in office. As used
herein, "beneficial ownership" shall have the meaning provided in Rule
13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended,
and any successor statute thereto, as interpreted by the rules and
regulations issued thereunder, in each case as in effect from time to
time. References to sections of the Code shall be construed also to
refer to any successor sections.
"Commitment" means the Revolving Commitment, the LOC
Commitment and the Swingline Commitment.
"Commitment Fee" shall have the meaning given such term in
Section 3.5(a).
"Commitment Period" means the period from and including the
Closing Date to but not including the earlier of (i) the Termination
Date, or (ii) the date on which the Commitments terminate in accordance
with the provisions of this Credit Agreement.
"Consolidated EBITDA" means for any period for the
Consolidated Group, the sum of Consolidated Net Income plus
Consolidated Interest Expense plus all provisions for any Federal,
state or other domestic and foreign income taxes plus depreciation and
amortization plus (minus) one-time non-recurring and/or restructuring
charges deducted (added) in calculating Consolidated Net Income, in
each case on a consolidated basis
6
<PAGE>
determined in accordance with GAAP applied on a consistent basis, but
excluding for purposes hereof extraordinary gains and losses and
related tax effects thereon (to the extent such items are not taken
into consideration for purposes of determining Consolidated Net
Income). Except as otherwise expressly provided, the applicable period
shall be for the four consecutive fiscal quarters ending as of the date
of determination.
"Consolidated Fixed Charge Coverage Ratio" means for any
period, the ratio of Consolidated EBITDA to Consolidated Fixed Charges.
"Consolidated Fixed Charges" means for any period for the
Consolidated Group, the cash portion of Consolidated Interest Expense,
in each case on a consolidated basis determined in accordance with GAAP
applied on an consistent basis. Except as otherwise expressly provided,
the applicable period shall be for the four consecutive fiscal quarters
ending as of the date of determination.
"Consolidated Funded Debt" means Funded Debt of the
Consolidated Group determined on a consolidated basis in accordance
with GAAP applied on a consistent basis.
"Consolidated Group" means the Borrower and its consolidated
subsidiaries, as determined in accordance with GAAP.
"Consolidated Interest Expense" means for any period for the
Consolidated Group, all interest expense, including the amortization of
debt discount and premium, the interest component under Capital Leases
and the implied interest component under Securitization Transactions,
in each case on a consolidated basis determined in accordance with GAAP
applied on a consolidated basis. Except as expressly provided
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Leverage Ratio" means, as of the last day of any
fiscal quarter, the ratio of Consolidated Funded Debt on such day to
Consolidated EBITDA for the period of four consecutive fiscal quarters
ending as of such day.
"Consolidated Net Income" means for any period for the
Consolidated Group, net income on a consolidated basis determined in
accordance with GAAP applied on a consistent basis, but excluding for
purposes of determining the Consolidated Leverage Ratio and
Consolidated Fixed Charge Coverage Ratio, any extraordinary gains or
losses and related tax effects thereon. Except as expressly provided
otherwise, the applicable period shall be for the four consecutive
quarters ending as of the date of determination.
"Consolidated Net Worth" means, as for any date for the
Consolidated Group, shareholders' equity or net worth as determined in
accordance with GAAP.
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"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any material
agreement, instrument or undertaking to which such Person is a party or
by which it or any of its property is bound.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, the LOC Documents, Security Agreement, Pledge
Agreement, Mortgages, each Joinder Agreement, the Administrative
Agent's Fee Letter, and all other related agreements and documents
issued or delivered hereunder or thereunder or pursuant hereto or
thereto.
"Credit Party" means any of the Borrower and the Guarantors.
"Debt Transaction" means, with respect to any member of the
Consolidated Group, any sale, issuance or placement of Funded Debt,
whether or not evidenced by promissory note or other written evidence
of indebtedness, other than under the Credit Documents.
"Default" means any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"Defaulting Lender" means, at any time, any Lender that, at
such time, (i) has failed to make an Extension of Credit required
pursuant to the terms of this Credit Agreement, (ii) has failed to pay
to the Administrative Agent or any Lender an amount owed by such Lender
pursuant to the terms of the Credit Agreement or any other of the
Credit Documents, or (iii) has been deemed insolvent or has become
subject to a bankruptcy or insolvency proceeding or to a receiver,
trustee or similar proceeding.
"Dollars" and "$" means dollars in lawful currency of the
United States of America.
"Domestic Credit Party" means any Credit Party which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Domestic Subsidiary" means any Subsidiary which is
incorporated or organized under the laws of any State of the United
States or the District of Columbia.
"Environmental Laws" means any and all lawful and applicable
Federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions,
grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
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"Equity Transaction" means, with respect to any member of the
Consolidated Group, any issuance of shares of its capital stock or
other equity interest, other than an issuance (i) to a member of the
Consolidated Group, (ii) in connection with a conversion of debt
securities to equity, (iii) in connection with exercise by a present or
former employee, officer or director under a stock incentive plan,
stock option plan or other equity-based compensation plan or
arrangement or (iv) in connection with the Spin-Off Transactions.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, as interpreted by
the rules and regulations thereunder, all as the same may be in effect
from time to time. References to sections of ERISA shall be construed
also to refer to any successor sections.
"ERISA Affiliate" means an entity which is under common
control with any Credit Party within the meaning of Section 4001(a)(14)
of ERISA, or is a member of a group which includes the Borrower and
which is treated as a single employer under Sections 414(b) or (c) of
the Code.
"ERISA Event" means (i) with respect to any Plan, the
occurrence of a Reportable Event or the substantial cessation of
operations (within the meaning of Section 4062(e) of ERISA); (ii) the
withdrawal by the Borrower, any Subsidiary of the Borrower or any ERISA
Affiliate from a Multiple Employer Plan during a plan year in which it
was a substantial employer (as such term is defined in Section 4001 of
ERISA), or the termination of a Multiple Employer Plan; (iii) the
distribution of a notice of intent to terminate or the actual
termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA;
(iv) the institution of proceedings to terminate or the actual
termination of a Plan by the PBGC under Section 4042 of ERISA; (v) any
event or condition which could reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (vi) the complete or
partial withdrawal of the Borrower, any Subsidiary of the Borrower or
any ERISA Affiliate from a Multiemployer Plan; (vii) the conditions for
imposition of a lien under Section 302(f) of ERISA exist with respect
to any Plan; or (vii) the adoption of an amendment to any Plan
requiring the provision of security to such Plan pursuant to Section
307 of ERISA.
"Eurodollar Loan" means any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate.
"Eurodollar Rate" means, for the Interest Period for each
Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
determined pursuant to the following formula:
Interbank Offered Rate
Eurodollar Rate = ---------------------------------
1 - Eurodollar Reserve Percentage
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"Eurodollar Reserve Percentage" means for any day, that
percentage (expressed as a decimal) which is in effect from time to
time under Regulation D of the Board of Governors of the Federal
Reserve System (or any successor), as such regulation may be amended
from time to time or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental,
emergency, special, or marginal reserves) applicable with respect to
Eurocurrency liabilities as that term is defined in Regulation D (or
against any other category of liabilities that includes deposits by
reference to which the interest rate of Eurodollar Loans is
determined), whether or not Lender has any Eurocurrency liabilities
subject to such reserve requirement at that time. Eurodollar Loans
shall be deemed to constitute Eurocurrency liabilities and as such
shall be deemed subject to reserve requirements without benefits of
credits for proration, exceptions or offsets that may be available from
time to time to a Lender. The Eurodollar Rate shall be adjusted
automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage. As of the date hereof, the Eurodollar
Reserve Percentage is zero.
"Event of Default" means such term as defined in Section 9.1.
"Existing Letters of Credit" means those Letters of Credit
outstanding on the Closing Date and identified on Schedule 2.2(b)-1.
"Extension of Credit" means, as to any Lender, the making of,
or participation in, a Loan by such Lender or the issuance or extension
of, or participation in, a Letter of Credit.
"Fees" means all fees payable pursuant to Section 3.5.
"Federal Funds Rate" means, for any day, the rate of interest
per annum (rounded upwards, if necessary, to the nearest whole multiple
of 1/100 of 1%) equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding
such day, provided that (A) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions
on the next preceding Business Day and (B) if no such rate is so
published on such next preceding Business Day, the Federal Funds Rate
for such day shall be the average rate quoted to the Administrative
Agent on such day on such transactions as determined by the
Administrative Agent.
"Foreign Credit Party" means a Credit Party which is not a
Domestic Credit Party.
"Foreign Subsidiary" means a Subsidiary which is not a
Domestic Subsidiary.
"Funded Debt" means, with respect to any Person, without
duplication, (i) all Indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures,
notes or similar instruments, or upon which interest payments are
customarily made, (iii) all purchase money Indebtedness (including for
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purposes hereof, indebtedness and obligations described in clauses
(iii) and (iv) of the definition of "Indebtedness") of such Person,
including without limitation the principal portion of all obligations
of such Person under Capital Leases, (iv) all Support Obligations of
such Person with respect to Funded Indebtedness of another Person, (v)
the maximum available amount of all standby letters of credit or
acceptances issued or created for the account of such Person, (vi) all
Funded Debt of another Person secured by a Lien on any Property of such
Person, whether or not such Funded Indebtedness has been assumed,
provided that for purposes hereof the amount of such Funded Debt shall
be limited to the greater of (A) the amount of such Funded Debt as to
which there is recourse to such Person and (B) the fair market value of
the property which is subject to the Lien (but not greater than the
amount of Funded Debt secured thereby), (vii) the outstanding
Attributed Principal Amount under any Securitization Transaction, and
(viii) the principal balance outstanding under any synthetic lease, tax
retention operating lease, off-balance sheet loan or similar
off-balance sheet financing product to which such Person is a party,
where such transaction is considered borrowed money indebtedness for
tax purposes but is classified as an operating lease in accordance with
GAAP (but specifically excluding, for purposes of this subsection
(viii), leases which are treated as operating leases both for purposes
of GAAP and for tax purposes). The Funded Debt of any Person shall
include the Funded Debt of any partnership or joint venture in which
such Person is a general partner or joint venturer, but only to the
extent to which there is recourse to such Person for the payment of
such Funded Debt.
"GAAP" means generally accepted accounting principles in the
United States applied on a consistent basis and subject to the terms of
Section 1.3 hereof.
"Governmental Authority" means any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or
regulatory body.
"Guarantor" means each of those other Persons identified as a
"Guarantor" on the signature pages hereto, and each other Person which
may hereafter become a Guarantor by execution of a Joinder Agreement,
together with their successors and permitted assigns.
"Guaranteed Obligations" means, as to each Guarantor, without
duplication, (i) all obligations of the Borrower (including interest
accruing after a Bankruptcy Event, regardless of whether such interest
is allowed as a claim under the Bankruptcy Code) to the Lenders and the
Administrative Agent, whenever arising, under this Credit Agreement,
the Notes or the Credit Documents, and (ii) all liabilities and
obligations, whenever arising, owing from the Borrower to any Lender,
or any Affiliate of a Lender, arising under any Hedging Agreement
relating to Obligations hereunder.
"Hedging Agreements" means any interest rate protection
agreement or foreign currency exchange agreement between the Borrower
and any Lender, or any Affiliate of a Lender.
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<PAGE>
"Indebtedness" of any Person means, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations
of such Person evidenced by bonds, debentures, notes or similar
instruments, or upon which interest payments are customarily made,
(iii) all obligations of such Person under conditional sale or other
title retention agreements relating to Property purchased by such
Person (other than customary reservations or retentions of title under
agreements with suppliers entered into in the ordinary course of
business), (iv) all obligations of such Person issued or assumed as the
deferred purchase price of Property or services purchased by such
Person (other than trade debt incurred in the ordinary course of
business and due within twelve months of the incurrence thereof) which
would appear as liabilities on a balance sheet of such Person, (v) all
obligations of such Person under take-or-pay or similar arrangements or
under commodities agreements, (vi) all Indebtedness of others secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on, or payable out
of the proceeds of production from, Property owned or acquired by such
Person, whether or not the obligations secured thereby have been
assumed, provided that for purposes hereof the amount of such
Indebtedness shall be limited to the greater of (A) the amount of such
Indebtedness as to which there is recourse to such Person and (B) the
fair market value of the property which is subject to the Lien (but not
greater than the amount of Indebtedness secured thereby), (vii) all
Support Obligations of such Person, (viii) the principal portion of all
obligations of such Person under Capital Leases, (ix) all obligations
of such Person in respect of interest rate protection agreements,
foreign currency exchange agreements, commodity purchase or option
agreements or other interest or exchange rate or commodity price
hedging agreements (including, but not limited to, the Hedging
Agreements), (x) the maximum amount of all standby letters of credit
issued or bankers' acceptances facilities created for the account of
such Person and, without duplication, all drafts drawn thereunder (to
the extent unreimbursed), (xi) all preferred stock issued by such
Person and required by the terms thereof to be redeemed, or for which
mandatory sinking fund payments are due, by a fixed date, (xii) the
outstanding Attributed Principal Amount under any Securitization
Transaction and (xiii) the principal balance outstanding under any
synthetic lease, tax retention operating lease, off-balance sheet loan
or similar off-balance sheet financing product to which such Person is
a party, where such transaction is considered borrowed money
indebtedness for tax purposes but is classified as an operating lease
in accordance with GAAP (but specifically excluding, for purposes of
this subsection (xiii), leases which are treated as operating leases
both for purposes of GAAP and for tax purposes). The Indebtedness of
any Person shall include the Indebtedness of any partnership or joint
venture in which such Person is a general partner or a joint venturer,
but only to the extent to which there is recourse to such Person for
payment of such Indebtedness.
"Interbank Offered Rate" means, for the Interest Period for
each Eurodollar Loan comprising part of the same borrowing (including
conversions, extensions and renewals), a per annum interest rate
(rounded upwards, if necessary, to the nearest whole multiple of 1/100
of 1%) equal to the rate of interest, determined by the Administrative
Agent on the basis of the offered rates for deposits in dollars for a
period of time corresponding to such Interest Period (and commencing on
the first day of such Interest Period), appearing on
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Telerate Page 3750 (or, if, for any reason, Telerate Page 3750 is not
available, the Reuters Screen LIBO Page) as of approximately 11:00 A.M.
(London time) two (2) Business Days before the first day of such
Interest Period. As used herein, "Telerate Page 3750" means the display
designated as page 3750 by Dow Jones Markets, Inc. (or such other page
as may replace such page on that service for the purpose of displaying
the British Bankers Association London interbank offered rates) and
"Reuters Screen LIBO Page" means the display designated as page "LIBO"
on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying
London interbank offered rates of major banks).
"Interest Payment Date" means (i) as to any Base Rate Loan,
the last day of each March, June, September and December, the date of
repayment of principal of such Loan and the Termination Date and (ii)
as to any Eurodollar Loan and Swingline Loan, the last day of each
Interest Period for such Loan, the date of repayment of principal of
such Loan and on the Termination Date, and in addition where the
applicable Interest Period is more than three months, then also on the
date three months from the beginning of the Interest Period, and each
three months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be deemed
to be the next succeeding Business Day.
"Interest Period" means (i) as to any Eurodollar Loan, a
period of one, two, three or six month's duration, as the Borrower may
elect, commencing in each case, on the date of the borrowing (including
conversions, extensions and renewals), and (ii) as to any Swingline
Loan, a period of such duration, not to exceed 30 days, as the Borrower
may request and the Swingline Lender may agree in accordance with the
provisions of Section 2.3(b)(i), commencing in each case, on the date
of borrowing; provided, however, (A) if any Interest Period would end
on a day which is not a Business Day, such Interest Period shall be
extended to the next succeeding Business Day (except that in the case
of Eurodollar Loans where the next succeeding Business Day falls in the
next succeeding calendar month, then on the next preceding Business
Day), (B) no Interest Period shall extend beyond the Termination Date,
and (C) in the case of Eurodollar Loans, where an Interest Period
begins on a day for which there is no numerically corresponding day in
the calendar month in which the Interest Period is to end, such
Interest Period shall end on the last day of such calendar month.
"Invested Amount" shall have the meaning given such term in
the definition of Attributed Principal Amount.
"Investment", in any Person, means any loan or advance to such
Person, any purchase or other acquisition of any capital stock,
warrants, rights, options, obligations or other securities of, or
equity interest in, such Person, any capital contribution to such
Person or any other investment in such Person, including, without
limitation, any Support Obligation incurred for the benefit of such
Person.
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"IPO" means the completion of the initial public offering of
common stock, par value $.001 per share, of the Borrower.
"Issuing Lender" means, initially, NationsBank and, hereafter,
any Lender which the Borrower may request and such Lender may agree.
"Issuing Lender Fees" shall have the meaning assigned to such
term in Section 3.5(b)(ii).
"Joinder Agreement" means a Joinder Agreement substantially in
the form of Schedule 7.11 hereto, executed and delivered by an
Additional Credit Party in accordance with the provisions of Section
7.11.
"Knowledge" of any Person means the actual knowledge of the
Responsible Officers of such Person and the knowledge they would
acquire through the exercise of reasonable diligence in the ordinary
course of duties.
"Lenders" means each of the Persons identified as a "Lender"
on the signature pages hereto, and their successors and assigns.
"Letter of Credit" means the Existing Letters of Credit and
any letter of credit issued by the Issuing Lender for the account of
the Borrower in accordance with the terms of Section 2.2.
"Letter of Credit Fee" shall have the meaning given such term
in Section 3.5(b)(i).
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, security interest, encumbrance, lien (statutory or
otherwise), preference, priority or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other
title retention agreement, any financing or similar statement or notice
filed under the Uniform Commercial Code as adopted and in effect in the
relevant jurisdiction or other similar recording or notice statute, and
any lease in the nature thereof).
"Loan" or "Loans" means the Revolving Loans and/or Swingline
Loans.
"LOC Commitment" means the commitment of the Issuing Lender to
issue, and to honor payment obligations under, Letters of Credit
hereunder and with respect to each Lender, the commitment of each
Lender to purchase participation interests in the Letters of Credit up
to such Lender's LOC Committed Amount as specified in Schedule 2.1(a),
as such amount may be reduced from time to time in accordance with the
provisions hereof.
"LOC Committed Amount" means, collectively, the aggregate
amount of all of the LOC Commitments of the Lenders to issue and
participate in Letters of Credit as
14
<PAGE>
referenced in Section 2.2(a) and, individually, the amount of each
Lender's LOC Commitment as specified in Schedule 2.1(a).
"LOC Documents" means, with respect to any Letter of Credit,
such Letter of Credit, any amendments thereto, any documents delivered
in connection therewith, any application therefor, and any agreements,
instruments, guarantees or other documents (whether general in
application or applicable only to such Letter of Credit) governing or
providing for (i) the rights and obligations of the parties concerned
or at risk or (ii) any collateral security for such obligations.
"LOC Obligations" means, at any time, the sum of (i) the
maximum amount which is, or at any time thereafter may become,
available to be drawn under Letters of Credit then outstanding,
assuming compliance with all requirements for drawings referred to in
such Letters of Credit plus (ii) the aggregate amount of all drawings
under Letters of Credit honored by the Issuing Lender but not
theretofore reimbursed.
"Material Acquisition" means any acquisition the Borrower
consummates with an acquisition value of $50,000,000 or greater.
"Material Adverse Effect" means a material adverse effect on
(i) the condition (financial or otherwise), operations, business,
assets, liabilities or prospects of the Consolidated Group taken as a
whole, (ii) the ability of the Credit Parties taken as a whole to
perform any material obligation under the Credit Documents to which it
is a party or (iii) the rights and remedies of the Lenders under the
Credit Documents.
"Materials of Environmental Concern" means any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Laws,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Moody's" means Moody's Investors Service, Inc., or any
successor or assignee of the business of such company in the business
of rating securities.
"Mortgages" means those mortgages, deeds of trust, security
deeds or like instruments given to the Administrative Agent for the
benefit of the Lenders to secure the Obligations hereunder, as amended
and modified.
"Mortgaged Property" means the property which is the subject
of a Mortgage as referenced therein.
"Multiemployer Plan" means a Plan which is a multiemployer
plan as defined in Sections 3(37) or 4001(a)(3) of ERISA.
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"Multiple Employer Plan" means a Plan of which the Borrower,
any Subsidiary of the Borrower or any ERISA Affiliate and at least one
employer other than the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate are contributing sponsors.
"NationsBank" means NationsBank, N.A. and its successors.
"Net Proceeds" means gross cash proceeds (including any cash
received by way of deferred payment pursuant to a promissory note,
receivable or otherwise, but only as and when received) received in
connection with an Asset Disposition, Equity Transaction, Debt
Transaction or Securitization Transaction (relating, in the case of a
Securitization Transaction, to the Attributed Principal Amount
thereof), net of (i) reasonable transaction costs, including in the
case of an Equity Transaction or a Debt Transaction, underwriting
discounts and commissions and in the case of an Asset Disposition
occurring in connection with a claim under an insurance policy, costs
incurred in connection with adjustment and settlement of the claim,
(ii) estimated taxes payable in connection therewith, and (iii) in the
case of an Asset Disposition, Debt Transaction or Securitization
Transaction, any amounts payable in respect of Funded Debt, including
without limitation principal, interest, premiums and penalties, which
is secured by, or otherwise related to, any property or asset which is
the subject thereof to the extent that such Funded Debt and any
payments in respect thereof are paid with a portion of the proceeds
therefrom.
"Non-Excluded Taxes" means such term as is defined in
Section 3.10.
"Note" or "Notes" means any Revolving Note.
"Notice of Borrowing" means a written notice of borrowing
in substantially the form of Schedule 2.1(b)(i), as required by
Section 2.1(b)(i).
"Notice of Extension/Conversion" means the written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Obligations" means, collectively, the Revolving Loans,
Swingline Loans and the LOC Obligations.
"Operating Lease" means, as applied to any Person, any lease
(including, without limitation, leases which may be terminated by the
lessee at any time) of any Property (whether real, personal or mixed)
which is not a Capital Lease other than any such lease in which that
Person is the lessor.
"Participation Interest" means the purchase by a Lender of a
participation in LOC Obligations as provided in Section 2.2(c), in
Swingline Loans as provided in Section 2.3(b)(iii) and in Loans as
provided in Section 3.13.
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"PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any
successor thereof.
"Permitted Investments" means Investments which are either (i)
cash and Cash Equivalents; (ii) accounts receivable created, acquired
or made in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; (iii) Investments consisting
of stock, obligations, securities or other property received in
settlement of accounts receivable (created in the ordinary course of
business) from bankrupt obligors; (iv) Investments existing as of the
Closing Date and set forth in Schedule 8.5, (v) Support Obligations
permitted by Section 8.1; (vi) acquisitions permitted by Section
8.4(c); (vii) transactions permitted by Section 8.6, (viii) loans to
employees, directors or officers in connection with the award of
convertible bonds or stock under a stock incentive plan, stock option
plan or other equity-based compensation plan or arrangement in the
aggregate not to exceed $5,000,000 (calculated on the exercise price
for any such shares) in the aggregate at any time outstanding; (ix)
other advances or loans to employees, directors, officers or agents not
to exceed $2,000,000 in the aggregate at any time outstanding; (x)
advances or loans to customers or suppliers that do not exceed
$5,000,000 in the aggregate at any one time outstanding, (xi)
Investments by a member of the Consolidated Group or an Affiliate of a
member of the Consolidated Group in connection with a Permitted
Securitization Transaction, (xii) Investments by members of the
Consolidated Group in their Subsidiaries and Affiliates existing on the
Closing Date, (xiii) Investments by one Credit Party in and to another
Credit Party which is, at the time such Investment is made, not subject
to a Bankruptcy Event, and (xiv) other loans, advances and investments
of a nature not contemplated in the foregoing subsections in an amount
not to exceed $5,000,000 in the aggregate at any time outstanding.
"Permitted Liens" means:
(i) Liens in favor of the Administrative
Agent on behalf of the Lenders;
(ii) Liens in favor of a Lender or an
Affiliate of a Lender pursuant to a Hedging Agreement
permitted hereunder, but only (A) to the extent such Liens
secure obligations under such agreements permitted under
Section 8.1, (B) to the extent such Liens are on the same
collateral as to which the Lenders also have a Lien and (C) if
such provider and the Lender shall share pari passu in the
collateral subject to such Liens;
(iii) Liens (other than Liens created or
imposed under ERISA) for taxes, assessments or governmental
charges or levies not yet due or Liens for taxes being
contested in good faith by appropriate proceedings for which
adequate reserves determined in accordance with GAAP have been
established (and as to which the Property subject to any such
Lien is not yet subject to foreclosure, sale or loss on
account thereof);
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(iv) Liens of landlords or of mortgagees of
landlords arising by operation of law or pursuant to the terms
of real property laws and Liens of carriers, warehousemen,
mechanics, materialmen and suppliers and other Liens imposed
by law or pursuant to customary reservations or retentions of
title arising in the ordinary course of business, provided
that such Liens secure only amounts not yet due and payable
or, if due and payable, are unfiled and no other action has
been taken to enforce the same, or are being contested in good
faith by appropriate proceedings for which adequate reserves
determined in accordance with GAAP have been established (and
as to which the Property subject to any such Lien is not yet
subject to foreclosure, sale or loss on account thereof);
(v) Liens (other than Liens created or
imposed under ERISA) incurred or deposits made by the Borrower
and its Subsidiaries in the ordinary course of business in
connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the
performance of tenders, statutory obligations, bids, leases,
government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for
the payment of borrowed money);
(vi) Liens in connection with attachments or
judgments (including judgment or appeal bonds) provided that
the judgments secured shall, within 30 days after the entry
thereof, have been bonded, discharged or execution thereof
stayed pending appeal, or shall have been discharged within 30
days after the expiration of any such stay;
(vii) easements, rights-of-way, restrictions
(including zoning restrictions), minor defects or
irregularities in title and other similar charges or
encumbrances not, in any material respect, impairing the use
of the encumbered Property for its intended purposes;
(viii) Liens securing purchase money and
sale/leaseback Indebtedness (including Capital Leases) to the
extent permitted under Section 8.1(c), provided that any such
Lien attaches only to the Property financed or leased and such
Lien attaches thereto concurrently with or within 90 days
after the acquisition thereof in connection with the purchase
money transactions and within 30 days after the closing of any
sale/leaseback transaction;
(ix) leases or subleases granted to others
not interfering in any material respect with the business of
any member of the Consolidated Group;
(x) any interest of title of a lessor under,
and Liens arising from UCC financing statements (or equivalent
filings, registrations or agreements in foreign jurisdictions)
relating to, leases permitted by this Credit Agreement;
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(xi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods;
(xii) Liens created or deemed to exist in
connection with a Permitted Securitization Transaction
(including any related filings of any financing statements),
but only to the extent that any such Lien relates to the
applicable receivables and related property actually sold,
contributed or otherwise conveyed pursuant to such
transaction;
(xiii) Liens deemed to exist in connection
with Investments in repurchase agreements permitted under
Section 8.5;
(xiv) normal and customary rights of setoff
upon deposits of cash in favor of banks or other depository
institutions;
(xv) Liens existing as of the Closing Date
and set forth on Schedule 6.8; provided that (a) no such Lien
shall at any time be extended to or cover any Property other
than the Property subject thereto on the Closing Date or
replacement property and (b) the principal amount of the
Indebtedness secured by such Liens shall not be increased;
(xvi) mortgage liens on real property of a
Person that becomes a Subsidiary or is merged into the
Borrower or a Subsidiary after the Closing Date securing
Indebtedness permitted by subsection 8.1(h); provided that (A)
such mortgage Liens existed at the time such Person became a
Subsidiary or was merged into the Borrower or a Subsidiary and
were not created in anticipation thereof, (B) no such mortgage
Lien is spread to cover any other property or asses after the
time such Person becomes a Subsidiary or is merged into the
Borrower or a Subsidiary and (C) such mortgage Liens are
released or otherwise satisfied by the end of the Acquired
Mortgaged Property Disposition Period provided in Section
7.15; and
(xvii) Additional Liens not otherwise
permitted by the preceding clauses that secure obligations not
to exceed $5,000,000 in the aggregate at any time outstanding.
"Permitted Securitization Transaction" means any
Securitization Transaction; provided that (i) the Administrative Agent
and the Required Lenders shall be reasonably satisfied with the
structure and documentation for any such transaction and that the terms
of such transaction entered into after the Closing Date, including the
discount applicable to the Receivables which are subject of such
financing and any termination events, shall be (in the good faith
understanding of the Administrative Agent and the Required Lenders)
consistent with those prevailing in the market at the time of
commitment thereto for similar transactions involving a receivables
originator/servicer of similar credit quality
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and a receivables pool or other similar characteristics and (ii) the
documentation for such transaction shall not be amended or modified in
a way which is materially detrimental to the Lenders without the prior
written approval of the Administrative Agent and the Required Lenders.
"Person" means any individual, partnership, joint venture,
firm, corporation, limited liability company, association, trust or
other enterprise (whether or not incorporated) or any Governmental
Authority.
"Plan" means any employee benefit plan (as defined in Section
3(3) of ERISA) which is covered by ERISA and with respect to which the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate is (or,
if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" within the meaning of Section 3(5)
of ERISA.
"Pledge Agreement" means the Pledge Agreement dated as of the
Closing Date given by the Borrower and the other pledgors identified
therein to NationsBank, N.A., as Administrative Agent, to secure the
obligations hereunder, as amended and modified.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by NationsBank as its prime rate in effect
at its principal office in Charlotte, North Carolina, with each change
in the Prime Rate being effective on the date such change is publicly
announced as effective (it being understood and agreed that the Prime
Rate is a reference rate used by NationsBank in determining interest
rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit by NationsBank to any
debtor).
"Pro Forma Basis" means, with respect to any transaction, that
such transaction shall be deemed to have occurred as of the first day
of the four fiscal-quarter period ending as of the most recent fiscal
quarter end preceding the date of such transaction with respect to
which the Administrative Agent and the Lenders have received the
officer's certificate in accordance with the provisions of Section
7.2(b). As used herein, "Transaction" means (i) any corporate merger or
consolidation as referred to in Section 8.4(a), (ii) any sale or other
disposition of assets as referred to in Section 8.4(b), (iii) any
acquisition of capital stock or securities or any purchase, lease or
other acquisition of property as referred to in Section 8.4(c) or (iv)
the making of any Restricted Payment as referred to in Section 8.10.
"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Receivables" means any right of payment from or on behalf of
any obligor, whether constituting an account, chattel paper,
instrument, general intangible or otherwise, arising from the sale or
financing by a member of the Consolidated Group of merchandise or
services, and monies due thereunder, security in the merchandise and
services financed thereby, records related thereto, and the right to
payment of any interest
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or finance charges and other obligations with respect thereto, proceeds
from claims on insurance policies related thereto, any other proceeds
related thereto, and any other related rights.
"Receivables Financier" means, in connection with a
Securitization Transaction, the Person which provides financing for
such transaction whether by purchase, loan or otherwise in respect of
Receivables.
"Register" shall have the meaning given such term in
Section 11.3(c).
"Regulation T, U, or X" means Regulation T, U or X,
respectively, of the Board of Governors of the Federal Reserve System
as from time to time in effect and any successor to all or a portion
thereof.
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the environment (including the abandonment or
discarding of barrels, containers and other closed receptacles
containing any Materials of Environmental Concern).
"Reportable Event" means any of the events set forth in
Section 4043(c) of ERISA, other than those events as to which the
notice requirement has been waived by regulation.
"Required Lenders" means, at any time, Lenders having more
than fifty percent (50%) of the Commitments, or if the Commitments have
been terminated, Lenders having more than fifty percent (50%) of the
aggregate principal amount of the Obligations outstanding (taking into
account in each case Participation Interests or obligation to
participate therein); provided that the Commitments of, and outstanding
principal amount of Obligations (taking into account Participation
Interests therein) owing to, a Defaulting Lender shall be excluded for
purposes hereof in making a determination of Required Lenders.
"Requirement of Law" means, as to any Person, the certificate
of incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its material property is subject.
"Responsible Officer" means the President, Chief Executive
Officer, the Chief Financial Officer and the Controller.
"Restricted Payment" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class
of stock now or hereafter outstanding, except (A) a dividend payable
solely in shares of that class to the holders of that class and (B)
dividends and other distributions payable to a Credit Party, (ii) any
redemption, retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any
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shares of any class of stock now or hereafter outstanding and (iii) any
payment made to retire, or to obtain the surrender of, any outstanding
warrants, options or other rights to acquire shares of any class of
stock now or hereafter outstanding.
"Revolving Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans in an aggregate
principal amount at any time outstanding of up to such Lender's
Revolving Committed Amount.
"Revolving Commitment Percentage" means, for each Lender, a
fraction (expressed as a decimal) the numerator of which is the
Revolving Committed Amount of such Lender at such time and the
denominator of which is the Aggregate Revolving Committed Amount at
such time. The initial Revolving Commitment Percentages are set out on
Schedule 2.1(a).
"Revolving Committed Amount" means, collectively, the
aggregate amount of all of the Revolving Commitments and, individually,
the amount of each Lender's Revolving Commitment as specified in
Schedule 2.1(a), as such amounts may be reduced from time to time in
accordance with the provisions hereof.
"Revolving Loans" shall have the meaning assigned to such term
in Section 2.1(a).
"Revolving Note" or "Revolving Notes" means the promissory
notes of the Borrower in favor of each of the Lenders evidencing the
Revolving Loans and Swingline Loans in substantially the form attached
as Schedule 2.1(e), individually or collectively, as appropriate, as
such promissory notes may be amended, modified, supplemented, extended,
renewed or replaced from time to time.
"S&P" means Standard & Poor's Ratings Group, a division of
McGraw Hill, Inc., or any successor or assignee of the business of such
division in the business of rating securities.
"Securitization Transaction" means any financing transaction
or series of financing transactions that have been or may be entered
into by a member of the Consolidated Group pursuant to which such
member of the Consolidated Group may sell, convey or otherwise transfer
to (i) a Subsidiary or affiliate (a "Securitization Subsidiary"), or
(ii) any other Person, or may grant a security interest in, any
Receivables or interests therein secured by merchandise or services
financed thereby (whether such Receivables are then existing or arising
in the future) of such member of the Consolidated Group, and any assets
related thereto, including without limitation, all security interests
in merchandise or services financed thereby, the proceeds of such
Receivables, and other assets which are customarily sold or in respect
of which security interests are customarily granted in connection with
securitization transactions involving such assets.
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"Security Agreement" means the Security Agreement dated as of
the Closing Date given by the Borrower and the other grantors
identified therein to NationsBank, N.A., as Administrative Agent, to
secure the obligations hereunder, as amended and modified.
"Single Employer Plan" means any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple
Employer Plan.
"Spin-Off Transactions" shall have the meaning given to such
term in Section 5.1(b).
"Subordinated Debt" means any Indebtedness of a member of the
Consolidated Group which by its terms is expressly subordinated in
right of payment to the prior payment of the obligations under the
Credit Agreement and the other Credit Documents on terms and conditions
satisfactory to the Required Lenders.
"Subsidiary" means, as to any Person, (a) any corporation more
than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of
such corporation (irrespective of whether or not at the time, any class
or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by
such Person directly or indirectly through Subsidiaries, and (b) any
partnership, association, joint venture or other entity in which such
Person directly or indirectly through Subsidiaries has more than 50% of
the voting interests at any time. Unless otherwise identified,
"Subsidiary" or "Subsidiaries" shall mean Subsidiaries of the Borrower.
"Support Obligations" means, with respect to any Person,
without duplication, any obligations of such Person (other than
endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) guaranteeing or intended to
guarantee any Indebtedness of any other Person in any manner, whether
direct or indirect, and including without limitation any obligation,
whether or not contingent, (i) to purchase any such Indebtedness or any
Property constituting security therefor, (ii) to advance or provide
funds or other support for the payment or purchase of any such
Indebtedness or to maintain working capital, solvency or other balance
sheet condition of such other Person (including without limitation keep
well agreements, maintenance agreements, comfort letters or similar
agreements or arrangements) for the benefit of any holder of
Indebtedness of such other Person, (iii) to lease or purchase Property,
securities or services primarily for the purpose of assuring the holder
of such Indebtedness, or (iv) to otherwise assure or hold harmless the
holder of such Indebtedness against loss in respect thereof. Subject to
any limits set forth in the agreements evidencing such Support
Obligations, the amount of any Support Obligation shall be deemed to be
an amount equal to the outstanding principal amount (or maximum
principal amount, if larger) of the Indebtedness in respect of which
such Support Obligation is made.
"Swingline Commitment" means the commitment of the Swingline
Lender to make Swingline Loans in an aggregate principal amount at any
time outstanding up to the
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Swingline Committed Amount and the commitment of the Lenders to
purchase participation interests in the Swingline Loans up to their
respective Revolving Commitment Percentage as provided in Section
2.3(b)(iii), as such amounts may be reduced from time to time in
accordance with the provisions hereof.
"Swingline Committed Amount" means the amount of the Swingline
Lender's Commitment as specified in Section 2.3(a).
"Swingline Lender" means NationsBank and its successors.
"Swingline Loan" means a swingline revolving loan made by the
Swingline Lender pursuant to the provisions of Section 2.3.
"Termination Date" means June __, 2003 (being five years from
the Closing Date), or if extended with the written consent of each of
the Lenders, such later date as to which the Termination Date may be
extended.
"Voting Stock" means, with respect to any Person, capital
stock or other equity or ownership interest issued by such Person the
holders of which are ordinarily, in the absence of contingencies,
entitled to vote for the election of directors (or persons performing
similar functions) of such Person, even though the right so to vote has
been suspended by the happening of such a contingency.
1.2 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the
word "from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
1.3 Accounting Terms.
Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Lenders hereunder shall be prepared, in accordance with GAAP applied on a
consistent basis. All calculations made for the purposes of determining
compliance with this Credit Agreement shall (except as otherwise expressly
provided herein) be made by application of GAAP applied on a basis consistent
with the most recent annual or quarterly financial statements delivered pursuant
to Section 7.1 hereof (or, prior to the delivery of the first financial
statements pursuant to Section 7.1 hereof, consistent with the annual unaudited
financial statements referenced in Section 6.1(i) hereof); provided, however, if
(a) the Borrower shall object to determining such compliance on such basis at
the time of delivery of such financial statements due to any change in GAAP or
the rules promulgated with respect thereto or (b) the Administrative Agent or
the Required Lenders shall so object in writing within 30 days after delivery of
such financial statements, then such calculations shall be made on a basis
consistent with the most recent financial statements delivered by the Borrower
to the Lenders as to which no such objection shall have been made.
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It is further acknowledged and agreed that, except as expressly
provided otherwise, for purposes of determining the Applicable Percentage and
compliance with the financial covenants in Section 7.11 (and compliance
therewith on a Pro Forma Basis), in the case of acquisitions and dispositions
which have occurred during the applicable period to the extent permitted
hereunder, adjustments shall be made to take into account historical performance
relating thereto during such applicable period prior to the date of such
acquisition or disposition, and the effect of any Indebtedness paid with
proceeds from a disposition whether or not such adjustments are consistent with
GAAP.
SECTION 2
CREDIT FACILITIES
2.1 Revolving Loans.
(a) Revolving Commitment. During the Commitment Period, subject to the
terms and conditions hereof, each Lender severally agrees to make revolving
credit loans (the "Revolving Loans") to the Borrower from time to time in the
amount of such Lender's Revolving Commitment Percentage of such Revolving Loans
for the purposes hereinafter set forth; provided that (i) with regard to the
Lenders collectively, the aggregate principal amount of Obligations outstanding
at any time shall not exceed the Aggregate Revolving Committed Amount and (ii)
with regard to each Lender individually, such Lender's Revolving Commitment
Percentage of Obligations outstanding at any time shall not exceed such Lender's
Revolving Committed Amount. Revolving Loans may consist of Base Rate Loans or
Eurodollar Loans, or a combination thereof, as the Borrower may request, and may
be repaid and reborrowed in accordance with the provisions hereof.
(b) Revolving Loan Borrowings.
(i) Notice of Borrowing. The Borrower shall request a
Revolving Loan borrowing by written notice (or telephone notice
promptly confirmed in writing) to the Administrative Agent not later
than 11:00 A.M. (Charlotte, North Carolina time) on the Business Day
prior to the date of the requested borrowing in the case of Base Rate
Loans, and on the third Business Day prior to the date of the requested
borrowing in the case of Eurodollar Loans. Each such request for
borrowing shall be irrevocable and shall specify (A) that a Revolving
Loan is requested, (B) the date of the requested borrowing (which shall
be a Business Day), (C) the aggregate principal amount to be borrowed,
and (D) whether the borrowing shall be comprised of Base Rate Loans,
Eurodollar Loans or a combination thereof, and if Eurodollar Loans are
requested, the Interest Period(s) therefor. If the Borrower shall fail
to specify in any such Notice of Borrowing (I) an applicable Interest
Period in the case of a Eurodollar Loan, then such notice shall be
deemed to be a request for an Interest Period of one month, or (II) the
type of Revolving Loan requested, then such notice shall be deemed to
be a request for a Base Rate Loan hereunder. The Administrative Agent
shall give notice to each Lender promptly upon receipt of each Notice
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of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof
and each such Lender's share of any borrowing to be made pursuant
thereto.
(ii) Minimum Amounts. Each Revolving Loan shall be in a
minimum aggregate principal amount of $5,000,000, in the case of
Eurodollar Loans, or $500,000 (or the remaining Revolving Committed
Amount, if less), in the case of Base Rate Loans, and integral
multiples of $500,000 in excess thereof.
(iii) Advances. Each Lender will make its Revolving Commitment
Percentage of each Revolving Loan borrowing available to the
Administrative Agent for the account of the Borrower, or in such other
manner as the Administrative Agent may specify in writing, by 1:00 P.M.
(Charlotte, North Carolina time) on the date specified in the
applicable Notice of Borrowing in Dollars and in funds immediately
available to the Administrative Agent. Such borrowing will then be made
available to the Borrower by the Administrative Agent by crediting the
account of the Borrower on the books of such office with the aggregate
of the amounts made available to the Administrative Agent by the
Lenders and in like funds as received by the Administrative Agent.
(c) Repayment. The principal amount of all Revolving Loans shall be due
and payable in full on the Termination Date.
(d) Interest. Subject to the provisions of Section 3.1,
(i) Base Rate Loans. During such periods as Revolving Loans
shall be comprised in whole or in part of Base Rate Loans, such Base
Rate Loans shall bear interest at a per annum rate equal to the Base
Rate plus the Applicable Percentage;
(ii) Eurodollar Loans. During such periods as Revolving Loans
shall be comprised in whole or in part of Eurodollar Loans, such
Eurodollar Loans shall bear interest at a per annum rate equal to the
Eurodollar Rate plus the Applicable Percentage.
Interest on Revolving Loans shall be payable in arrears on each applicable
Interest Payment Date (or at such other times as may be specified herein).
(e) Revolving Notes. The Revolving Loans shall be evidenced by a duly
executed Revolving Note in favor of each Lender.
(f) Maximum Number of Eurodollar Loans. The Borrower will be limited to
a maximum number of ten (10) Eurodollar Loans outstanding at any time. For
purposes hereof, Eurodollar Loans with separate or different Interest Periods
will be considered as separate Eurodollar Loans even if their Interest Periods
expire on the same date.
2.2 Letter of Credit Subfacility.
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(a) Issuance. During the Commitment Period, subject to the terms and
conditions hereof and of the LOC Documents, if any, and such other terms and
conditions which the Issuing Lender may reasonably require, the Issuing Lender
shall issue, and the Lenders shall participate in, such Letters of Credit as the
Borrower may request for its own account or for the account of any Subsidiary as
provided herein, in a form acceptable to the Issuing Lender, for the purposes
hereinafter set forth; provided that (i) the aggregate amount of LOC Obligations
shall not exceed FIVE MILLION DOLLARS ($5,000,000) at any time (the "LOC
Committed Amount"), (ii) with regard to the Lenders collectively, the aggregate
principal amount of Obligations outstanding at any time shall not exceed the
Aggregate Revolving Committed Amount and (iii) with regard to each Lender
individually, such Lender's Revolving Commitment Percentage of Obligations
outstanding at any time shall not exceed such Lender's Revolving Committed
Amount. Letters of Credit issued hereunder shall not have an original expiry
date more than one year from the date of issuance or extension, nor an expiry
date, whether as originally issued or by extension, extending beyond the
Termination Date. Each Letter of Credit shall comply with the related LOC
Documents. The issuance date of each Letter of Credit shall be a Business Day.
(b) Notice and Reports. Except for those Letters of Credit described on
Schedule 2.2(b)-1 which shall be issued on the Closing Date, the request for the
issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing
Lender at least three (3) Business Days prior to the requested date of issuance
(or such shorter period as may be agreed by the Issuing Lender). A form of
Notice of Request for Letter of Credit is attached as Schedule 2.2(b)-2. The
Issuing Lender will provide to the Administrative Agent at least monthly, and
more frequently upon request, a detailed summary report on its Letters of Credit
and the activity thereon, in form and substance acceptable to the Administrative
Agent. In addition, the Issuing Lender will provide to the Administrative Agent
for dissemination to the Lenders at least quarterly, and more frequently upon
request, a detailed summary report on its Letters of Credit and the activity
thereon, including, among other things, the Credit Party for whose account the
Letter of Credit is issued, the beneficiary, the face amount, and the expiry
date. The Issuing Lender will provide copies of the Letters of Credit to the
Administrative Agent and the Lenders promptly upon request.
(c) Participation. Each Lender, with respect to the Existing Letters of
Credit, hereby purchases a participation interest in such Existing Letters of
Credit, and with respect to Letters of Credit issued after the Closing Date,
upon issuance of a Letter of Credit, shall be deemed to have purchased without
recourse a risk participation from the applicable Issuing Lender in such Letter
of Credit and the obligations arising thereunder, in each case in an amount
equal to its pro rata share of the obligations under such Letter of Credit
(based on the respective Revolving Commitment Percentages of the Lenders) and
shall absolutely, unconditionally and irrevocably assume, as primary obligor and
not as surety, and be obligated to pay to the Issuing Lender therefor and
discharge when due, its pro rata share of the obligations arising under such
Letter of Credit. Without limiting the scope and nature of each Lender's
participation in any Letter of Credit, to the extent that the Issuing Lender has
not been reimbursed as required hereunder or under any such Letter of Credit,
each such Lender shall pay to the Issuing Lender its pro rata share of such
unreimbursed drawing in same day funds on the day of notification by the Issuing
Lender of an unreimbursed drawing pursuant to the provisions of subsection (d)
hereof. The obligation of each Lender
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to so reimburse the Issuing Lender shall be absolute and unconditional and shall
not be affected by the occurrence of a Default, an Event of Default or any other
occurrence or event. Any such reimbursement shall not relieve or otherwise
impair the obligation of the Borrower to reimburse the Issuing Lender under any
Letter of Credit, together with interest as hereinafter provided.
(d) Reimbursement. In the event of any drawing under any Letter of
Credit, the Issuing Lender will promptly notify the Borrower. Unless the
Borrower shall immediately notify the Issuing Lender that the Borrower intends
to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall
be deemed to have requested that the Lenders make a Revolving Loan in the amount
of the drawing as provided in subsection (e) hereof on the related Letter of
Credit, the proceeds of which will be used to satisfy the related reimbursement
obligations. The Borrower promises to reimburse the Issuing Lender on the day of
drawing under any Letter of Credit (either with the proceeds of a Revolving Loan
obtained hereunder or otherwise) in same day funds. If the Borrower shall fail
to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount
of such drawing shall bear interest at a per annum rate equal to the Base Rate
plus the sum of (i) the Applicable Percentage and (ii) two percent (2%). The
Borrower's reimbursement obligations hereunder shall be absolute and
unconditional under all circumstances irrespective of any rights of setoff,
counterclaim or defense to payment the Borrower may claim or have against the
Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the
Letter of Credit drawn upon or any other Person, including without limitation
any defense based on any failure of the Borrower or any other Credit Party to
receive consideration or the legality, validity, regularity or unenforceability
of the Letter of Credit. The Issuing Lender will promptly notify the other
Lenders of the amount of any unreimbursed drawing and each Lender shall promptly
pay to the Administrative Agent for the account of the Issuing Lender in Dollars
and in immediately available funds, the amount of such Lender's pro rata share
of such unreimbursed drawing. Such payment shall be made on the day such notice
is received by such Lender from the Issuing Lender if such notice is received at
or before 2:00 P.M. (Charlotte, North Carolina time) otherwise such payment
shall be made at or before 12:00 Noon (Charlotte, North Carolina time) on the
Business Day next succeeding the day such notice is received. If such Lender
does not pay such amount to the Issuing Lender in full upon such request, such
Lender shall, on demand, pay to the Administrative Agent for the account of the
Issuing Lender interest on the unpaid amount during the period from the date of
such drawing until such Lender pays such amount to the Issuing Lender in full at
a rate per annum equal to, if paid within two (2) Business Days of the date that
such Lender is required to make payments of such amount pursuant to the
preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the
Base Rate. Each Lender's obligation to make such payment to the Issuing Lender,
and the right of the Issuing Lender to receive the same, shall be absolute and
unconditional, shall not be affected by any circumstance whatsoever and without
regard to the termination of this Credit Agreement or the Commitments hereunder,
the existence of a Default or Event of Default or the acceleration of the
obligations of the Borrower hereunder and shall be made without any offset,
abatement, withholding or reduction whatsoever. Simultaneously with the making
of each such payment by a Lender to the Issuing Lender, such Lender shall,
automatically and without any further action on the part of the Issuing Lender
or such Lender, acquire a participation in an amount equal to such payment
(excluding the portion of such payment constituting interest owing to the
Issuing Lender) in the related unreimbursed drawing portion of
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the LOC Obligation and in the interest thereon and in the related LOC Documents,
and shall have a claim against the Borrower with respect thereto.
(e) Repayment with Revolving Loans. On any day on which the Borrower
shall have requested, or been deemed to have requested, a Revolving Loan advance
to reimburse a drawing under a Letter of Credit, the Administrative Agent shall
give notice to the Lenders that a Revolving Loan has been requested or deemed
requested by the Borrower to be made in connection with a drawing under a Letter
of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans
(or Eurodollar Loans to the extent the Borrower has complied with the procedures
of Section 2.1(b)(i) with respect thereto) shall be immediately made to the
Borrower by all Lenders (notwithstanding any termination of the Commitments
pursuant to Section 9.2) pro rata based on the respective Revolving Commitment
Percentages of the Lenders (determined before giving effect to any termination
of the Commitments pursuant to Section 9.2) and the proceeds thereof shall be
paid directly to the Issuing Lender for application to the respective LOC
Obligations. Each such Lender hereby irrevocably agrees to make its pro rata
share of each such Revolving Loan immediately upon any such request or deemed
request in the amount, in the manner and on the date specified in the preceding
sentence notwithstanding (i) the amount of such borrowing may not comply with
the minimum amount for advances of Revolving Loans otherwise required hereunder,
(ii) whether any conditions specified in Section 5.2 are then satisfied, (iii)
whether a Default or an Event of Default then exists, (iv) failure for any such
request or deemed request for Revolving Loan to be made by the time otherwise
required hereunder, (v) whether the date of such borrowing is a date on which
Revolving Loans are otherwise permitted to be made hereunder or (vi) any
termination of the Commitments relating thereto immediately prior to or
contemporaneously with such borrowing. In the event that any Revolving Loan
cannot for any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding under the
Bankruptcy Code with respect to the Borrower or any Credit Party), then each
such Lender hereby agrees that it shall forthwith purchase (as of the date such
borrowing would otherwise have occurred, but adjusted for any payments received
from the Borrower on or after such date and prior to such purchase) from the
Issuing Lender such participation in the outstanding LOC Obligations as shall be
necessary to cause each such Lender to share in such LOC Obligations ratably
(based upon the respective Revolving Commitment Percentages of the Lenders
(determined before giving effect to any termination of the Commitments pursuant
to Section 9.2)), provided that in the event such payment is not made on the day
of drawing, such Lender shall pay in addition to the Issuing Lender interest on
the amount of its unfunded Participation Interest at a rate equal to, if paid
within two (2) Business Days of the date of drawing, the Federal Funds Rate, and
thereafter at the Base Rate.
(f) Designation of Subsidiaries as Account Parties. Notwithstanding
anything to the contrary set forth in this Credit Agreement, including without
limitation Section 2.2(a) hereof, a Letter of Credit issued hereunder may
contain a statement to the effect that such Letter of Credit is issued for the
account of a Subsidiary, provided that notwithstanding such statement, the
Borrower shall be the actual account party for all purposes of this Credit
Agreement for such Letter of Credit and such statement shall not affect the
Borrower's reimbursement obligations hereunder with respect to such Letter of
Credit.
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(g) Renewal, Extension. The renewal or extension of any Letter of
Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.
(h) Uniform Customs and Practices. The Issuing Lender may have the
Letters of Credit be subject to The Uniform Customs and Practice for Documentary
Credits, as published as of the date of issue by the International Chamber of
Commerce (the "UCP"), in which case the UCP may be incorporated therein and
deemed in all respects to be a part thereof.
(i) Indemnification; Nature of Issuing Lender's Duties.
(i) In addition to its other obligations under this Section
2.2, the Borrower hereby agrees to protect, indemnify, pay and save the
Issuing Lender harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including
reasonable attorneys' fees) that the Issuing Lender may incur or be
subject to as a consequence, direct or indirect, of (A) the issuance of
any Letter of Credit or (B) the failure of the Issuing Lender to honor
a drawing under a Letter of Credit as a result of any act or omission,
whether rightful or wrongful, of any present or future de jure or de
facto government or governmental authority (all such acts or omissions,
herein called "Government Acts").
(ii) As between the Borrower and the Issuing Lender, the
Borrower shall assume all risks of the acts, omissions or misuse of any
Letter of Credit by the beneficiary thereof. The Issuing Lender shall
not be responsible: (A) for the form, validity, sufficiency, accuracy,
genuineness or legal effect of any document submitted by any party in
connection with the application for and issuance of any Letter of
Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged; (B) for the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, that may
prove to be invalid or ineffective for any reason; (C) for errors,
omissions, interruptions or delays (other than by the Issuing Lender)
in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in cipher; (D) for any loss
or delay (other than by the Issuing Lender) in the transmission or
otherwise of any document required in order to make a drawing under a
Letter of Credit or of the proceeds thereof; and (E) for any
consequences arising from causes beyond the control of the Issuing
Lender, including, without limitation, any Government Acts. None of the
above shall affect, impair, or prevent the vesting of the Issuing
Lender's rights or powers hereunder.
(iii) In furtherance and extension and not in limitation of
the specific provisions hereinabove set forth, any action taken or
omitted by the Issuing Lender, under or in connection with any Letter
of Credit or the related certificates, if taken or omitted in good
faith and not constituting gross negligence, shall not put such Issuing
Lender under any resulting liability to the Borrower or any other
Credit Party. It is the intention of the parties
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that this Credit Agreement shall be construed and applied to protect
and indemnify the Issuing Lender against any and all risks involved in
the issuance of the Letters of Credit, all of which risks are hereby
assumed by the Borrower (on behalf of itself and each of the other
Credit Parties), including, without limitation, any and all Government
Acts. The Issuing Lender shall not, in any way, be liable for any
failure by the Issuing Lender or anyone else to pay any drawing under
any Letter of Credit as a result of any Government Acts or any other
cause beyond the control of the Issuing Lender.
(iv) Nothing in this subsection (i) is intended to limit the
reimbursement obligations of the Borrower contained in subsection (d)
above. The obligations of the Borrower under this subsection (i) shall
survive the termination of this Credit Agreement. No act or omissions
of any current or prior beneficiary of a Letter of Credit shall in any
way affect or impair the rights of the Issuing Lender to enforce any
right, power or benefit under this Credit Agreement.
(v) Notwithstanding anything to the contrary contained in this
subsection (i), the Borrower shall have no obligation to indemnify the
Issuing Lender in respect of any liability incurred by the Issuing
Lender (A) arising out of the negligence or willful misconduct of the
Issuing Lender, as determined by a court of competent jurisdiction, or
(B) caused by the Issuing Lender's failure to pay under any Letter of
Credit after presentation to it of a request strictly complying with
the terms and conditions of such Letter of Credit, as determined by a
court of competent jurisdiction, unless such payment is prohibited by
any law, regulation, court order or decree.
(j) Responsibility of Issuing Lender. It is expressly understood and
agreed that the obligations of the Issuing Lender hereunder to the Lenders are
only those expressly set forth in this Credit Agreement and that the Issuing
Lender shall be entitled to assume that the conditions precedent set forth in
Section 5.2 have been satisfied unless it shall have acquired actual knowledge
that any such condition precedent has not been satisfied; provided, however,
that nothing set forth in this Section 2.2 shall be deemed to prejudice the
right of any Lender to recover from the Issuing Lender any amounts made
available by such Lender to the Issuing Lender pursuant to this Section 2.2 in
the event that it is determined by a court of competent jurisdiction that the
payment with respect to a Letter of Credit constituted gross negligence or
willful misconduct on the part of the Issuing Lender.
(k) Conflict with LOC Documents. In the event of any conflict between
this Credit Agreement and any LOC Document (including any letter of credit
application), this Credit Agreement shall control.
2.3 Swingline Loan Subfacility.
(a) Swingline Commitment. Subject to the terms and conditions hereof
and in reliance upon the representations and warranties set forth herein, the
Swingline Lender, in its individual capacity, agrees to make certain revolving
credit loans requested by the Borrower in Dollars to the Borrower (each a
"Swingline Loan" and, collectively, the "Swingline Loans") from time to time
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from the Closing Date until the Termination Date for the purposes hereinafter
set forth; provided, however, (i) the aggregate principal amount of Swingline
Loans outstanding at any time shall not exceed TWENTY MILLION DOLLARS
($20,000,000) (the "Swingline Committed Amount") and (ii) with regard to the
Lenders collectively, the aggregate principal amount of Obligations outstanding
at any time shall not exceed the Aggregate Revolving Committed Amount. Swingline
Loans hereunder shall be made as Base Rate Loans, and may be repaid and
reborrowed in accordance with the provisions hereof.
(b) Swingline Loan Advances.
(i) Notices; Disbursement. Whenever the Borrower
desires a Swingline Loan advance hereunder it shall give written notice
(or telephonic notice promptly confirmed in writing) to the Swingline
Lender not later than 11:00 A.M. (Charlotte, North Carolina time) on
the Business Day of the requested Swingline Loan advance. Each such
notice shall be irrevocable and shall specify (A) that a Swingline Loan
advance is requested, (B) the date of the requested Swingline Loan
advance (which shall be a Business Day) and (C) the principal amount of
and Interest Period for the Swingline Loan advance requested. Each
Swingline Loan shall have such maturity date as the Swingline Lender
and the Borrower shall agree upon receipt by the Swingline Lender of
any such notice from the Borrower. The Swingline Lender shall initiate
the transfer of funds representing the Swingline Loan advance to the
Borrower by 3:00 P.M. (Charlotte, North Carolina time) on the Business
Day of the requested borrowing.
(ii) Minimum Amounts. Each Swingline Loan advance shall be in
a minimum principal amount of $500,000 and in integral multiples of
$100,000 in excess thereof (or the remaining amount of the Swingline
Committed Amount, if less).
(iii) Repayment of Swingline Loans. Swingline Loans shall not
be outstanding more than 30 days from the date of advance and may not
extend beyond the Termination Date, on which date the Swingline Loans
shall be due and payable in full. The Swingline Lender may, at any
time, in its sole discretion, by written notice to the Borrower and the
Lenders, demand repayment of its Swingline Loans by way of a Revolving
Loan advance, in which case the Borrower shall be deemed to have
requested a Revolving Loan advance comprised solely of Base Rate Loans
in the amount of such Swingline Loans; provided, however, that any such
demand shall be deemed to have been given one Business Day prior to the
Termination Date and on the date of the occurrence of any Event of
Default described in Section 9.1 and upon acceleration of the
indebtedness hereunder and the exercise of remedies in accordance with
the provisions of Section 9.2. Each Lender hereby irrevocably agrees to
make its pro rata share of each such Revolving Loan in the amount, in
the manner and on the date specified in the preceding sentence
notwithstanding (I) the amount of such borrowing may not comply with
the minimum amount for advances of Revolving Loans otherwise required
hereunder, (II) whether any conditions specified in Section 5.2 are
then satisfied, (III) whether a Default or an Event of Default then
exists, (IV) failure of any such request or deemed request for
Revolving Loan to be made by the time otherwise required hereunder, (V)
whether the date of such borrowing is a date on which Revolving Loans
are
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otherwise permitted to be made hereunder or (VI) any termination of the
Commitments relating thereto immediately prior to or contemporaneously
with such borrowing. In the event that any Revolving Loan cannot for
any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding
under the Bankruptcy Code with respect to the Borrower or any other
Credit Party), then each Lender hereby agrees that it shall forthwith
purchase (as of the date such borrowing would otherwise have occurred,
but adjusted for any payments received from the Borrower on or after
such date and prior to such purchase) from the Swingline Lender such
Participations Interest in the outstanding Swingline Loans as shall be
necessary to cause each such Lender to share in such Swingline Loans
ratably based upon its Revolving Commitment Percentage of the Revolving
Committed Amount (determined before giving effect to any termination of
the Commitments pursuant to Section 3.4), provided that (A) all
interest payable on the Swingline Loans shall be for the account of the
Swingline Lender until the date as of which the respective
Participation Interest is purchased and (B) at the time any purchase of
Participation Interests pursuant to this sentence is actually made, the
purchasing Lender shall be required to pay to the Swingline Lender, to
the extent not paid to the Swingline Lender by the Borrower in
accordance with the terms of subsection (c)(ii) below, interest on the
principal amount of Participation Interests purchased for each day from
and including the day upon which such borrowing would otherwise have
occurred to but excluding the date of payment for such Participation
Interests, at the rate equal to the Federal Funds Rate.
(c) Interest on Swingline Loans.
Subject to the provisions of Section 3.1, each Swingline Loan shall
bear interest at a per annum rate (computed on the basis of the actual number
of days elapsed over a year of 365 days) equal to the Base Rate. Interest on
Swingline Loans shall be payable in arrears on each applicable Interest
Payment Date (or at such other times as may be specified herein), unless
accelerated sooner pursuant to Section 9.2.
(d) Swingline Note. The Swingline Loans shall be evidenced by the
Revolving Note.
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITIES
3.1 Default Rate.
Upon the occurrence, and during the continuance, of an Event
of Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable on demand, at a per annum rate 2% greater
than the rate which would otherwise be applicable (or if no rate is applicable,
whether in respect of interest, fees or other amounts, then 2% greater than the
Base Rate).
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3.2 Extension and Conversion.
Subject to the terms of Section 5.2, the Borrower shall have
the option, on any Business Day, to extend existing Loans into a subsequent
permissible Interest Period or to convert Loans into Loans of another interest
rate type; provided, however, that (i) except as provided in Section 3.8,
Eurodollar Loans may be converted into Base Rate Loans only on the last day of
the Interest Period applicable thereto, (ii) Eurodollar Loans may be extended,
and Base Rate Loans may be converted into Eurodollar Loans, only if no Default
or Event of Default is in existence on the date of extension or conversion,
(iii) Loans extended as, or converted into, Eurodollar Loans shall be subject to
the terms of the definition of "Interest Period" set forth in Section 1.1 and
shall be in such minimum amounts as provided in Section 2.1(b)(ii) , and (iv)
any request for extension or conversion of a Eurodollar Loan which shall fail to
specify an Interest Period shall be deemed to be a request for an Interest
Period of one month. Each such extension or conversion shall be effected by the
Borrower by giving a Notice of Extension/Conversion (or telephone notice
promptly confirmed in writing) to the Administrative Agent prior to 11:00 A.M.
(Charlotte, North Carolina time) on the Business Day of, in the case of the
conversion of a Eurodollar Loan into a Base Rate Loan, and on the third Business
Day prior to, in the case of the extension of a Eurodollar Loan as, or
conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the proposed
extension or conversion, specifying the date of the proposed extension or
conversion, the Loans to be so extended or converted, the types of Loans into
which such Loans are to be converted and, if appropriate, the applicable
Interest Periods with respect thereto. Each request for extension or conversion
shall be irrevocable and shall constitute a representation and warranty by the
Borrower of the matters specified in subsections (a) through (e) of Section 5.2.
In the event the Borrower fails to request extension or conversion of any
Eurodollar Loan in accordance with this Section, or any such conversion or
extension is not permitted or required by this Section, then such Eurodollar
Loan shall be automatically converted into a Base Rate Loan at the end of the
Interest Period applicable thereto. The Administrative Agent shall give each
Lender notice as promptly as practicable of any such proposed extension or
conversion affecting any Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. Revolving Loans and Swingline Loans
may be repaid in whole or in part without premium or penalty; provided that (i)
Eurodollar Loans may be prepaid only upon three (3) Business Days' prior written
notice to the Administrative Agent and must be accompanied by payment of any
amounts owing under Section 3.11, and (ii) partial prepayments shall be minimum
principal amounts of $5,000,000, in the case of Eurodollar Loans, and $500,000,
in the case of Base Rate Loans, and in integral multiples of $500,000 in excess
thereof.
(b) Mandatory Prepayments. If at any time, (A) the aggregate
principal amount of Obligations shall exceed the Aggregate Revolving Committed
Amount, (B) the aggregate amount of LOC Obligations shall exceed the LOC
Committed Amount, or (C) the aggregate amount of Swingline Loans shall exceed
the Swingline Committed Amount, the Borrower shall immediately make payment on
the Revolving Loans and/or to a cash collateral account in respect of the LOC
Obligations, in an amount sufficient to eliminate the deficiency.
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(c) Application. Unless otherwise specified by the Borrower,
prepayments made hereunder shall be applied first to Swingline Loans, then to
Revolving Loans which are Base Rate Loans, then to Revolving Loans which are
Eurodollar Loans in direct order of Interest Period maturities, and then to a
cash collateral account to secure LOC Obligations. Amounts prepaid hereunder may
be reborrowed in accordance with the provisions hereof.
3.4 Termination and Reduction of Commitments
(a) Voluntary Reductions. The Revolving Commitments may be
terminated or permanently reduced by the Borrower in whole or in part upon three
(3) Business Days' prior written notice to the Administrative Agent, provided
that (i) after giving effect to any voluntary reduction the aggregate amount of
Obligations shall not exceed the Aggregate Revolving Committed Amount, as
reduced, and (ii) partial reductions by the Borrower shall be minimum principal
amount of $5,000,000, and in integral multiples of $1,000,000 in excess thereof.
(b) Mandatory Reductions. The Revolving Commitments shall be
permanently reduced in an amount equal to one hundred percent (100%) of the Net
Proceeds received from Asset Dispositions in any fiscal year; but only to the
extent that (i) such Net Proceeds are not reinvested in other property or assets
within six (6) months of the date of sale, lease, disposition, casualty, theft
or loss giving rise thereto, and (ii) the aggregate amount of such Net Proceeds
not reinvested in accordance with the foregoing subsection (i) in any fiscal
year shall exceed five percent (5%) of total assets for the Consolidated Group
as of the end of the immediately preceding fiscal year.
(c) Termination. The Commitments hereunder shall terminate on
the Termination Date.
3.5 Fees.
(a) Commitment Fee. In consideration of the Revolving
Commitments hereunder, the Borrower agrees to pay to the Administrative Agent
for the ratable benefit of the Lenders a commitment fee (the "Commitment Fee")
equal to the Applicable Percentage per annum on the average daily unused amount
of the Revolving Committed Amount for the applicable period. The Commitment Fee
shall be payable quarterly in arrears on the 15th day following the last day of
each calendar quarter for the immediately preceding quarter (or portion thereof)
beginning with the first such date to occur after the Closing Date. For purposes
of computation of the Commitment Fee, Swingline Loans shall not be counted
toward or considered usage under the Revolving Loan facility.
(b) Letter of Credit Fees.
(i) Letter of Credit Fee. In consideration of the LOC
Commitment hereunder, the Borrower agrees to pay to the Administrative
Agent for the ratable benefit of the Lenders a fee (the "Letter of
Credit Fee") equal to the Applicable Percentage per
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annum on the average daily maximum amount available to be drawn under
Letters of Credit from the date of issuance to the date of expiration.
The Letter of Credit Fee shall be payable quarterly in arrears on the
15th day following the last day of each calendar quarter for the
immediately preceding quarter (or portion thereof) beginning with the
first such date to occur after the Closing Date.
(ii) Issuing Lender Fee. In addition to the Letter of
Credit Fee, the Borrower agrees to pay to the Issuing Lender for its
own account without sharing by the other Lenders (A) a fronting and
negotiation fee of .125% per annum on the average daily maximum amount
available to be drawn under Letters of Credit issued by it from the
date of issuance to the date of expiration, and (B) customary charges
of the Issuing Lender with respect to the issuance, amendment,
transfer, administration, cancellation and conversion of, and drawings
under, such Letters of Credit (collectively, the "Issuing Lender
Fees").
(c) Administrative Fees. The Borrower agrees to pay to the
Administrative Agent, for its own account, an annual administrative fee and such
other fees, if any, referred to in the Administrative Agent's Fee Letter
(collectively, the "Administrative Agent Fees").
3.6 Capital Adequacy.
If any Lender has determined, after the date hereof, that the
adoption or the becoming effective of, or any change in, or any change by any
Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof in the interpretation or administration
of, any applicable law, rule or regulation regarding capital adequacy, or
compliance by such Lender with any request or directive of general applicability
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital or assets as a consequence
of its commitments or obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, effectiveness, change or
compliance (taking into consideration such Lender's policies with respect to
capital adequacy applied on a consistent basis), then, upon notice from such
Lender to the Borrower, the Borrower shall be obligated to pay to such Lender
such additional amount or amounts as will compensate such Lender for such
reduction. Each determination by any such Lender of amounts owing under this
Section shall, absent manifest error, be conclusive and binding on the parties
hereto.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Administrative
Agent shall have determined (which determination shall be conclusive and binding
upon the Borrower) that, by reason of circumstances affecting the relevant
market, adequate and reasonable means do not exist for ascertaining the
Eurodollar Rate for such Interest Period, the Administrative Agent shall give
telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as
practicable thereafter. If such notice is given (a) any Eurodollar Loans
requested to be made on the first day of such Interest Period shall be made as
Base Rate Loans and (b) any Loans that were to have been
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converted on the first day of such Interest Period to or continued as Eurodollar
Loans shall be converted to or continued as Base Rate Loans. The Administrative
Agent shall withdraw such notice promptly after such circumstances cease to
exist. Until such notice has been withdrawn by the Administrative Agent, no
further Eurodollar Loans shall be made or continued as such, nor shall the
Borrower have the right to convert Base Rate Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or any
change in any Requirement of Law or in the interpretation or application thereof
occurring after the Closing Date shall make it unlawful for any Lender to make
or maintain Eurodollar Loans as contemplated by this Credit Agreement, (a) such
Lender shall promptly give written notice of such circumstances to the Borrower
and the Administrative Agent (which notice shall be withdrawn whenever such
circumstances no longer exist), (b) the commitment of such Lender hereunder to
make Eurodollar Loans, continue Eurodollar Loans as such and convert a Base Rate
Loan to Eurodollar Loans shall forthwith be canceled and, until such time as it
shall no longer be unlawful for such Lender to make or maintain Eurodollar
Loans, such Lender shall then have a commitment only to make a Base Rate Loan
when a Eurodollar Loan is requested and (c) such Lender's Loans then outstanding
as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans
on the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of the
then current Interest Period with respect thereto, the Borrower shall pay to
such Lender such amounts, if any, as may be required pursuant to Section 3.11.
3.9 Requirements of Law.
Subject to Section 3.16, if, after the date hereof, the adoption of or
any change in any Requirement of Law or in the interpretation or application
thereof applicable to any Lender, or compliance by any Lender with any request
or directive of general applicability (whether or not having the force of law)
from any central bank or other Governmental Authority, in each case made
subsequent to the Closing Date (or, if later, the date on which such Lender
becomes a Lender):
(a) shall subject such Lender to any tax of any kind
whatsoever with respect to any Letter of Credit, any Eurodollar Loans
made by it or its obligation to make Eurodollar Loans, or change the
basis of taxation of payments to such Lender in respect thereof (except
for (i) Non-Excluded Taxes covered by Section 3.10 (including
Non-Excluded Taxes imposed solely by reason of any failure of such
Lender to comply with its obligations under Section 3.10(b)) and (ii)
changes in taxes measured by or imposed upon the overall net income, or
franchise tax (imposed in lieu of such net income tax), of such Lender
or its applicable lending office, branch, or any affiliate thereof));
(b) shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or any
other
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acquisition of funds by, any office of such Lender which is not
otherwise included in the determination of the Eurodollar Rate
hereunder; or
(c) shall impose on such Lender any other condition
(excluding any tax of any kind whatsoever);
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, upon notice to the Borrower from such Lender,
through the Administrative Agent, in accordance herewith, the Borrower shall be
obligated to promptly pay such Lender, upon its demand, any additional amounts
(net of any amounts paid pursuant to Section 3.6) necessary to compensate such
Lender for such increased cost or reduced amount receivable, provided that, in
any such case, the Borrower may elect to convert the Eurodollar Loans made by
such Lender hereunder to Base Rate Loans by giving the Administrative Agent at
least one Business Day's notice of such election, in which case the Borrower
shall promptly pay to such Lender, upon demand, without duplication, such
amounts, if any, as may be required pursuant to Section 3.11. If any Lender
becomes entitled to claim any additional amounts pursuant to this subsection, it
shall provide prompt notice thereof to the Borrower, through the Administrative
Agent, certifying (x) that one of the events described in this paragraph (a) has
occurred and describing in reasonable detail the nature of such event, (y) as to
the increased cost or reduced amount resulting from such event and (z) as to the
additional amount demanded by such Lender and a reasonably detailed explanation
of the calculation thereof. Such a certificate as to any additional amounts
payable pursuant to this subsection submitted by such Lender, through the
Administrative Agent, to the Borrower shall be conclusive and binding on the
parties hereto in the absence of manifest error. This covenant shall survive the
termination of this Credit Agreement and the payment of the Loans and all other
amounts payable hereunder.
3.10 Taxes.
(a) Except as provided below in this subsection, all payments made by
the Borrower under this Credit Agreement and any Notes shall be made free and
clear of, and without deduction or withholding for or on account of, any present
or future income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any court, or governmental body, agency or other
official, excluding taxes (the "Excluded Taxes") that are measured by or imposed
upon the overall net income of the Administrative Agent or any Lender or its
applicable lending office, or any branch or affiliate thereof, and all franchise
taxes, branch taxes, taxes on doing business or taxes on the overall capital or
net worth of the Administrative Agent or any Lender or its applicable lending
office, or any branch or affiliate thereof, in each case imposed in lieu of net
income taxes, imposed: (i) by the jurisdiction under the laws of which the
Administrative Agent or such Lender, applicable lending office, branch or
affiliate is organized or is located, or in which its principal executive office
is located, or any nation within which such jurisdiction is located or any
political subdivision thereof; or (ii) by reason of any connection between the
jurisdiction imposing such tax and the Administrative Agent or such Lender,
applicable lending office, branch or affiliate other than a
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connection arising solely from such Lender having executed, delivered or
performed its obligations, or received payment under or enforced, this Credit
Agreement or any Notes. If any such taxes, levies, imposts, duties, charges,
fees, deductions or withholdings other than the Excluded Taxes ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the
Administrative Agent or any Lender hereunder or under any Notes, (A) the amounts
so payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Credit Agreement and
any Notes, provided, however, that the Borrower shall be entitled to deduct and
withhold any Non-Excluded Taxes and shall not be required to increase any such
amounts payable to any Lender that is not organized under the laws of the United
States of America or a state thereof if such Lender fails to comply with the
requirements of paragraph (b) of this subsection whenever any Non-Excluded Taxes
are payable by the Borrower, and (B) as promptly as possible thereafter the
Borrower shall send to the Administrative Agent for its own account or for the
account of such Lender, as the case may be, a certified copy of an original
official receipt received by the Borrower showing payment thereof. If the
Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure. If the Administrative Agent or any Lender receives a
refund or tax benefit in respect of Non-Excluded Taxes for which the Borrower
had made additional payments pursuant to this Section 3.10(a), the
Administrative Agent or such Lender, as the case may be, shall promptly pay such
refund (together with any interest with respect thereto received from the
relevant taxing authority) to the Borrower; provided, however, that the Borrower
agrees promptly to return such refund (together with any interest with respect
thereto due to the relevant taxing authority) to the Administrative Agent or the
applicable Lender, as the case may be, upon receipt of a notice that such refund
is required to be repaid to the relevant taxing authority. The agreements in
this subsection shall survive the termination of this Credit Agreement and the
payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(X)(i) on or before the date of any payment by the Borrower
under this Credit Agreement or Notes to such Lender, deliver to the
Borrower and the Administrative Agent (A) two (2) duly completed copies
of United States Internal Revenue Service Form 1001 or 4224, or
successor applicable form, as the case may be, certifying that it is
entitled to receive payments under this Credit Agreement and any Notes
without deduction or withholding of any United States federal income
taxes and (B) an Internal Revenue Service Form W-8 or W-9, or successor
applicable form, as the case may be, certifying that it is entitled to
an exemption from United States backup withholding tax;
(ii) deliver to the Borrower and the Administrative Agent two
(2) further copies of any such form or certification on or before the
date that any such form or certification
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expires or becomes obsolete and after the occurrence of any event
requiring a change in the most recent form previously delivered by it
to the Borrower; and
(iii) obtain such extensions of time for filing and complete
such forms or certifications as may reasonably be requested by the
Borrower or the Administrative Agent; or
(Y) in the case of any such Lender that is not a "bank" within
the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, (i)
represent to the Borrower (for the benefit of the Borrower and the
Administrative Agent) that it is not a bank within the meaning of
Section 881(c)(3)(A) of the Internal Revenue Code, (ii) agree to
furnish to the Borrower on or before the date of any payment by the
Borrower, with a copy to the Administrative Agent two (2) accurate and
complete original signed copies of Internal Revenue Service Form W-8,
or successor applicable form certifying to such Lender's legal
entitlement at the date of such certificate to an exemption from U.S.
withholding tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this Credit
Agreement and any Notes (and to deliver to the Borrower and the
Administrative Agent two (2) further copies of such form on or before
the date it expires or becomes obsolete and after the occurrence of any
event requiring a change in the most recently provided form and, if
necessary, obtain any extensions of time reasonably requested by the
Borrower or the Administrative Agent for filing and completing such
forms), and (iii) agree, to the extent legally entitled to do so, upon
reasonable request by the Borrower, to provide to the Borrower (for the
benefit of the Borrower and the Administrative Agent) such other forms
as may be reasonably required in order to establish the legal
entitlement of such Lender to an exemption from withholding with
respect to payments under this Credit Agreement and any Notes;
unless in any such case any change in treaty, law or regulation has occurred
after the date such Person becomes a Lender hereunder which renders all such
forms inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender so advises the
Borrower and the Administrative Agent. Each Person that shall become a Lender
pursuant to subsection 11.3 shall, upon the effectiveness of the related
transfer, be required to provide all of the forms, certifications and statements
required pursuant to this subsection.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each Lender
harmless from any loss or expense which such Lender may sustain or incur (other
than through such Lender's gross negligence or willful misconduct) as a
consequence of (a) default by the Borrower in making a borrowing of, conversion
into or continuation of Eurodollar Loans after the Borrower has given a notice
requesting the same in accordance with the provisions of this Credit Agreement,
(b) default by the Borrower in making any prepayment of a Eurodollar Loan after
the Borrower has given a notice thereof in accordance with the provisions of
this Credit Agreement or (c) the making of a prepayment of Eurodollar Loans on a
day which is not the last day of an Interest Period with respect thereto. With
respect to Eurodollar Loans, such indemnification may include an amount
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equal to the excess, if any, of (i) the amount of interest which would have
accrued on the amount so prepaid, or not so borrowed, converted or continued,
for the period from the date of such prepayment or of such failure to borrow,
convert or continue to the last day of the applicable Interest Period (or, in
the case of a failure to borrow, convert or continue, the Interest Period that
would have commenced on the date of such failure) in each case at the applicable
rate of interest for such Loans provided for herein (excluding, however, the
Applicable Percentage included therein, if any) over (ii) the amount of interest
(as reasonably determined by such Lender) which would have accrued to such
Lender on such amount by placing such amount on deposit for a comparable period
with leading banks in the interbank Eurodollar market. The covenants of the
Borrower set forth in this Section 3.11 shall survive the termination of this
Credit Agreement and the payment of the Loans and all other amounts payable
hereunder.
3.12 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Loans. Each Loan, each payment or prepayment of principal of any
Loan (other than Swingline Loans) or reimbursement obligations arising from
drawings under Letters of Credit, each payment of interest on the Loans or
reimbursement obligations arising from drawings under Letters of Credit, each
payment of Commitment Fees, each payment of the Letter of Credit Fee, each
reduction of the Revolving Committed Amount and each conversion or extension of
any Loan (other than Swingline Loans), shall be allocated pro rata among the
Lenders in accordance with the respective principal amounts of their outstanding
Loans and Participation Interests
(b) Advances. No Lender shall be responsible for the failure or delay
by any other Lender in its obligation to make its ratable share of a borrowing
hereunder; provided, however, that the failure of any Lender to fulfill its
obligations hereunder shall not relieve any other Lender of its obligations
hereunder. Unless the Administrative Agent shall have been notified in writing
by any Lender prior to a borrowing that such Lender will not make the amount
that would constitute its ratable share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by such Lender within the time period specified therefor hereunder, such
Lender shall pay to the Administrative Agent, on demand, such amount with
interest thereon at a rate equal to the Federal Funds Rate for a period of two
(2) Business Days, and thereafter at the Base Rate, for the period until such
Lender makes such amount immediately available to the Administrative Agent. If
such Lender does not pay such amounts to the Administrative Agent forthwith upon
demand, the Administrative Agent may notify the Borrower and request the
Borrower to immediately pay such amount to the Administrative Agent with
interest at the Base Rate. A certificate of the Administrative Agent submitted
to any Lender with respect to any amounts owing under this subsection shall be
conclusive in the absence of manifest error.
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3.13 Sharing of Payments.
The Lenders agree among themselves that, in the event that any Lender
shall obtain payment in respect of any Loan, LOC Obligations or any other
obligation owing to such Lender under this Credit Agreement through the exercise
of a right of setoff, banker's lien or counterclaim, or pursuant to a secured
claim under Section 506 of Title 11 of the United States Code or other security
or interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or
otherwise, or by any other means, in excess of its pro rata share of such
payment as provided for in this Credit Agreement, such Lender shall promptly
purchase from the other Lenders a participation in such Loans, LOC Obligations
and other obligations in such amounts, and make such other adjustments from time
to time, as shall be equitable to the end that all Lenders share such payment in
accordance with their respective ratable shares as provided for in this Credit
Agreement. The Lenders further agree among themselves that if payment to a
Lender obtained by such Lender through the exercise of a right of setoff,
banker's lien, counterclaim or other event as aforesaid shall be rescinded or
must otherwise be restored, each Lender which shall have shared the benefit of
such payment shall, by purchase of a participation, return its share of that
benefit (together with its share of any accrued interest payable with respect
thereto) to each Lender whose payment shall have been rescinded or otherwise
restored. The Borrower agrees that any Lender so purchasing such a participation
may, to the fullest extent permitted by law, exercise all rights of payment,
including setoff, banker's lien or counterclaim, with respect to such
participation as fully as if such Lender were a holder of such Loan, LOC
Obligations or other obligation in the amount of such participation. Except as
otherwise expressly provided in this Credit Agreement, if any Lender or the
Administrative Agent shall fail to remit to the Administrative Agent or any
other Lender an amount payable by such Lender or the Administrative Agent to the
Administrative Agent or such other Lender pursuant to this Credit Agreement on
the date when such amount is due, such payments shall be made together with
interest thereon for each date from the date such amount is due until the date
such amount is paid to the Administrative Agent or such other Lender at a rate
per annum equal to the Federal Funds Rate. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a setoff to which this Section 3.13 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a manner
consistent with the rights of the Lenders under this Section 3.13 to share in
the benefits of any recovery on such secured claim.
3.14 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein, all payments
hereunder shall be made to the Administrative Agent in dollars in immediately
available funds, without setoff, deduction, counterclaim or withholding of any
kind, at the Administrative Agent's office specified in Section 11.1 not later
than 2:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments
received after such time shall be deemed to have been received on the next
succeeding Business Day. The Administrative Agent may (but shall not be
obligated to) debit the amount of any such payment which is not made by such
time to any ordinary deposit account of the Borrower maintained with the
Administrative Agent (with notice to the Borrower). The Borrower shall, at the
time it makes any payment under this Credit Agreement, specify to the
Administrative Agent
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the Loans, LOC Obligations, Fees, interest or other amounts payable by the
Borrower hereunder to which such payment is to be applied (and in the event that
it fails so to specify, or if such application would be inconsistent with the
terms hereof, the Administrative Agent shall distribute such payment to the
Lenders in such manner as the Administrative Agent may determine to be
appropriate in respect of obligations owing by the Borrower hereunder, subject
to the terms of Section 3.12(a)). The Administrative Agent will distribute such
payments to such Lenders, if any such payment is received prior to 12:00 Noon
(Charlotte, North Carolina time) on a Business Day in like funds as received
prior to the end of such Business Day and otherwise the Administrative Agent
will distribute such payment to such Lenders on the next succeeding Business
Day. Whenever any payment hereunder shall be stated to be due on a day which is
not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day (subject to accrual of interest and Fees for the period
of such extension), except that in the case of Eurodollar Loans, if the
extension would cause the payment to be made in the next following calendar
month, then such payment shall instead be made on the next preceding Business
Day. Except as expressly provided otherwise herein, all computations of interest
and fees shall be made on the basis of actual number of days elapsed over a year
of 360 days, except with respect to computation of interest on Base Rate Loans
which (unless the Base Rate is determined by reference to the Federal Funds
Rate) shall be calculated based on a year of 365 or 366 days, as appropriate.
Interest shall accrue from and include the date of borrowing, but exclude the
date of payment.
(b) Allocation of Payments After Event of Default. Notwithstanding any
other provisions of this Credit Agreement to the contrary, after the occurrence
and during the continuance of an Event of Default, all amounts collected or
received by the Administrative Agent or any Lender on account of the Guaranteed
Obligations or any other amounts outstanding under any of the Credit Documents
shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation reasonable attorneys' fees)
of the Administrative Agent in connection with enforcing the rights of
the Lenders under the Credit Documents;
SECOND, to payment of any fees owed to the Administrative
Agent;
THIRD, to the payment of all reasonable out-of-pocket costs
and expenses (including without limitation, reasonable attorneys' fees)
of each of the Lenders in connection with enforcing its rights under
the Credit Documents or otherwise with respect to the Obligations owing
to such Lender;
FOURTH, to the payment of all accrued interest and fees on or
in respect of the Obligations;
FIFTH, to the payment of the outstanding principal amount of
the Guaranteed Obligations (including the payment or cash
collateralization of the outstanding LOC Obligations);
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SIXTH, to all other Obligations and other obligations which
shall have become due and payable under the Credit Documents or
otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH"
above; and
SEVENTH, to the payment of the surplus, if any, to whoever may
be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category; and (ii) each of the Lenders shall receive an amount equal
to its pro rata share (based on the proportion that the then outstanding
Obligations held by such Lender bears to the aggregate then outstanding
Obligations) of amounts available to be applied pursuant to clauses "FOURTH",
"FIFTH" and "SIXTH" above; and (iii) to the extent that any amounts available
for distribution pursuant to clause "FIFTH" above are attributable to the issued
but undrawn amount of outstanding Letters of Credit, such amounts shall be held
by the Administrative Agent in a cash collateral account and applied (A) first,
to reimburse the Issuing Lender for any drawings under such Letters of Credit
and (B) then, following the expiration of all Letters of Credit, to all other
obligations of the types described in clauses "FIFTH" and "SIXTH" above in the
manner provided in this Section 3.14(b).
3.15 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts evidencing each
Loan made by such Lender to the Borrower from time to time, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Credit Agreement. Each Lender will make reasonable efforts to
maintain the accuracy of its account or accounts and to promptly update its
account or accounts from time to time, as necessary.
(b) The Administrative Agent shall maintain the Register pursuant to
Section 11.3(c) hereof, and a subaccount for each Lender, in which Register and
subaccounts (taken together) shall be recorded (i) the amount, type and Interest
Period of each such Loan hereunder, (ii) the amount of any principal or interest
due and payable or to become due and payable to each Lender hereunder and (iii)
the amount of any sum received by the Administrative Agent hereunder from or for
the account of the Borrower and each Lender's share thereof. The Administrative
Agent will make reasonable efforts to maintain the accuracy of the subaccounts
referred to in the preceding sentence and to promptly update such subaccounts
from time to time, as necessary.
(c) The entries made in the accounts, Register and subaccounts
maintained pursuant to subsection (b) of this Section 3.15 (and, if consistent
with the entries of the Administrative Agent, subsection (a)) shall be prima
facie evidence of the existence and amounts of the obligations of the Borrower
therein recorded; provided, however, that the failure of any Lender or the
Administrative Agent to maintain any such account, such Register or such
subaccount, as applicable, or any error therein, shall not in any manner affect
the obligation of the Borrower to repay the Loans made by such Lender in
accordance with the terms hereof.
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3.16 Certain Rules Relating to the Payment of Additional Amounts. (a)
Upon the request and at the expense of the Borrower, each Lender to which the
Borrower is required to pay any additional amount pursuant to Section 3.9 or
3.10 shall reasonably afford the Borrower the opportunity to contest, and shall
reasonably cooperate with the Borrower in contesting, the imposition of any
Non-Excluded Tax giving rise to such payment; provided that (i) such Lender
shall not be required to afford the Borrower the opportunity to so contest
unless the Borrower shall have confirmed in writing to such Lender its
obligation to pay such amounts pursuant to this Agreement and (ii) the Borrower
shall reimburse such Lender for its reasonable attorney's and accountant's fees
and disbursements incurred in so cooperating with the Borrower in contesting the
imposition of such Non-Excluded Tax.
(b) If a Lender changes its applicable lending office (other than
pursuant to paragraph (c) below) or engages in a combination with another
financial institution and the effect of the change or combination, as of the
date of the change or combination, would be to cause the Borrower to become
obligated to pay any additional amount under subsection 3.9 or 3.10, the
Borrower shall not be obligated to pay such additional amount.
(c) If a condition or an event occurs that would, or would upon the
passage of time or giving of notice, result in the payment of any additional
amount to any Lender by the Borrower pursuant to Section 3.9 or 3.10, such
Lender shall promptly notify the Borrower and the Administrative Agent and shall
take such steps as may reasonably be available to it and acceptable to the
Borrower to mitigate the effects of such condition or event (which shall include
efforts to rebook the Revolving Loans held by such Lender at another lending
office, or through another branch or an affiliate, of such Lender); provided
that such Lender shall not be required to take any step that, in its reasonable
judgment, would be disadvantageous to its business or operations in any material
respect or would require it to incur additional costs (unless the Borrower
agrees to reimburse such Lender for the reasonable incremental out-of-pocket
costs thereof).
(d) If the Borrower shall become obligated to pay additional amounts
pursuant to Section 3.9 or 3.10 and any affected Lender shall not have promptly
taken steps necessary to avoid the need for payments under Section 3.9 or 3.10,
the Borrower shall have the right, for so long as such obligation remains, with
the assistance of the Administrative Agent, to seek one or more substitute
Lenders reasonably satisfactory to the Administrative Agent and the Borrower to
purchase the affected Revolving Loans, in whole or in part, at an aggregate
price no less than such Revolving Loans' principal amount plus accrued interest,
and assume the affected obligations under this Agreement. In such case, the
Borrower, the Administrative Agent, the affected Lender, and any substitute
Lender shall execute and deliver an appropriately completed Assignment pursuant
to Section 11.3(b) to effect the assignment of rights to, and the assumption of
obligations by, the substitute Lender; provided that any fees required to be
paid pursuant to Section 11.3(b) in connection with such assignment shall be
paid by the Borrower.
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SECTION 4
GUARANTY
4.1 The Guarantee.
Each of the Guarantors hereby jointly and severally guarantees to each
Lender, to each Affiliate of a Lender that enters into a Hedging Agreement and
to the Administrative Agent as hereinafter provided the prompt payment of the
Guaranteed Obligations in full when due (whether at stated maturity, as a
mandatory prepayment, by acceleration, as mandatory cash collateralization or
otherwise) strictly in accordance with the terms thereof. The Guarantors hereby
further agree that if any of the Guaranteed Obligations are not paid in full
when due (whether at stated maturity, as a mandatory prepayment, by
acceleration, as mandatory cash collateralization or otherwise), the Guarantors
will, jointly and severally, promptly pay the same, without any demand or notice
whatsoever, and that in the case of any extension of time of payment or renewal
of any of the Guaranteed Obligations, the same will be promptly paid in full
when due (whether at extended maturity, as a mandatory prepayment, by
acceleration or otherwise) in accordance with the terms of such extension or
renewal.
Notwithstanding any provision to the contrary contained herein or in
any other of the Credit Documents or Hedging Agreements, to the extent the
obligations of a Guarantor shall be adjudicated to be invalid or unenforceable
for any reason (including, without limitation, because of any applicable state
or federal law relating to fraudulent conveyances or transfers) then the
obligations of each Guarantor hereunder shall be limited to the maximum amount
that is permissible under applicable law (whether federal or state and
including, without limitation, the Bankruptcy Code).
4.2 Obligations Unconditional.
The obligations of the Guarantors under Section 4.1 hereof are joint
and several, absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of any of the Credit Documents or Hedging
Agreements, or any other agreement or instrument referred to therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 4.2 that the obligations of the
Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Each Guarantor agrees that such Guarantor shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Guaranteed Obligations for amounts paid under this
Guaranty until such time as the Lenders (and any Affiliates of Lenders entering
into Hedging Agreements) have been paid in full, all Commitments under the
Credit Agreement have been terminated and no Person or Governmental Authority
shall have any right to request any return or reimbursement of funds from the
Lenders in connection with monies received under the Credit Documents or Hedging
Agreements. Without limiting the generality of the foregoing, it is agreed that,
to the fullest extent permitted by law, the
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occurrence of any one or more of the following shall not alter or impair the
liability of any Guarantor hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to any
Guarantor, the time for any performance of or compliance with any of
the Guaranteed Obligations shall be extended, or such performance or
compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of any
of the Credit Documents, any Hedging Agreement or any other agreement
or instrument referred to in the Credit Documents or Hedging Agreements
shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall
be accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under any of the
Credit Documents, any Hedging Agreement or any other agreement or
instrument referred to in the Credit Documents or Hedging Agreements
shall be waived or any other guarantee of any of the Guaranteed
Obligations or any security therefor shall be released or exchanged in
whole or in part or otherwise dealt with;
(iv) any Lien granted to, or in favor of, the Administrative
Agent or any Lender or Lenders as security for any of the Guaranteed
Obligations shall fail to attach or be perfected; or
(v) any of the Guaranteed Obligations shall be determined to
be void or voidable (including, without limitation, for the benefit of
any creditor of any Guarantor) or shall be subordinated to the claims
of any Person (including, without limitation, any creditor of any
Guarantor).
With respect to its obligations hereunder, each Guarantor hereby expressly
waives diligence, presentment, demand of payment, protest and all notices
whatsoever, and any requirement that the Administrative Agent or any Lender
exhaust any right, power or remedy or proceed against any Person under any of
the Credit Documents, any Hedging Agreement or any other agreement or instrument
referred to in the Credit Documents or Hedging Agreements, or against any other
Person under any other guarantee of, or security for, any of the Guaranteed
Obligations.
4.3 Reinstatement.
The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Guaranteed Obligations is rescinded
or must be otherwise restored by any holder of any of the Guaranteed
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Administrative Agent and each Lender on demand for all reasonable costs and
expenses (including, without limitation, fees and expenses of counsel) incurred
by the Administrative Agent or such Lender in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any
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claim alleging that such payment constituted a preference, fraudulent transfer
or similar payment under any bankruptcy, insolvency or similar law.
4.4 Certain Additional Waivers.
Each Guarantor agrees that such Guarantor shall have no right of
recourse to security for the Guaranteed Obligations, except through the exercise
of the rights of subrogation pursuant to Section 4.2.
4.5 Remedies.
The Guarantors agree that, to the fullest extent permitted by law, as
between the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, the Guaranteed Obligations may be declared to be
forthwith due and payable as provided in Section 9.2 hereof (and shall be deemed
to have become automatically due and payable in the circumstances provided in
said Section 9.2) for purposes of Section 4.1 hereof notwithstanding any stay,
injunction or other prohibition preventing such declaration (or preventing the
Guaranteed Obligations from becoming automatically due and payable) as against
any other Person and that, in the event of such declaration (or the Guaranteed
Obligations being deemed to have become automatically due and payable), the
Guaranteed Obligations (whether or not due and payable by any other Person)
shall forthwith become due and payable by the Guarantors for purposes of said
Section 4.1.
4.6 Rights of Contribution.
The Guarantors hereby agree, as among themselves, that if any Guarantor
shall become an Excess Funding Guarantor (as defined below), each other
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
succeeding provisions of this Section 4.6), pay to such Excess Funding Guarantor
an amount equal to such Guarantor's Pro Rata Share (as defined below and
determined, for this purpose, without reference to the properties, assets,
liabilities and debts of such Excess Funding Guarantor) of such Excess Payment
(as defined below). The payment obligation of any Guarantor to any Excess
Funding Guarantor under this Section 4.6 shall be subordinate and subject in
right of payment to the prior payment in full of the obligations of such
Guarantor under the other provisions of this Section 4, and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For purposes
hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations
arising under the other provisions of this Section 4 (hereafter, the "Guarantied
Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata
Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in
respect of any Guarantied Obligations, the amount paid by an Excess Funding
Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and
(iii) "Pro Rata Share", for the purposes of this Section 4.6, shall mean, for
any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which
the aggregate present fair saleable value of all of its assets and properties
exceeds the amount of all debts and liabilities of such Guarantor (including
contingent, subordinated, unmatured, and unliquidated liabilities, but excluding
the obligations of such Guarantor hereunder) to (b) the amount by which the
aggregate present fair saleable value of all assets and other properties of the
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Borrower and all of the Guarantors exceeds the amount of all of the debts and
liabilities (including contingent, subordinated, unmatured, and unliquidated
liabilities, but excluding the obligations of the Borrower and the Guarantors
hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date
(if any Guarantor becomes a party hereto subsequent to the Closing Date, then
for the purposes of this Section 4.6 such subsequent Guarantor shall be deemed
to have been a Guarantor as of the Closing Date and the information pertaining
to, and only pertaining to, such Guarantor as of the date such Guarantor became
a Guarantor shall be deemed true as of the Closing Date).
4.7 Continuing Guarantee.
The guarantee in this Section 4 is a continuing guarantee, and shall
apply to all Guaranteed Obligations whenever arising.
SECTION 5
CONDITIONS
5.1 Conditions to Closing.
This Credit Agreement shall become effective, and the initial
Extensions of Credit may be made, upon the satisfaction of the following
conditions precedent:
(a) Execution of Credit Agreement and Credit Documents.
Receipt of (i) multiple counterparts of this Credit Agreement, (ii) a Revolving
Note for each Lender, (iii) multiple counterparts of the Pledge Agreement, the
Security Agreement and the UCC financing statements relating thereto, if any, in
each case executed by a duly authorized officer of each party thereto and in
each case conforming to the requirements of this Credit Agreement.
(b) Consummation of Spin-off. Evidence of consummation of
the spin-off of the Borrower from USOP (the "Spin-off Transactions") as
described in the Distribution Agreement among Workflow Graphics, Inc., Aztec
Technology Partners, Navigant International, Inc. and the Borrower
(collectively, the "Spin-Off Companies") and USOP, the Tax Allocation
Agreement among the Spin-Off Companies and USOP, the Employee Benefits
Agreement among the Spin-Off Companies and USOP and the Tax Indemnity
Agreement among the Spin-Off Companies, all of which are attached as exhibits
to the Borrower's Registration Statement on Form S-1 under the Securities Act
of 1933, and the transactions contemplated in connection therewith, including
receipt of all shareholder, governmental and other necessary consents,
approvals and authorizations (including the passage of all waiting periods).
(c) Pro Forma Balance Sheet. Receipt of a pro forma balance
sheet for the Borrower and its Subsidiaries upon consummation of the spin-off
and the transactions contemplated in connection therewith after giving effect to
the initial Extensions of Credit hereunder.
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(d) Legal Opinions. Receipt of multiple counterparts of
opinions of counsel for the Credit Parties relating to the Credit Documents and
the transactions contemplated herein, in form and substance satisfactory to the
Administrative Agent and the Required Lenders.
(e) Stock Certificates. Receipt of original stock certificates
evidencing the ownership interests of the Credit Parties pledged pursuant to the
Pledge Agreement, together in each case with original undated stock powers
executed in blank.
(f) Financial Information. Receipt of financial information
regarding the Borrower and its subsidiaries, as may be requested by, and in each
case in form and substance satisfactory to the Administrative Agent and the
Lenders.
(g) Evidence of Insurance. Receipt of insurance certificates
or policies evidencing flood hazard insurance (for improvements located in areas
having "special flood hazards"), casualty insurance (including builders' risk
and all-risk permanent policies) and liability insurance conforming to the
requirements of this Credit Agreement and the other Credit Documents, showing
the Administrative Agent as loss payee with respect to the flood hazard and
casualty insurance, together with evidence of payment of premiums thereon.
(h) Absence of Legal Proceedings. The absence of any action ,
suit, investigation or proceeding pending in any court or before any arbitrator
or governmental instrumentality which could reasonably be expected to have a
Material Adverse Effect on the Consolidated Group taken as a whole.
(i) Corporate Documents. Receipt of the following (or their
equivalent) for each of the Credit Parties:
(i) Articles of Incorporation. Copies of the articles
of incorporation or charter documents certified to be true and complete
as of a recent date by the appropriate governmental authority of the
state of its incorporation.
(ii) Resolutions. Copies of resolutions of the Board
of Directors approving and adopting the respective Credit Documents,
the transactions contemplated therein and authorizing execution and
delivery thereof, certified by a secretary or assistant secretary as of
the Closing Date to be true and correct and in force and effect as of
such date.
(iii) Bylaws. Copies of the bylaws certified by a
secretary or assistant secretary as of the Closing Date to be true and
correct and in force and effect as of such date.
(iv) Good Standing. Copies, where applicable, of (A)
certificates of good standing, existence or its equivalent certified as
of a recent date by the appropriate governmental authorities of the
state of incorporation and each other state in which the failure to so
qualify and be in good standing would in the aggregate have a Material
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Adverse Effect and (B) a certificate indicating payment of all
corporate franchise taxes certified as of a recent date by the
appropriate governmental taxing authorities.
(v) Officer's Certificate. An officer's certificate
for each of the Credit Parties dated as of the Closing Date
substantially in the form of Schedule 5.1(i)(v) with appropriate
insertions and attachments.
(j) Fees. Receipt of all fees, if any, owing pursuant to the
Administrative Agent's Fee Letter, Section 3.5 or otherwise.
(k) Subsection 5.2 Conditions. The conditions specified in
Section 5.2 shall be satisfied.
(l) Additional Matters. All other documents and legal matters
in connection with the transactions contemplated by this Credit Agreement shall
be reasonably satisfactory in form and substance to the Agents and the Required
Lenders.
5.2 Conditions to All Extensions of Credit.
The obligation of each Lender to make any Extension of Credit hereunder
(including the initial Extension of Credit to be made hereunder) is subject to
the satisfaction of the following conditions precedent on the date of making
such Extension of Credit:
(a) Representations and Warranties. The representations and
warranties made by the Credit Parties herein or in any other Credit Documents or
which are contained in any certificate furnished at any time under or in
connection herewith shall be true and correct in all material respects on and as
of the date of such Extension of Credit as if made on and as of such date
(except for those which expressly relate to an earlier date).
(b) No Default or Event of Default. No Default or Event of
Default shall have occurred and be continuing on such date or after giving
effect to the Extension of Credit to be made on such date unless such Default or
Event of Default shall have been waived in accordance with this Credit
Agreement.
(c) No Bankruptcy Event. No Bankruptcy Event shall have
occurred and be continuing with respect to any of the Credit Parties.
(d) No Material Adverse Effect. No circumstances, events or
conditions shall have occurred since the date of the audited financial
statements referenced in Section 6.1 which could reasonably be expected to have
a Material Adverse Effect.
(e) Additional Conditions to Revolving Loans. If a Revolving
Loan is made pursuant to Section 2.1, all conditions set forth therein shall
have been satisfied.
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(f) Additional Conditions to Letters of Credit. If such
Extension of Credit is made pursuant to Section 2.2, all conditions set forth
therein shall have been satisfied.
(g) Additional Conditions to Swingline Loans. If a Swingline
Loan is made pursuant to Section 2.3, all conditions set forth therein shall
have been satisfied.
Each request for Extension of Credit (including extensions and
conversions) and each acceptance by the Borrower of an Extension of Credit
(including extensions and conversions) shall be deemed to constitute a
representation and warranty by the Borrower as of the date of such Extension of
Credit that the applicable conditions in paragraphs (a), (b), (c) and (d), and
in (e), (f) or (g) of this subsection have been satisfied.
5.3 Conditions Subsequent to Closing.
As of the Closing Date, it is the present intention of the Borrower, as
a general matter, to lease, rather than own, real property in its business. To
that end, the Borrower plans to market real property owned by it with an intent
to lease back the real property necessary and useful in its operations and to
dispose of real property which is not needed in the operation of its business.
The Borrower agrees that to the extent domestic members of the Consolidated
Group shall continue to own real property owned as of the Closing Date twelve
(12) months after the Closing Date, the following conditions subsequent shall be
satisfied:
(a) Execution of Mortgages. Receipt of multiple counterparts
of the Mortgages in each case executed by a duly authorized officer of each
party thereto and in each case conforming to the requirements of the Credit
Agreement.
(b) Surveys. Receipt of copies of recent ALTA surveys of each
of the Mortgaged Properties by registered engineers or land surveyors, in form
and detail (including the location of special flood hazard areas) acceptable to
the Administrative Agent.
(c) Title Policies. Receipt of standard ALTA mortgagee
policies insuring the priority of the Mortgages in amounts and from companies
acceptable to the Administrative Agent and the Required Lenders. The title
policies shall include only such exceptions as are acceptable to the
Administrative Agent. Copies of recorded documentation relating to all such
exceptions will be provided to the Administrative Agent.
(d) Appraisals. Receipt of appraisals of certain of the
Mortgaged Property, in form and content satisfactory to the Administrative
Agent.
(e) Environmental Reports. Receipt of copies of environmental
assessment reports and other environmental documentation, if any, relating to
the Mortgaged Properties, which reports shall be in form and detail and which
results and conclusions shall be satisfactory to the Administrative Agent and
the Required Lenders.
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SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Credit Agreement and to make
Extensions of Credit herein provided for, each of the members of the
Consolidated Group parties hereto hereby represents and warrants to the
Administrative Agent and to each Lender that:
6.1 Financial Condition.
Each of the financial statements described below (copies of which have
heretofore been provided to the Administrative Agent for distribution to the
Lenders), have been prepared in accordance with GAAP consistently applied
throughout the periods covered thereby, are complete and correct in all material
respects and present fairly the financial condition and results from operations
of the entities and for the periods specified, subject in the case of interim
company-prepared statements to normal year-end adjustments:
(i) a consolidated and consolidating balance sheet of the
Borrower and its consolidated subsidiaries dated as of April 26, 1997,
together with related statements income and cash flows certified by
Price Waterhouse LLP, certified public accountants; and
(ii) a consolidated and consolidating balance sheet of the
Borrower and its consolidated subsidiaries dated as of January 24, 1998
certified by Price Waterhouse LLP, certified public accountants.
6.2 No Changes or Restricted Payments.
Since the date of the financial statements referenced in Section
6.1(i), there has been no circumstance, development or event relating to or
affecting the members of the Consolidated Group which has had or would be
reasonably expected to have a Material Adverse Effect.
6.3 Organization; Existence; Compliance with Law.
Each of the members of the Consolidated Group (a) is duly organized,
validly existing in good standing under the laws of the jurisdiction of its
incorporation or organization, (b) has the corporate or other necessary power
and authority, and the legal right to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign entity and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not, in the aggregate, have a Material
Adverse Effect, and (d) is in compliance with all Requirements of Law, except to
the extent that the failure to comply therewith would not, in the aggregate, be
reasonably expected to have a Material Adverse Effect.
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6.4 Power; Authorization; Enforceable Obligations.
Each of the Credit Parties has the corporate or other necessary power
and authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party and has taken all necessary corporate or other
action to authorize the execution, delivery and performance by it of the Credit
Documents to which it is a party. No consent or authorization of, filing with,
notice to or other act by or in respect of, any Governmental Authority or any
other Person is required in connection with acceptance of extensions of credit
or the making of the guaranties hereunder or with the execution, delivery or
performance of any Credit Documents by the Credit Parties (other than those
which have been obtained, such filings as are required by the Securities and
Exchange Commission and to fulfill other reporting requirements with
Governmental Authorities) or with the validity or enforceability of any Credit
Document against the Credit parties (except such filings as are necessary in
connection with the perfection of the Liens created by such Credit Documents).
Each Credit Document to which it is a party constitutes a legal, valid and
binding obligation of such Credit Party enforceable against such Credit Party in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law.
6.5 No Legal Bar.
The execution, delivery and performance of the Credit Documents, the
borrowings hereunder and the use of the Extensions of Credit will not violate
any Requirement of Law or any Contractual Obligation of any member of the
Consolidated Group (except those as to which waivers or consents have been
obtained), and will not result in, or require, the creation or imposition of any
Lien on any of their respective properties or revenues pursuant to any
Requirement of Law or Contractual Obligation other than the Liens arising under
or contemplated in connection with the Credit Documents. No member of the
Consolidated Group is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a Material
Adverse Effect.
6.6 No Material Litigation.
No claim, litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the best knowledge of the
Credit Parties, threatened by or against, any members of the Consolidated Group
or against any of their respective properties or revenues which (a) relate to
the Credit Documents or any of the transactions contemplated hereby or thereby,
(b) if adversely determined, could reasonably be expected to have a Material
Adverse Effect. Set forth on Schedule 6.6 is a summary of all claims,
litigation, investigations and proceedings pending or, to the best knowledge of
the Credit Parties, threatened by or against the members of the Consolidated
Group or against any of their respective properties or revenues seeking damages
in excess of $100,000 in each case, and none of such actions, individually or in
the aggregate, is reasonably expected to have a Material Adverse Effect.
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6.7 No Default.
No Default or Event of Default has occurred and is continuing.
6.8 Ownership of Property; Liens.
Each of members of the Consolidated Group has good record and
marketable title in fee simple to, or a valid leasehold interest in, all its
material real property, and good title to, or a valid leasehold interest in, all
its other material property, and none of such property is subject to any Lien,
except for Permitted Liens.
6.9 Intellectual Property.
Each of the members of the Consolidated Group owns, or has the legal
right to use, all United States trademarks, tradenames, copyrights, technology,
know-how and processes, if any, necessary for each of them to conduct its
business as currently conducted (the "Intellectual Property") except for those
the failure to own or have such legal right to use could not be reasonably
expected to have a Material Adverse Effect. No claim has been asserted and is
pending by any Person challenging or questioning the use of any such
Intellectual Property or the validity or effectiveness of any such Intellectual
Property, nor does any Credit Party know of any such claim, and the use of such
Intellectual Property by the members of the Consolidated Group does not infringe
on the rights of any Person, except for such claims and infringements that in
the aggregate, could not be reasonably expected to have a Material Adverse
Effect.
6.10 No Burdensome Restrictions.
No Requirement of Law or Contractual Obligation of the members of the
Consolidated Group could be reasonably expected to have a Material Adverse
Effect.
6.11 Taxes.
Each of the members of the Consolidated Group has filed or caused to be
filed all United States federal income tax returns and all other material tax
returns which, to the best knowledge of the Credit Parties, are required to be
filed and has paid (a) all taxes shown to be due and payable on said returns or
(b) all taxes shown to be due and payable on any assessments of which it has
received notice made against it or any of its property and all other taxes, fees
or other charges imposed on it or any of its property by any Governmental
Authority (other than any (i) taxes, fees or other charges with respect to which
the failure to pay, in the aggregate, could not reasonably be expected to have a
Material Adverse Effect or (ii) taxes, fees or other charges the amount or
validity of which are currently being contested and with respect to which
reserves in conformity with GAAP have been provided on the books of such
Person), and no tax Lien has been filed, and, to the best knowledge of the
Credit Parties, no claim is being asserted, with respect to any such tax, fee or
other charge.
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6.12 ERISA
Except as could not reasonably be expected to have a Material Adverse
Effect:
(a) To the knowledge of the Credit Parties, during the five-year period
prior to the date on which this representation is made or deemed made: (i) no
ERISA Event has occurred and no event or condition has occurred or exists as a
result of which any ERISA Event could reasonably be expected to occur, with
respect to any Plan; (ii) no "accumulated funding deficiency," as such term is
defined in Section 302 of ERISA and Section 412 of the Code, whether or not
waived, has occurred with respect to any Plan; (iii) each Plan has been
maintained, operated, and funded in compliance with its own terms and in
material compliance with the provisions of ERISA, the Code, and any other
applicable federal or state laws; and (iv) no lien in favor of the PBGC or a
Plan has arisen or is reasonably likely to arise on account of any Plan.
(b) The actuarial present value of all "benefit liabilities" (as
defined in Section 4001(a)(16) of ERISA), whether or not vested, under each
Single Employer Plan, as of the last annual valuation date prior to the date on
which this representation is made or deemed made (determined, in each case, in
accordance with Financial Accounting Standards Board Statement 87, utilizing the
actuarial assumptions used in such Plan's most recent actuarial valuation
report), did not exceed as of such valuation date the fair market value of the
assets of such Plan.
(c) No member of the Consolidated Group nor any ERISA Affiliate has
incurred, or, to the best knowledge of the Credit Parties, could be reasonably
expected to incur, any withdrawal liability under ERISA to any Multiemployer
Plan or Multiple Employer Plan. No member of the Consolidated Group nor any
ERISA Affiliate would become subject to any withdrawal liability under ERISA if
any member of the Consolidated Group or any ERISA Affiliate were to withdraw
completely from all Multiemployer Plans and Multiple Employer Plans as of the
valuation date most closely preceding the date on which this representation is
made or deemed made. No member of the Consolidated Group nor any ERISA Affiliate
has received any notification that any Multiemployer Plan is in reorganization
(within the meaning of Section 4241 of ERISA), is insolvent (within the meaning
of Section 4245 of ERISA), or has been terminated (within the meaning of Title
IV of ERISA), and no Multiemployer Plan is, to the best knowledge of the Credit
Parties, reasonably expected to be in reorganization, insolvent, or terminated.
(d) No prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility has
occurred with respect to a Plan which has subjected or may subject any member of
the Consolidated Group or any ERISA Affiliate to any liability under Sections
406, 409, 502(i), or 502(l) of ERISA or Section 4975 of the Code, or under any
agreement or other instrument pursuant to which any member of the Consolidated
Group or any ERISA Affiliate has agreed or is required to indemnify any person
against any such liability.
(e) No member of the Consolidated Group nor any ERISA Affiliates has
any material liability with respect to "expected post-retirement benefit
obligations" within the meaning of the Financial Accounting Standards Board
Statement 106. Each Plan which is a welfare plan (as
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defined in Section 3(1) of ERISA) to which Sections 601-609 of ERISA and Section
4980B of the Code apply has been administered in compliance in all material
respects of such sections.
6.13 Governmental Regulations, Etc.
(a) No part of the proceeds of the Extensions of Credit hereunder will
be used, directly or indirectly, for the purpose of purchasing or carrying any
"margin stock" within the meaning of Regulation U, or for the purpose of
purchasing or carrying or trading in any securities. If requested by any Lender
or the Administrative Agent, the Borrower will furnish to the Administrative
Agent and each Lender a statement to the foregoing effect in conformity with the
requirements of FR Form U-1 referred to in said Regulation U. No indebtedness
being reduced or retired out of the proceeds of the Extensions of Credit
hereunder was or will be incurred for the purpose of purchasing or carrying any
margin stock within the meaning of Regulation U or any "margin security" within
the meaning of Regulation T. "Margin stock" within the meanings of Regulation U
does not constitute more than 25% of the value of the consolidated assets of the
Borrower and its Subsidiaries. None of the transactions contemplated by this
Credit Agreement (including, without limitation, the direct or indirect use of
the proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, or regulations issued pursuant thereto, or Regulation T, U or X.
(b) None of the members of the Consolidated Group is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940, each as amended. In addition,
none of the members of the Consolidated Group is (i) an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended, and is not controlled by such a company, or (ii) a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of
a "holding company" or of a "subsidiary" of a "holding company", within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
(c) No director, executive officer or principal shareholder of any
member of the Consolidated Group is a director, executive officer or principal
shareholder of any Lender. For the purposes hereof the terms "director",
"executive officer" and "principal shareholder" (when used with reference to any
Lender) have the respective meanings assigned thereto in Regulation O issued by
the Board of Governors of the Federal Reserve System.
(d) Each of the members of the Consolidated Group has obtained all
material licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its respective Property and to the conduct of its
business.
(e) None of the members of the Consolidated Group is in violation of
any applicable statute, regulation or ordinance of the United States of America,
or of any state, city, town, municipality, county or any other jurisdiction, or
of any agency thereof (including without limitation, environmental laws and
regulations), which violation could reasonably be expected to have a Material
Adverse Effect.
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(f) Each of the members of the Consolidated Group is current with all
material reports and documents, if any, required to be filed with any state or
federal securities commission or similar agency and is in full compliance in all
material respects with all applicable rules and regulations of such commissions.
6.14 Subsidiaries.
Set forth on Schedule 6.14 are all the Subsidiaries of the Borrower at
the Closing Date, the jurisdiction of their incorporation and the direct or
indirect ownership interest of the Borrower therein.
6.15 Purpose of Extensions of Credit.
Extensions of Credit hereunder may be used to refinance existing
indebtedness (including intercompany indebtedness owing to USOP), to
finance working capital, capital expenditures and other lawful corporate
purposes, including acquisitions permitted hereunder.
6.16 Environmental Matters.
Except as could not reasonably be expected to have a Material Adverse
Effect:
(a) Each of the facilities and properties owned, leased or operated by
the members of the Consolidated Group (the "Properties") and, to the knowledge
of the Credit Parties, all operations at the Properties are in compliance with
all applicable Environmental Laws, and there is no violation of any
Environmental Law with respect to the Properties or the businesses operated by
the members of the Consolidated Group (the "Businesses"), and, to the knowledge
of the Credit Parties, there are no conditions relating to the Businesses or
Properties that could reasonably be expected to give rise to liability under any
applicable Environmental Laws.
(b) None of the Properties contains, or, to the knowledge of the Credit
Parties, has previously contained, any Materials of Environmental Concern at, on
or under the Properties in amounts or concentrations that constitute or
constituted a violation of, or could reasonably be expected to give rise to
liability under, Environmental Laws.
(c) None of the Credit Parties has received any written or verbal
notice of, or inquiry from any Governmental Authority regarding, any violation,
alleged violation, non-compliance, liability or potential liability regarding
environmental matters or compliance with Environmental Laws with regard to any
of the Properties or the Businesses, nor does any Credit Party have knowledge or
reason to believe that any such notice will be received or is being threatened.
(d) To the knowledge of the Credit Parties, Materials of Environmental
Concern have not been transported or disposed of from the Properties, or
generated, treated, stored or disposed of at, on or under any of the Properties
or any other location, in each case by or on behalf any
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members of the Consolidated Group in violation of, or in a manner that would be
reasonably likely to give rise to liability under, any applicable Environmental
Law.
(e) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of any Credit Party, threatened, under any
Environmental Law to which any member of the Consolidated Group is or is
reasonably likely to be named as a party, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or other
administrative or judicial requirements outstanding under any Environmental Law
with respect to any member of the Consolidated Group, the Properties or the
Businesses.
(f) To the knowledge of the Credit Parties, there has been no release
or, threat of release of Materials of Environmental Concern at or from the
Properties, or arising from or related to the operations (including, without
limitation, disposal) of any member of the Consolidated Group in connection with
the Properties or otherwise in connection with the Businesses, in violation of
or in amounts or in a manner that could reasonably be expected to give rise to
liability under Environmental Laws.
SECTION 7
AFFIRMATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith have been paid in full, each
of the members of the Consolidated Group party hereto shall:
7.1 Financial Statements.
Furnish, or cause to be furnished, to the Administrative Agent for
distribution to the Lenders:
(a) Audited Financial Statements. As soon as available, but in
any event within 120 days after the end of each fiscal year, an audited
consolidated balance sheet of the Borrower and its subsidiaries as of
the end of the fiscal year and the related consolidated statements of
income, retained earnings, shareholders' equity and cash flows for the
year, audited by Price Waterhouse LLP, or other firm of independent
certified public accountants of nationally recognized standing
reasonably acceptable to the Required Lenders, setting forth in each
case in comparative form the figures for the previous year, reported
without a "going concern" or like qualification or exception, or
qualification indicating that the scope of the audit was inadequate to
permit such independent certified public accountants to certify such
financial statements without such qualification.
(b) Company-Prepared Financial Statements. As soon as
available, but in any event
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(i) within 50 days after the end of each of the first
three fiscal quarters, a company-prepared consolidated balance
sheet of the Borrower and its subsidiaries as of the end of
the quarter and related company-prepared consolidated
statements of income, retained earnings, shareholders' equity
and cash flows for such quarterly period and for the fiscal
year to date;
(ii) within 60 days after the end of the fourth
fiscal quarter, a company-prepared consolidated balance sheet
of the Borrower and its subsidiaries as of the end of the
quarter and related company-prepared consolidated statements
of income, retained earnings, shareholders' equity and cash
flows for such quarterly period and for the fiscal year to
date;
(iii) Prior to the end of each fiscal year, an annual
business plan and budget for the members of the Consolidated
Group, containing, among other things, pro forma financial
statements for the next fiscal year,
in each case setting forth in comparative form the consolidated figures
for the corresponding period or periods of the preceding fiscal year or
the portion of the fiscal year ending with such period, as applicable,
in each case subject to normal recurring year-end audit adjustments.
All such financial statements shall be complete and correct in all material
respects (subject, in the case of interim statements, to normal recurring
year-end audit adjustments) and shall be prepared in reasonable detail and, in
the case of the annual and quarterly financial statements provided in accordance
with subsections (a) and (b) above, in accordance with GAAP (subject to the
adjustments specified in Section 1.3) applied consistently throughout the
periods reflected therein and further accompanied by a description of, and an
estimation of the effect on the financial statements on account of, a change in
the application of accounting principles as provided in Section 1.3.
7.2 Certificates; Other Information.
Furnish, or cause to be furnished, to the Administrative Agent for
distribution to the Lenders:
(a) Accountant's Certificate and Reports. Concurrently with
the delivery of the financial statements referred to in subsection
7.1(a) above, a certificate of the independent certified public
accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of
any Default or Event of Default with respect to the financial covenants
contained in Section 7.9, except as specified in such certificate.
(b) Officer's Certificate. Concurrently with the delivery of
the financial statements referred to in Sections 7.1(a) and 7.1(b)
above, a certificate of a Responsible
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Officer stating that, to the best of such Responsible Officer's
knowledge and belief, (i) the financial statements fairly present in
all material respects the financial condition of the parties covered by
such financial statements, (ii) during such period the members of the
Consolidated Group have observed or performed in all material respects
the covenants and other agreements hereunder and under the other Credit
Documents relating to them, and satisfied in all material respects the
conditions, contained in this Credit Agreement to be observed,
performed or satisfied by them, and (iii) such Responsible Officer has
obtained no knowledge of any Default or Event of Default except as
specified in such certificate. Such certificate shall include the
calculations required to indicate compliance with Section 7.9. A form
of Officer's Certificate is attached as Schedule 7.2(b).
(c) Accountants' Reports. Promptly upon receipt, a copy of any
final (as distinguished from a preliminary or discussion draft)
"management letter" or other similar report submitted by independent
accountants or financial consultants to the members of the Consolidated
Group in connection with any annual, interim or special audit.
(d) Capital Budget Reports. Annually, within 30 days after the
end of each fiscal year, a capital expenditures budget for the
Consolidated Group, and quarterly within 45 days after the end of each
fiscal quarter, a report of capital expenditures, asset sales and
dispositions (including sale-leasebacks and the terms thereof) and
reinvestment of net proceeds thereof for the fiscal quarter and
including information for the fiscal year-to-date and a comparison
against both the prior fiscal year and the capital budget, in form
reasonably acceptable to the Administrative Agent, demonstrating, among
other things, compliance with the provisions of Sections 3.4(b), 7.9(d)
and 8.4(b).
(e) Public Information. Within thirty days after the same are
sent, copies of all reports (other than those otherwise provided
pursuant to subsection 7.1) and other financial information which any
member of the Consolidated Group sends to its public stockholders, and
within thirty days after the same are filed, copies of all financial
statements and non-confidential reports which any member of the
Consolidated Group may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental
Authority.
(f) Other Information. Promptly, such additional financial and
other information as the Administrative Agent, at the request of any
Lender, may from time to time reasonably request.
7.3 Notices.
Give notice to the Administrative Agent (which shall promptly transmit
such notice to each Lender) of:
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(a) Defaults. Immediately (and in any event within two (2)
Business Days) after a Responsible Officer of any Credit Party acquires
actual knowledge of the occurrence of any Default or Event of Default.
(b) Contractual Obligations. Promptly, the occurrence of any
default or event of default by any member of the Consolidated Group
under any Contractual Obligation to which it is a party which could
reasonably be expected to have a Material Adverse Effect.
(c) Legal Proceedings. Promptly, any litigation, or any
investigation or proceeding (including without limitation, any
environmental proceeding) of which any member of the Consolidated Group
has knowledge, or any material development in respect thereof of which
any member of the Consolidated Group has knowledge, affecting any
member of the Consolidated Group which has a reasonable possibility of
an adverse determination, is not covered by insurance and could
reasonably be expected to have a Material Adverse Effect.
(d) ERISA. Promptly, after any Responsible Officer of the
Borrower knows or has reason to know of the likely occurrence of a
Material Adverse Effect as a result of (i) any event or condition,
including, but not limited to, any Reportable Event, that constitutes,
or can reasonably be expected to lead to, an ERISA Event; (ii) with
respect to any Multiemployer Plan, the receipt of notice as prescribed
in ERISA or otherwise of any withdrawal liability assessed against any
of their ERISA Affiliates, or of a determination that any Multiemployer
Plan is in reorganization or insolvent (both within the meaning of
Title IV of ERISA); (iii) the failure to make full payment on or before
the due date (including extensions) thereof of all amounts which the
members of the Consolidated Group or any ERISA Affiliate are required
to contribute to each Plan pursuant to its terms and as required to
meet the minimum funding standard set forth in ERISA and the Code with
respect; or (iv) any change in the funding status of any Plan that
reasonably could be expected to have a Material Adverse Effect;
together with a description of any such event or condition or a copy of
any such notice and a statement by the chief financial officer of the
Borrower briefly setting forth the details regarding such event,
condition, or notice, and the action, if any, which has been or is
being taken or is proposed to be taken by the Credit Parties with
respect thereto. Promptly upon request, the members of the Consolidated
Group shall furnish the Administrative Agent and the Lenders with such
additional information concerning any Plan as may be reasonably
requested, including, but not limited to, copies of each annual
report/return (Form 5500 series), as well as all schedules and
attachments thereto required to be filed with the Department of Labor
and/or the Internal Revenue Service pursuant to ERISA and the Code,
respectively, for each "plan year" (within the meaning of Section 3(39)
of ERISA).
(e) Other. Promptly, any other development or event which a
Responsible Officer of the Borrower determines could reasonably be
expected to have a Material Adverse Effect.
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Each notice pursuant to this subsection shall be accompanied by a statement of a
Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the relevant Credit Parties propose
to take with respect thereto.
7.4 Payment of Obligations.
Pay, discharge or otherwise satisfy at or before maturity or before
they become delinquent, as the case may be, in accordance with prudent business
practice (subject, where applicable, to specified grace periods) all material
obligations of each member of the Consolidated Group of whatever nature and any
additional costs that are imposed as a result of any failure to so pay,
discharge or otherwise satisfy such obligations, except when the amount or
validity of such obligations and costs is currently being contested in good
faith by appropriate proceedings and reserves, if applicable, in conformity with
GAAP with respect thereto have been provided on the books of the Consolidated
Group, as the case may be.
7.5 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now
conducted by it on the date hereof and similar or related businesses with, and
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges, licenses and
franchises necessary or desirable in the normal conduct of its business; comply
with all Contractual Obligations and Requirements of Law applicable to it except
to the extent that failure to comply therewith would not, in the aggregate, have
a Material Adverse Effect.
7.6 Maintenance of Property; Insurance.
Keep all material property used in its business in reasonably good
working order and condition (ordinary wear and tear excepted); maintain with
financially sound and reputable insurance companies casualty, liability and such
other insurance (which may include plans of self-insurance) with such coverage
and deductibles, and in such amounts as are consistent with prudent business
practice and in any event consistent with normal industry practice (except to
any greater extent as may be required by the terms of any of the other Credit
Documents); and furnish to the Administrative Agent, upon written request, full
information as to the insurance carried.
7.7 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and
correct entries in conformity with GAAP and all Requirements of Law shall be
made of all dealings and transactions in relation to its businesses and
activities; and permit, during regular business hours and upon reasonable notice
by the Administrative Agent, the Administrative Agent to visit and inspect any
of its properties and examine and make abstracts (including photocopies) from
any of its books and records (other than materials protected by the
attorney-client privilege or materials which the Credit Parties may not disclose
without violation of a confidentiality obligation binding upon them) at any
reasonable time, and to discuss the business, operations, properties
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and financial and other condition of the members of the Consolidated Group with
officers and employees of the members of the Consolidated Group and with their
independent certified public accountants. The cost of the inspection referred to
in the preceding sentence shall be for the account of the Lenders unless an
Event of Default has occurred and is continuing, in which case the cost of such
inspection shall be for the account of the Credit Parties.
7.8 Environmental Laws.
(a) Comply in all material respects with, and take reasonable actions
to ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws and obtain and comply in all
material respects with and maintain, and take reasonable actions to ensure that
all tenants and subtenants obtain and comply in all material respects with and
maintain, any and all licenses, approvals, notifications, registrations or
permits required by applicable Environmental Laws except to the extent that
failure to do so could not reasonably be expected to have a Material Adverse
Effect;
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws except to the extent that the same are being contested in good faith by
appropriate proceedings and the failure to do or the pendency of such
proceedings could not reasonably be expected to have a Material Adverse Effect;
and
(c) Defend, indemnify and hold harmless the Administrative Agent and
the Lenders, and their respective employees, agents, officers and directors,
from and against any and all claims, demands, penalties, fines, liabilities,
settlements, damages, costs and expenses of whatever kind or nature known or
unknown, contingent or otherwise, arising out of, or in any way relating to the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the members of the Consolidated Group or the
Properties, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, reasonable attorney's and
consultant's fees, investigation and laboratory fees, response costs, court
costs and litigation expenses, except to the extent that any of the foregoing
arise out of the gross negligence or willful misconduct of the party seeking
indemnification therefor. The agreements in this paragraph shall survive
repayment of the Loans and all other amounts payable hereunder, and termination
of the Commitments.
7.9 Financial Covenants.
(a) Consolidated Leverage Ratio. As of the end of each fiscal
quarter, the Consolidated Leverage Ratio shall be not greater than
<TABLE>
<CAPTION>
<S> <C>
for the fiscal quarter ending on or about October 30, 1998 4.30:1.0
for the fiscal quarter ending on or about July 30 of each year thereafter 4.75:1.0
for each other fiscal quarter ending after the fiscal quarter ending on or about October 30, 1998 4.0:1.0
</TABLE>
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<PAGE>
(b) Consolidated Fixed Charge Coverage Ratio. As of the end of each
fiscal quarter to occur during the periods shown, the Consolidated Fixed Charge
Coverage Ratio shall be not less than 3.0:1.0.
(c) Consolidated Net Worth. As of the end of each fiscal quarter (after
giving effect to the IPO), Consolidated Net Worth shall be not less than
$90,000,000 plus the net cash proceeds from the IPO plus on the last day of each
fiscal quarter to occur after the Closing Date, 50% of Consolidated Net Income
for the fiscal quarter then ended, such increases to be cumulative, plus 100% of
the net proceeds from Equity Transactions occurring after the Closing Date.
(d) Capital Expenditures. Members of the Consolidated Group will not
make Capital Expenditures in any fiscal year in excess of:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year 1998 $5,000,000
Fiscal year 1999 $6,000,000
Fiscal year 2000 $7,000,000
Fiscal year 2001 $8,000,000
Fiscal year 2002 $9,000,000
Fiscal year 2003 $10,000,000
</TABLE>
The unused portion of Capital Expenditures permitted but not used in any fiscal
year may be carried over and used in the next fiscal year (one-year carry-over).
7.10 Agency Fees.
Pay to the Administrative Agent the annual agency fee and comply with
the other agreements provided for in the Administrative Agent's Fee Letter.
7.11 Additional Guaranties and Stock Pledges.
(a) Domestic Subsidiaries. Where Domestic Subsidiaries of the Borrower
which are not Credit Parties hereunder (the "Non-Guarantor Subsidiaries") shall
at any time constitute more than (the "Threshold Requirement"):
(i) in any instance for any such Non-Guarantor Subsidiary,
five percent (5%) of consolidated assets for the Consolidated Group or
five percent (5%) of consolidated revenues for the Consolidated Group,
or
(ii) in the aggregate for all such Non-Guarantor Subsidiaries,
ten percent (10%) of consolidated assets for the Consolidated Group or
ten percent (10%) of consolidated revenues for the Consolidated Group,
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then the Borrower shall (i) promptly notify the Administrative Agent thereof,
and promptly cause such Domestic Subsidiary or Subsidiaries to become a
Guarantor by execution of a Joinder Agreement, such that immediately after
joinder as a Guarantor, the remaining Non-Guarantor Subsidiaries shall not in
any instance, or collectively, exceed the Threshold Requirement, (ii) deliver
with the Joinder Agreement, supporting resolutions, incumbency certificates,
corporate formation and organizational documentation and opinions of counsel as
the Administrative Agent may reasonably request, and (iii) deliver stock
certificates and related pledge agreements or pledge joinder agreements
evidencing the pledge of 100% of the Voting Stock of all Domestic Subsidiaries
(whether or not they are Guarantors) and 65% of the Voting Stock of all Foreign
Subsidiaries, together with undated stock transfer powers executed in blank.
(b) Foreign Subsidiaries. At any time any Person becomes a Foreign
Subsidiary, the Borrower will promptly notify the Administrative Agent thereof
and cause (i) delivery of supporting resolutions, incumbency certificates,
corporation formation and organizational documentation and opinions of counsel
as the Administrative Agent may reasonably request, and (ii) delivery of stock
certificates (where required for perfection under local law) and a related
pledge agreement or pledge joinder agreement evidencing the pledge of 65% of the
Voting Stock of such Foreign Subsidiary and of 65% of the Voting Stock of each
of its Domestic Subsidiaries and 65% of the Voting Stock of each of its Foreign
Subsidiaries, together in each case with undated stock transfer powers executed
in blank.
7.12 Ownership of Subsidiaries.
Except to the extent otherwise permitted in Section 8.4(b) and Section
8.7 and to the extent as would not cause a Change of Control and except as set
forth on Schedule 6.14, the Borrower shall, directly or indirectly, own at all
times 100% of the Voting Stock of each of its Subsidiaries.
7.13 Use of Proceeds.
Extensions of Credit will be used solely for the purposes provided in
Section 6.15.
7.14 Year 2000 Compatibility.
Take all action necessary to assure that its computer based systems are
able to operate and effectively process data including dates on and after
January 1, 2000, and, at the reasonable request of the Administrative Agent or
the Required Lenders, provide evidence to the Lenders of such year 2000
compatibility.
7.15 Further Assurances in respect of Assumed Mortgage
Indebtedness.
As of the Closing Date, it is the present intention of the Borrower, as
a general matter, to lease, rather than own, real property in its business. To
that end, the Borrower plans to market real property owned by it with an intent
to lease back the real property necessary and useful in its operations and to
dispose of real property which is not needed in the operation of its business.
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Consistent with this approach, the Borrower agrees that in respect of real
property constituting an acquisition permitted under Section 8.4, including such
real property which is subject to a mortgage lien permitted hereunder ("Acquired
Real Property"), it will, and will cause its Domestic Subsidiaries to, sell and
lease-back or sell and dispose of such Acquired Real Property, within 18 months
from the date of acquisition, in the case of Acquired Real Property with a fair
market value of less than $5 million for any individual property, and within 12
months from the date of acquisition in the case of Acquired Real Property with a
fair market value of $5 million or more for any individual property (the
"Acquired Real Property Disposition Period"). In the event that any Acquired
Real Property remains at the end of the applicable Acquired Real Property
Disposition Period, (i) in the case of properties with a fair market value of $5
million or more for any individual property, the Borrower will cause such
properties to be released from the mortgage Liens in favor of other lenders, if
any, and grant mortgage Liens in favor of the Administrative Agent to secure the
Obligations hereunder, together with the items referenced in Section 5.3; and
(ii) in the case of properties with a fair market value of less than $5 million
for any individual property, then if and to the extent the fair market value of
all such properties shall exceed $15 million in the aggregate, the Borrower will
cause a sufficient number of such properties to be released from the mortgage
Liens in favor of other lenders, if any, and grant mortgage Liens in favor of
the Administrative Agent to secure the Obligations hereunder, together with the
items referenced in Section 5.3, such that after giving effect thereto the fair
market value of such properties not subject to the mortgage Liens in favor of
the Administrative Agent to secure the Obligations hereunder shall not exceed
$15 million in the aggregate. Failure to release Acquired Real Property from the
mortgage Liens and to provide mortgage Liens in favor of the Administrative
Agent to secure the Obligations as required hereunder (together with the other
items referenced in Section 5.3) by the end of the Acquired Real Property
Disposition Period will constitute a default under Section 8.2, in the absence
of a consent by the Required Lenders.
SECTION 8
NEGATIVE COVENANTS
Each of the Credit Parties covenants and agrees that on the Closing
Date, and so long as this Credit Agreement is in effect and until the
Commitments have been terminated, no Obligations remain outstanding and all
amounts owing hereunder or in connection herewith, have been paid in full, no
member of the Consolidated Group shall:
8.1 Indebtedness.
Contract, create, incur, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness arising or existing under this Credit
Agreement and the other Credit Documents;
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(b) Indebtedness set forth in Schedule 8.1, and renewals,
refinancings and extensions thereof on terms and conditions no less
favorable than for such existing Indebtedness;
(c) Capital Lease Obligations and Indebtedness incurred, in
each case, to provide all or a portion of the purchase price or costs
of construction of an asset or, in the case of a sale/leaseback
transaction as described in Section 8.11, to finance the value of such
asset owned by a member of the Consolidated Group, provided that (i)
such Indebtedness when incurred shall not exceed the purchase price or
cost of construction of such asset or, in the case of a sale/leaseback
transaction, the fair market value of such asset, (ii) no such
Indebtedness shall be refinanced for a principal amount in excess of
the principal balance outstanding thereon at the time of such
refinancing plus the reasonable expenses of such refinancing, and (iii)
the total amount of all such Indebtedness shall not exceed $5,000,000
at any time outstanding;
(d) Indebtedness and obligations in connection with Permitted
Securitization Transactions; provided that the total Attributed
Principal Amount for all such financings shall not exceed $50,000,000
at any time;
(e) Indebtedness and obligations owing under interest rate
protection agreements relating to the Obligations hereunder and under
interest rate, commodities and foreign currency exchange protection
agreements entered into in the ordinary course of business to manage
existing or anticipated risks and not for speculative purposes;
(f) unsecured intercompany Indebtedness owing by a member of
the Consolidated Group to another member of the Consolidated Group;
(g) Subordinated Debt of the Borrower;
(h) mortgage Indebtedness assumed in connection with an
acquisition permitted under Section 8.4, and any refinancing,
refunding, renewal or extension thereof, provided that (i) such
Indebtedness was in existence as of the date of the acquisition and was
not incurred or assumed in contemplation thereof, (ii) the amount of
any such mortgage Indebtedness shall not be increased in connection
with any refinancing, refunding, renewal or extension (exclusive of
reasonable premiums, fees and expenses in connection therewith), and
(iii) the Borrower shall be compliance with the requirements of Section
7.15;
(i) other unsecured Indebtedness of the Borrower of up to
$5,000,000 in the aggregate at any time outstanding; and
(j) Support Obligations with respect to Indebtedness permitted
under this Section 8.1.
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8.2 Liens.
Contract, create, incur, assume or permit to exist any Lien with
respect to any of their respective property or assets of any kind (whether real
or personal, tangible or intangible), whether now owned or hereafter acquired,
except for Permitted Liens.
8.3 Nature of Business.
Alter the character of their business in any material respect from that
conducted as of the Closing Date and similar or related businesses.
8.4 Consolidation, Merger, Sale or Purchase of Assets, etc.
Other than those transactions contemplated in the Borrower's Form S-1
Registration Statement under the Securities Act of 1933 with respect to the IPO,
(a) Enter into a transaction of merger or consolidation,
except
(i) a member of the Consolidated Group may be a party
to a transaction of merger or consolidation with another member of the
Consolidated Group, provided that (A) if the Borrower is a party
thereto, it shall be the surviving corporation, (B) if a Guarantor is a
party thereto and the Borrower is not a party thereto, a Guarantor
shall be the surviving corporation or the surviving corporation shall
be a Domestic Subsidiary and shall become a Guarantor hereunder as an
Additional Credit Party pursuant to Section 7.11 concurrently
therewith, and (C) no Default or Event of Default shall exist either
immediately prior to or immediately after giving effect thereto; and
(ii) a member of the Consolidated Group (other than
the Borrower) may be a party to a transaction of merger or
consolidation with any other Person, provided that (A) the provisions
of Section 7.11 regarding joinder of certain Subsidiaries as Additional
Credit Parties hereunder shall be complied with, (B) no Default or
Event of Default shall exist either immediately prior to or immediately
after giving effect thereto, and (C) the provisions of subsection (c)
of this Section shall be complied with.
(b) Sell, lease, transfer or otherwise dispose of assets,
property and/or operations (including any sale-leaseback transaction, but
excluding the sale of inventory in the ordinary course of business, the sale or
disposition of plant, property and equipment which is no longer useful in the
business or as to which the proceeds therefrom are reinvested in plant, property
and equipment within six months thereof), other than to another Credit Party,
which
(i) in the aggregate in any fiscal year shall
constitute more than ten percent (10%) of total assets for the
Consolidated Group as of the immediately preceding fiscal year, or in
the aggregate in any fiscal year shall account for more than ten
percent (10%) of Consolidated Net Income for the immediately preceding
fiscal year; or
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(ii) would cause a Default or Event of Default to
exist after giving effect thereto on a Pro Forma Basis,
without the prior written consent of the Required Lenders (which consent shall
not be unreasonably withheld or delayed).
(c) Acquire all or any portion of the capital stock or other
ownership interest in any Person which is not a Subsidiary or all or any
substantial portion of the assets, property and/or operations of a Person which
is not a Subsidiary, without the prior written consent of the Required Lenders
(which consent shall not be unreasonably withheld or delayed), unless
(i) in the case of an acquisition of capital stock or
other ownership interest after giving effect thereto, such Person will
not be a Subsidiary, then such acquisition will not cause a violation
of Section 8.5;
(ii) in the case of an acquisition of capital stock
or other ownership interest, after giving effect thereto, such Person
will be a Subsidiary, or in the case of an acquisition of assets,
property and/or operations, then
(A) the cost of any such acquisition
(or series of related transactions) shall not exceed $50 million in any
instance;
(B) the acquisition is in the same or a
similar or related line of business as that of the Credit Parties;
(C) the Board of Directors of the Person
which is the subject of the acquisition shall have approved the
acquisition; and
(D) no Default or Event of Default would
exist after giving effect thereto on a Pro Forma Basis.
(d) In the case of the Borrower and any Subsidiary which is
not wholly-owned, liquidate, wind-up or dissolve, whether voluntarily or
involuntarily (or suffer to permit any such liquidation or dissolution).
8.5 Advances, Investments and Loans.
Lend money or extend credit or make advances to any Person, or purchase
or acquire any stock, obligations or securities of, or any other interest in, or
make any capital contribution to, or otherwise make an Investment in, any Person
except for Permitted Investments.
8.6 Transactions with Affiliates.
Enter into or permit to exist any transaction or series of
transactions, whether or not in the ordinary course of business, with any
officer, director, shareholder or Affiliate other than (i)
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transactions permitted by Section 8.1, Section 8.4(b), Section 8.5 or Section
8.10, (ii) customary fees and expenses paid to directors, (iii) transactions
between the Borrower and a wholly owned Domestic Guarantor, (iv) transactions
pursuant to agreements existing as of the Closing Date and set forth on Schedule
8.6 hereto [to include Ledecky Services Agreement described on p. 38 of Form
S-1], and (v) any other transaction that is on terms and conditions
substantially as favorable as would be obtainable in a comparable arm's-length
transaction with a Person other than an officer, director, shareholder or
Affiliate.
8.7 Ownership of Equity Interests.
Issue, sell, transfer, pledge or otherwise dispose of any partnership
interests, shares of capital stock or other equity or ownership interests
("Equity Interests") in any member of the Consolidated Group, except (i)
issuance, sale or transfer of Equity Interests to a Credit Party by a Subsidiary
of such Credit Party, (ii) in connection with a transaction permitted by Section
8.4, or (iii) as needed to qualify directors under applicable law.
8.8 Fiscal Year.
Change its fiscal year end from the last Saturday in April of each
year.
8.9 Prepayments of Indebtedness, etc.
(a) After the issuance thereof, amend or modify (or permit the
amendment or modification of), the terms of any other Indebtedness in a manner
adverse to the interests of the Lenders (including specifically shortening any
maturity or average life to maturity or requiring any payment sooner than
previously scheduled or increasing the interest rate or fees applicable
thereto);
(b) Make any prepayment, redemption, defeasance or acquisition for
value of (including without limitation, by way of depositing money or securities
with the trustee with respect thereto before due for the purpose of paying when
due), or refund, refinance or exchange of any Funded Debt (other than the
Obligations or intercompany Indebtedness permitted hereunder) other than (a)
regularly scheduled payments of principal and interest, (b) Funded Debt having
an interest rate in excess of the Base Rate, and (c) other Funded Debt not
exceeding $250,000 in any instance and $500,000 in the aggregate in any calendar
year.
8.10 Restricted Payments.
Make or permit any Restricted Payments, unless and to the extent that
no Default or Event of Default shall exist immediately prior or after giving
effect thereto on a Pro Forma Basis.
8.11 No Further Negative Pledges.
Except with respect to prohibitions against other encumbrances on
specific Property encumbered to secure payment of particular Indebtedness (which
Indebtedness relates solely to
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such specific Property, and improvements and accretions thereto, and is
otherwise permitted hereby), no member of the Consolidated Group will enter
into, assume or become subject to any agreement prohibiting or otherwise
restricting the creation or assumption of any Lien upon its material properties
or assets, whether now owned or hereafter acquired, or requiring the grant of
any material security for such obligation if security is given for some other
obligation.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. Any Credit Party shall
(i) default in the payment when due of any principal of any of
the Loans or of any reimbursement obligations arising from drawings
under Letters of Credit and such default shall continue for the lesser
of three (3) Business Days or until the Termination Date; or
(ii) default, and such defaults shall continue for three (3)
or more Business Days, in the payment when due of any interest on the
Loans or on any reimbursement obligations arising from drawings under
Letters of Credit, or of any Fees or other amounts owing hereunder,
under any of the other Credit Documents or in connection herewith or
therewith; or
(b) Representations. Any representation, warranty or statement made or
deemed to be made herein, in any of the other Credit Documents, or in any
statement or certificate delivered or required to be delivered pursuant hereto
or thereto shall prove untrue in any material respect on the date as of which it
was deemed to have been made; or
(c) Covenants.
(i) Default in the due performance or observance of any term,
covenant or agreement contained in Section 7.3(a), 7.9, 7.11, 7.13 or
8.1 through 8.12, inclusive, or any condition contained in Section 5.3;
(ii) Default in the due performance or observance by it of any
term, covenant or agreement (other than those referred to in subsections
(a), (b) or (c)(i) of this Section 9.1) contained in this Credit
Agreement and such default shall continue unremedied for a period of at
least 30 days after the earlier of a responsible officer of a Credit
Party becoming aware of such default or notice thereof by the
Administrative Agent; or
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(d) Other Credit Documents. (i) Any Credit Party shall default in the
due performance or observance of any material term, covenant or agreement in any
of the other Credit Documents (subject to applicable grace or cure periods, if
any), or (ii) except as to the Credit Party which is dissolved, released or
merged or consolidated out of existence as the result of or in connection with a
dissolution, merger or disposition permitted by Section 8.4(a), Section 8.4(b)
or Section 8.4(c), any Credit Document shall fail to be in full force and effect
or to give the Administrative Agent and/or the Lenders any material part of the
Liens, rights, powers and privileges purported to be created thereby; or
(e) Guaranties. Except as to the Credit Party which is dissolved,
released or merged or consolidated out of existence as the result of or in
connection with a dissolution, merger or disposition permitted by Section
8.4(a), Section 8.4(b) or Section 8.4(c), the guaranty given by any Guarantor
hereunder or any material provision thereof shall cease to be in full force and
effect, or any Guarantor hereunder or any Person acting by or on behalf of such
Guarantor shall deny or disaffirm such Guarantor's obligations under such
guaranty, or any Guarantor shall default (subject to applicable grace or cure
period, if any) in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to any guaranty; or
(f) Bankruptcy, etc. Any Bankruptcy Event shall occur with respect to
any Credit Party; or
(g) Defaults under Other Agreements. With respect to any Indebtedness
(other than Indebtedness outstanding under this Credit Agreement) in excess of
$5,000,000 in the aggregate for the Consolidated Group taken as a whole, (A) (1)
any member of the Consolidated Group shall default in any payment (beyond the
applicable grace period with respect thereto, if any) with respect to any such
Indebtedness, or (2) the occurrence and continuance of a default in the
observance or performance relating to such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or any other
event or condition shall occur or condition exist, the effect of which default
or other event or condition is to cause, or permit, the holder or holders of
such Indebtedness (or trustee or agent on behalf of such holders) to cause
(determined without regard to whether any notice or lapse of time is required),
any such Indebtedness to become due prior to its stated maturity; or (B) any
such Indebtedness shall be declared due and payable, or required to be prepaid
other than by a regularly scheduled required prepayment, prior to the stated
maturity thereof; or
(h) Judgments. Any member of the Consolidated Group shall fail within
60 days of the date due and payable to pay, bond or otherwise discharge any
judgment, settlement or order for the payment of money which judgment,
settlement or order, when aggregated with all other such judgments, settlements
or orders due and unpaid at such time, exceeds $1,000,000, and which is not
covered by insurance, stayed on appeal (or for which no motion for stay is
pending) or is not otherwise being executed; or
(i) ERISA. Any of the following events or conditions, if such event or
condition could reasonably be expected to have a Material Adverse Effect: (1)
any "accumulated funding
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deficiency," as such term is defined in Section 302 of ERISA and Section 412 of
the Code, whether or not waived, shall exist with respect to any Plan, or any
lien shall arise on the assets of a member of the Consolidated Group or any
ERISA Affiliate in favor of the PBGC or a Plan; (2) an ERISA Event shall occur
with respect to a Single Employer Plan, which is, in the reasonable opinion of
the Administrative Agent, likely to result in the termination of such Plan for
purposes of Title IV of ERISA; (3) an ERISA Event shall occur with respect to a
Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable
opinion of the Administrative Agent, likely to result in (i) the termination of
such Plan for purposes of Title IV of ERISA, or (ii) a member of the
Consolidated Group or any ERISA Affiliate incurring any liability in connection
with a withdrawal from, reorganization of (within the meaning of Section 4241 of
ERISA), or insolvency of (within the meaning of Section 4245 of ERISA) such
Plan; or (4) any prohibited transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall
occur which may subject a member of the Consolidated Group or any ERISA
Affiliate to any liability under Sections 406, 409, 502(i), or 502(l) of ERISA
or Section 4975 of the Code, or under any agreement or other instrument pursuant
to which a member of the Consolidated Group or any ERISA Affiliate has agreed or
is required to indemnify any person against any such liability; or
(j) Ownership. There shall occur a Change of Control.
9.2 Acceleration; Remedies.
Upon the occurrence and during the continuance of an Event of Default,
and at any time thereafter, the Administrative Agent shall, upon the request and
direction of the Required Lenders, by written notice to the Credit Parties take
any of the following actions:
(i) Termination of Commitments. Declare the Commitments
terminated whereupon the Commitments shall be immediately terminated.
(ii) Acceleration. Declare the unpaid principal of and any
accrued interest in respect of all Loans, any reimbursement obligations
arising from drawings under Letters of Credit and any and all other
indebtedness or obligations of any and every kind owing by the Credit
Parties to the Administrative Agent and/or any of the Lenders hereunder
to be due whereupon the same shall be immediately due and payable
without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by each of the Credit Parties.
(iii) Cash Collateral. Direct the Borrowers to pay (and each
Borrower agrees that upon receipt of such notice, or upon the occurrence
of an Event of Default under Section 9.1(f), it will immediately pay) to
the Administrative Agent additional cash, to be held by the
Administrative Agent, for the benefit of the Lenders, in a cash
collateral account as additional security for the LOC Obligations in
respect of subsequent drawings under all then outstanding Letters of
Credit in an amount equal to the maximum aggregate amount which may be
drawn under all Letters of Credits then outstanding.
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(iv) Enforcement of Rights. Enforce any and all rights and
interests created and existing under the Credit Documents and all rights
of set-off.
Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(f) shall occur, then (a) if such Event of Default occurs with respect to the
Borrower, (i) with respect to the Borrower, the Commitments shall automatically
terminate and all Loans, all reimbursement obligations arising from drawings
under Letters of Credit, all accrued interest in respect thereof, all accrued
and unpaid Fees and other indebtedness or obligations owing to the
Administrative Agent and/or any of the Lenders hereunder automatically shall
immediately become due and payable without presentment, demand, protest or the
giving of any notice or other action by the Administrative Agent or the Lenders,
all of which are hereby waived by the Credit Parties, and (ii) with respect to
any other Credit Party, all obligations of such Credit Party hereunder
automatically shall immediately become due and payable without presentment,
demand, protest or the giving of any notice or other action by the
Administrative Agent or the Lenders, all of which are hereby waived by such
Credit Party; (b) if such Event of Default occurs with respect to any other
Credit Party, all obligations of such Credit Party hereunder automatically shall
immediately become due and payable without presentment, demand, protest or the
giving of any notice or other action by the Administrative Agent or the Lenders,
all of which are hereby waived by such Credit Party; and (c) nothing in this
sentence shall be construed to prevent the Administrative Agent or the Lenders
from exercising any other remedies it or they may have under this Section 9.2.
SECTION 10
AGENCY PROVISIONS
10.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity, the "Administrative Agent") of such
Lender to act as specified herein and the other Credit Documents, and each such
Lender hereby authorizes the Administrative Agent as the Administrative Agent
for such Lender, to take such action on its behalf under the provisions of this
Credit Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of the
other Credit Documents, together with such other powers as are reasonably
incidental thereto. Each Lender further directs and authorizes the
Administrative Agent to execute releases (or similar agreements) to give effect
to the provisions of this Credit Agreement and the other Credit Documents,
including specifically without limitation the provisions of Section 8.4 hereof.
Notwithstanding any provision to the contrary elsewhere herein and in the other
Credit Documents, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein and therein, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Credit Agreement or any of the other Credit Documents, or shall otherwise exist
against the Administrative Agent. The provisions of this Section are solely for
the benefit of the Administrative Agent and the Lenders and none of the Credit
Parties shall have any rights as a third party beneficiary of the provisions
hereof. In
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performing its functions and duties under this Credit Agreement and the other
Credit Documents, the Administrative Agent shall act solely as Administrative
Agent of the Lenders and does not assume and shall not be deemed to have assumed
any obligation or relationship of agency or trust with or for any Credit Party
or any of their respective Affiliates.
10.2 Delegation of Duties.
The Administrative Agent may execute any of its duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
10.3 Exculpatory Provisions.
The Administrative Agent and its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall not be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful misconduct), or
(ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by any of the Credit Parties
contained herein or in any of the other Credit Documents or in any certificate,
report, document, financial statement or other written or oral statement
referred to or provided for in, or received by the Administrative Agent under or
in connection herewith or in connection with the other Credit Documents, or
enforceability or sufficiency therefor of any of the other Credit Documents, or
for any failure of any Credit Party to perform its obligations hereunder or
thereunder. The Administrative Agent shall not be responsible to any Lender for
the effectiveness, genuineness, validity, enforceability, collectability or
sufficiency of this Credit Agreement, or any of the other Credit Documents or
for any representations, warranties, recitals or statements made herein or
therein or made by the Borrower or any Credit Party in any written or oral
statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Administrative Agent to the Lenders or by or on behalf
of the Credit Parties to the Administrative Agent or any Lender or be required
to ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Loans or the use of the Letters of Credit
or of the existence or possible existence of any Default or Event of Default or
to inspect the properties, books or records of the Credit Parties or any of
their respective Affiliates.
10.4 Reliance on Communications.
The Administrative Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to any of
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the Credit Parties, independent accountants and other experts selected by the
Administrative Agent with reasonable care). The Administrative Agent may deem
and treat the Lenders as the owners of their respective interests hereunder for
all purposes unless a written notice of assignment, negotiation or transfer
thereof shall have been filed with the Administrative Agent in accordance with
Section 11.3(b) hereof. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Credit Agreement or under any
of the other Credit Documents unless it shall first receive such advice or
concurrence of the Required Lenders as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Administrative Agent shall in all cases be fully protected
in acting, or in refraining from acting, hereunder or under any of the other
Credit Documents in accordance with a request of the Required Lenders (or to the
extent specifically provided in Section 11.6, all the Lenders) and such request
and any action taken or failure to act pursuant thereto shall be binding upon
all the Lenders (including their successors and assigns).
10.5 Notice of Default.
The Administrative Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless the
Administrative Agent has received notice from a Lender or a Credit Party
referring to the Credit Document, describing such Default or Event of Default
and stating that such notice is a "notice of default." In the event that the
Administrative Agent receives such a notice, the Administrative Agent shall give
prompt notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders.
10.6 Non-Reliance on Administrative Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Administrative
Agent and its officers, directors, employees, Administrative Agents,
attorneys-in-fact or affiliates has not made any representations or warranties
to it and that no act by the Administrative Agent or any affiliate thereof
hereinafter taken, including any review of the affairs of any Credit Party or
any of their respective Affiliates, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, assets, operations, property,
financial and other conditions, prospects and creditworthiness of the Borrower,
the other Credit Parties or their respective Affiliates and made its own
decision to make its Loans hereunder and enter into this Credit Agreement. Each
Lender also represents that it will, independently and without reliance upon the
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Credit Agreement, and to make such investigation as it deems necessary to
inform itself as to the business, assets, operations, property, financial and
other conditions, prospects and creditworthiness of the Borrower, the other
Credit Parties and their respective Affiliates. Except for notices, reports and
other documents expressly required to be
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furnished to the Lenders by the Administrative Agent hereunder, the
Administrative Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business, operations,
assets, property, financial or other conditions, prospects or creditworthiness
of the Borrower, the other Credit Parties or any of their respective Affiliates
which may come into the possession of the Administrative Agent or any of its
officers, directors, employees, Administrative Agents, attorneys-in-fact or
affiliates.
10.7 Indemnification.
The Lenders agree to indemnify the Administrative Agent in its capacity
as such (to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to their respective
Commitments (or if the Commitments have expired or been terminated, in
accordance with the respective principal amounts of outstanding Loans and
Participation Interests of the Lenders), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including without limitation at any time following the final payment of all of
the obligations of the Borrower hereunder and under the other Credit Documents)
be imposed on, incurred by or asserted against the Administrative Agent in its
capacity as such in any way relating to or arising out of this Credit Agreement
or the other Credit Documents or any documents contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or any
action taken or omitted by the Administrative Agent under or in connection with
any of the foregoing; provided that no Lender shall be liable for the payment of
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
gross negligence or willful misconduct of the Administrative Agent. If any
indemnity furnished to the Administrative Agent for any purpose shall, in the
opinion of the Administrative Agent, be insufficient or become impaired, the
Administrative Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional indemnity is
furnished. The agreements in this Section shall survive the repayment of the
Loans, LOC Obligations and other obligations under the Credit Documents and the
termination of the Commitments hereunder.
10.8 Administrative Agent in its Individual Capacity.
The Administrative Agent and its affiliates may make loans to, accept
deposits from and generally engage in any kind of business with the Borrower,
its Subsidiaries or their respective Affiliates as though the Administrative
Agent were not the Administrative Agent hereunder. With respect to the Loans
made by and all obligations of the Borrower hereunder and under the other Credit
Documents, the Administrative Agent shall have the same rights and powers under
this Credit Agreement as any Lender and may exercise the same as though it were
not the Administrative Agent, and the terms "Lender" and "Lenders" shall include
the Administrative Agent in its individual capacity.
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10.9 Successor Administrative Agent.
The Administrative Agent may, at any time, resign upon 20 days' written
notice to the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Administrative Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Administrative Agent. If no successor Administrative Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Administrative Agent shall select a
successor Administrative Agent provided such successor is a Lender hereunder or
a commercial bank organized under the laws of the United States of America or of
any State thereof and has a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor, such successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations as Administrative Agent, as
appropriate, under this Credit Agreement and the other Credit Documents and the
provisions of this Section 10.9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Credit Agreement.
SECTION 11
MISCELLANEOUS
11.1 Notices.
Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (i) when
delivered, (ii) when transmitted via telecopy (or other facsimile device) to the
number set out below with receipt confirmed by machine or voice, (iii) the day
following the day on which the same has been delivered prepaid to a reputable
national overnight air courier service, or (iv) the third Business Day following
the day on which the same is sent by certified or registered mail, postage
prepaid, in each case to the respective parties at the address, in the case of
the Borrower, Guarantors and the Administrative Agent, set forth below, and, in
the case of the Lenders, set forth on Schedule 11.1, or at such other address as
such party may specify by written notice to the other parties hereto:
if to the Borrower or the Guarantors:
School Specialty, Inc.
100 N. Bluemound Drive
Appleton, Wisconsin 54913-1579
Attn: Donald J. Noskowiak
Telephone: 920-734-2756, Ext. 258
Telecopy: 920-734-6276
with a copy to:
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Joseph F. Franzoi, IV
Franzoi & Franzoi, S.C.
514 Racine Street
Menasha, Wisconsin 54952-2398
Telephone: 920-725-3916
Telecopy: 920-725-0998
and a copy to:
Russell J. Bruemmer
Wilmer, Cutler & Pickering
2445 M Street, NW
Washington, DC 20037-1420
Telephone: 202-663-6804
Telecopy: 202-663-6363
if to the Administrative Agent:
NationsBank, N.A.
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attn: Agency Services
Telephone: (704) 388-1108
Telecopy: (704) 388-9436
with a copy to:
NationsBank, N.A.
Corporate Finance Group
6610 Rockledge Drive, 6th Floor
MD2-600-06-13
Bethesda, Maryland 20817-1876
Attn: Michael R. Heredia
Telephone: (301) 571-0724
Telecopy: (301) 571-0719
11.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable law
or otherwise, and not by way of limitation of any such rights, upon the
occurrence and during the continuance of an Event of Default, each Lender is
authorized at any time and from time to time, without presentment, demand,
protest or other notice of any kind (all of which rights being hereby expressly
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waived), to set-off and to appropriate and apply any and all deposits (general
or special) and any other indebtedness at any time held or owing by such Lender
(including, without limitation branches, agencies or Affiliates of such Lender
wherever located) to or for the credit or the account of any Credit Party
against obligations and liabilities of such Person to such Lender hereunder,
under the Notes, the other Credit Documents or otherwise, irrespective of
whether such Lender shall have made any demand hereunder and although such
obligations, liabilities or claims, or any of them, may be contingent or
unmatured, and any such set-off shall be deemed to have been made immediately
upon the occurrence of an Event of Default even though such charge is made or
entered on the books of such Lender subsequent thereto. Any Person purchasing a
participation in the Loans and Commitments hereunder pursuant to Section 3.13 or
Section 11.3(d) may exercise all rights of set-off with respect to its
participation interest as fully as if such Person were a Lender hereunder.
11.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto; provided that none of the Credit Parties may assign or
transfer any of its interests without prior written consent of the Lenders;
provided further that the rights of each Lender to transfer, assign or grant
participations in its rights and/or obligations hereunder shall be limited as
set forth in this Section 11.3, provided however that nothing herein shall
prevent or prohibit any Lender from (i) pledging its Loans hereunder to a
Federal Reserve Bank in support of borrowings made by such Lender from such
Federal Reserve Bank, or (ii) granting assignments or selling participations in
such Lender's Loans and/or Commitments hereunder to its parent company and/or to
any Affiliate or Subsidiary of such Lender.
(b) Assignments. Each Lender may assign all or a portion of its rights
and obligations hereunder, pursuant to an assignment agreement substantially in
the form of Schedule 11.3(b), to (i) any Lender or any Affiliate or Subsidiary
of a Lender, or (ii) any other commercial bank, financial institution or
"accredited investor" (as defined in Regulation D of the Securities and Exchange
Commission) reasonably acceptable to the Administrative Agent and, so long as no
Default or Event of Default has occurred and is continuing, the Borrower;
provided that (i) any such assignment (other than any assignment to an existing
Lender) shall be in a minimum aggregate amount of $5,000,000 (or, if less, the
remaining amount of the Commitment being assigned by such Lender) of the
Commitments and in integral multiples of $1,000,000 above such amount and (ii)
each such assignment shall be of a constant, not varying, percentage of all such
Lender's rights and obligations under this Credit Agreement. Any assignment
hereunder shall be effective upon delivery to the Administrative Agent of
written notice of the assignment together with a transfer fee of $3,500 payable
by the Assigning Lender to the Administrative Agent for its own account from and
after the later of (i) the effective date specified in the applicable assignment
agreement and (ii) the date of recording of such assignment in the Register
pursuant to the terms of subsection (c) below. The assigning Lender will give
prompt notice to the Administrative Agent and the Borrower of any such
assignment. Upon the effectiveness of any such assignment (and after notice to,
and (to the extent required pursuant to the terms hereof), with the consent of,
the Borrower as provided herein), the assignee shall become a "Lender" for all
purposes of this Credit Agreement
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and the other Credit Documents and, to the extent of such assignment, the
assigning Lender shall be relieved of its obligations hereunder to the extent of
the Loans and Commitment components being assigned. Along such lines the
Borrower agrees that upon notice of any such assignment and surrender of the
appropriate Note or Notes, it will promptly provide to the assigning Lender and
to the assignee separate promissory notes in the amount of their respective
interests substantially in the form of the original Note (but with notation
thereon that it is given in substitution for and replacement of the original
Note or any replacement notes thereof). By executing and delivering an
assignment agreement in accordance with this Section 11.3(b), the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim; (ii) except
as set forth in clause (i) above, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Credit
Agreement, any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement, any
of the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto or the financial condition of any Credit Party or any
of their respective Affiliates or the performance or observance by any Credit
Party of any of its obligations under this Credit Agreement, any of the other
Credit Documents or any other instrument or document furnished pursuant hereto
or thereto; (iii) such assignee represents and warrants that it is legally
authorized to enter into such assignment agreement; (iv) such assignee confirms
that it has received a copy of this Credit Agreement, the other Credit Documents
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such assignment agreement;
(v) such assignee will independently and without reliance upon the
Administrative Agent, such assigning Lender or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Credit Agreement and the other Credit Documents; (vi) such assignee
appoints and authorizes the Administrative Agent to take such action on its
behalf and to exercise such powers under this Credit Agreement or any other
Credit Document as are delegated to the Administrative Agent by the terms hereof
or thereof, together with such powers as are reasonably incidental thereto; and
(vii) such assignee agrees that it will perform in accordance with their terms
all the obligations which by the terms of this Credit Agreement and the other
Credit Documents are required to be performed by it as a Lender.
(c) Maintenance of Register. The Administrative Agent shall maintain at
one of its offices in Charlotte, North Carolina a copy of each Lender assignment
agreement delivered to it in accordance with the terms of subsection (b) above
and a register for the recordation of the identity of the principal amount, type
and Interest Period of each Loan outstanding hereunder, the names, addresses and
the Commitments of the Lenders pursuant to the terms hereof from time to time
(the "Register"). The Administrative Agent will make reasonable efforts to
maintain the accuracy of the Register and to promptly update the Register from
time to time, as necessary. The entries in the Register shall be conclusive in
the absence of manifest error and the Borrower, the Administrative Agent and the
Lenders may treat each Person whose name is recorded in the Register pursuant to
the terms hereof as a Lender hereunder for all purposes of this Credit
Agreement. The Register
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shall be available for inspection by the Borrower and each Lender, at any
reasonable time and from time to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer, grant or assign
participations in all or any part of such Lender's rights, obligations, or
rights and obligations hereunder (including all or a portion of its Commitments
or its Loans); provided that (i) such selling Lender shall remain a "Lender" for
all purposes under this Credit Agreement (such selling Lender's obligations
under the Credit Documents remaining unchanged) and the participant shall not
constitute a Lender hereunder, (ii) no such participant shall have, or be
granted, rights to approve any amendment or waiver relating to this Credit
Agreement or the other Credit Documents except to the extent any such amendment
or waiver would (A) reduce the principal of or rate of interest on or Fees in
respect of any Loans in which the participant is participating, (B) postpone the
date fixed for any payment of principal (including extension of the Termination
Date or the date of any mandatory prepayment), interest or Fees in which the
participant is participating, (C) except as expressly provided in the Credit
Documents, release all or substantially all of the Guarantors from their
guaranty obligations hereunder, or (D) except as permitted under Section 8.4(b),
release all or substantially all of the collateral, and (iii) sub-participations
by the participant (except to an affiliate, parent company or affiliate of a
parent company of the participant) shall be prohibited. In the case of any such
participation, the participant shall not have any rights under this Credit
Agreement or the other Credit Documents (the participant's rights against the
selling Lender in respect of such participation to be those set forth in the
participation agreement with such Lender creating such participation) and all
amounts payable by and other obligations of the Borrower hereunder shall be
determined as if such Lender had not sold such participation, provided, however,
that such participant shall be entitled to receive additional amounts under
Sections 3.6, 3.9, 3.10 and 3.11 on the same basis as if it were a Lender (but
not in excess of amounts available to the Lender from which the participant took
its interest).
11.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Administrative Agent or any
Lender in exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Administrative Agent or any
Lender and any of the Credit Parties shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Administrative Agent or any Lender
would otherwise have. No notice to or demand on any Credit Party in any case
shall entitle the Borrower or any other Credit Party to any other or further
notice or demand in similar or other circumstances or constitute a waiver of the
rights of the Administrative Agent or the Lenders to any other or further action
in any circumstances without notice or demand.
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11.5 Payment of Expenses, etc.
The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and
expenses (A) of the Administrative Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit Agreement
and the other Credit Documents and the documents and instruments referred to
therein (including, without limitation, the reasonable fees and expenses of
Moore & Van Allen, PLLC, special counsel to the Administrative Agent) and any
amendment, waiver or consent relating hereto and thereto including, but not
limited to, any such amendments, waivers or consents resulting from or related
to any work-out, renegotiation or restructure relating to the performance by the
Credit Parties under this Credit Agreement and (B) of the Administrative Agent
and the Lenders in connection with enforcement of the Credit Documents and the
documents and instruments referred to therein (including, without limitation, in
connection with any such enforcement, the reasonable fees and disbursements of
counsel for the Administrative Agent and each of the Lenders); (ii) pay and hold
each of the Lenders harmless from and against any and all present and future
stamp and other similar taxes with respect to the foregoing matters and save
each of the Lenders harmless from and against any and all liabilities with
respect to or resulting from any delay or omission (other than to the extent
attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender,
its officers, directors, employees, representatives and Administrative Agents
from and hold each of them harmless against any and all losses, liabilities,
claims, damages or expenses incurred by any of them as a result of, or arising
out of, or in any way related to, or by reason of (A) any investigation,
litigation or other proceeding (whether or not any Lender is a party thereto)
related to the entering into and/or performance of any Credit Document or the
use of proceeds of any Loans (including other extensions of credit) hereunder or
the consummation of any other transactions contemplated in any Credit Document,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation, litigation or other
proceeding or (B) the presence or Release of any Materials of Environmental
Concern at, under or from any Property owned, operated or leased by the Borrower
or any of its Subsidiaries, or the failure by the Borrower or any of its
Subsidiaries to comply with any Environmental Law (but excluding, in the case of
either of clause (A) or (B) above, any such losses, liabilities, claims, damages
or expenses to the extent incurred by reason of gross negligence or willful
misconduct on the part of the Person to be indemnified).
11.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any of
the terms hereof or thereof may be amended, changed, waived, discharged or
terminated unless such amendment, change, waiver, discharge or termination is in
writing entered into by, or approved in writing by, the Required Lenders and the
Borrower, provided, however, that:
(a) without the consent of each Lender affected thereby,
neither this Credit Agreement nor any of the other Credit Documents may
be amended to
(i) extend the final maturity of any Loan or the time
of payment of any reimbursement obligation, or any portion
thereof, arising from drawings under
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Letters of Credit, or extend or waive any principal
amortization payment of any Loan, or any portion thereof,
(ii) reduce the rate or extend the time of payment of
interest (other than as a result of waiving the applicability
of any increase in interest rates after the occurrence of an
Event of Default or on account of a failure to deliver
financial statements on a timely basis) thereon or Fees
hereunder,
(iii) reduce or waive the principal amount of any Loan or
of any reimbursement obligation, or any portion thereof,
arising from drawings under Letters of Credit,
(iv) increase the Commitment of a Lender over the amount
thereof in effect (it being understood and agreed that a
waiver of any Default or Event of Default or mandatory
reduction in the Commitments shall not constitute a change in
the terms of any Commitment of any Lender),
(v) except as permitted under Section 8.4(b), release
all or substantially all of the collateral,
(vi) except as the result of or in connection with a
dissolution, merger or disposition of a Subsidiary permitted
under Section 8.4, release the Borrower or all or
substantially all of the Guarantors from its or their
obligations under the Credit Documents,
(vii) amend, modify or waive any provision of this
Section 11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12,
3.13, 3.14, 9.1(a), 11.2, 11.3, 11.5 or 11.9,
(viii) reduce any percentage specified in, or otherwise
modify, the definition of Required Lenders, or
(ix) consent to the assignment or transfer by the
Borrower (or another Credit Party) of any of its rights and
obligations under (or in respect of) the Credit Documents
except as permitted thereby;
(b) without the consent of the Agent, no provision of
Section 10 may be amended;
(c) without the consent of the Issuing Lender, no provision of
Section 2.2 may be amended.
Notwithstanding the fact that the consent of all the Lenders is
required in certain circumstances as set forth above, (x) each Lender is
entitled to vote as such Lender sees fit on any bankruptcy reorganization plan
that affects the Loans, and each Lender acknowledges that the
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provisions of Section 1126(c) of the Bankruptcy Code supersedes the unanimous
consent provisions set forth herein and (y) the Required Lenders may consent to
allow a Credit Party to use cash collateral in the context of a bankruptcy or
insolvency proceeding.
11.7 Counterparts.
This Credit Agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument. It shall not be necessary in
making proof of this Credit Agreement to produce or account for more than one
such counterpart.
11.8 Headings.
The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.
11.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 2.2(i), 3.9, 3.11, 10.7 or 11.5 shall survive the execution and delivery
of this Credit Agreement, the making of the Loans, the issuance of the Letters
of Credit, the repayment of the Loans, LOC Obligations and other obligations
under the Credit Documents and the termination of the Commitments hereunder, and
all representations and warranties made by the Credit Parties herein shall
survive delivery of the Notes and the making of the Loans hereunder.
11.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Any legal action or proceeding with respect to this Credit Agreement or any
other Credit Document may be brought in the courts of the State of New York in
New York County, or of the United States for the Southern District of New York,
and, by execution and delivery of this Credit Agreement, each of the Credit
Parties hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the nonexclusive jurisdiction of such courts.
Each of the Credit Parties further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to it at the address set out for notices pursuant to Section 11.1, such
service to become effective three (3) days after such mailing. Nothing herein
shall affect the right of the Administrative Agent to serve process in any other
manner permitted by law or to commence legal proceedings or to otherwise proceed
against any Credit Party in any other jurisdiction.
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<PAGE>
(b) Each of the Credit Parties hereby irrevocably waives any objection
which it may now or hereafter have to the laying of venue of any of the
aforesaid actions or proceedings arising out of or in connection with this
Credit Agreement or any other Credit Document brought in the courts referred to
in subsection (a) hereof and hereby further irrevocably waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE ADMINISTRATIVE AGENT,
THE LENDERS, THE BORROWER AND THE CREDIT PARTIES HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
11.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.
11.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and supersede
all prior agreements and understandings, oral or written, if any, including any
commitment letters or correspondence relating to the Credit Documents or the
transactions contemplated herein and therein.
11.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at such time on or
after the Closing Date when it shall have been executed by the Borrower, the
Guarantors and the Administrative Agent, and the Administrative Agent shall have
received copies hereof (telefaxed or otherwise) which, when taken together, bear
the signatures of each Lender, and thereafter this Credit Agreement shall be
binding upon and inure to the benefit of the Borrower, the Guarantors, the
Administrative Agent and each Lender and their respective successors and
assigns.
(b) The term of this Credit Agreement shall be until no Loans, LOC
Obligations or any other amounts payable hereunder or under any of the other
Credit Documents shall remain outstanding and until all of the Commitments
hereunder shall have expired or been terminated.
11.14 Confidentiality.
The Administrative Agent and the Lenders agree to keep confidential
(and to cause their respective affiliates, officers, directors, employees,
Administrative Agents and representatives to
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keep confidential) all information, materials and documents furnished to the
Administrative Agent or any such Lender by or on behalf of any Credit Party
(whether before or after the Closing Date) which relates to the Borrower or any
of its Subsidiaries (the "Information"). Notwithstanding the foregoing, the
Administrative Agent and each Lender shall be permitted to disclose Information
(i) to its affiliates, officers, directors, employees, agents and
representatives (provided they have been informed of the confidential nature of
such Information and have agreed to abide by the provisions of this Section
11.14) in connection with its participation in any of the transactions evidenced
by this Credit Agreement or any other Credit Documents or the administration of
this Credit Agreement or any other Credit Documents; (ii) to the extent required
by applicable laws and regulations or by any subpoena or similar legal process,
or requested by any Governmental Authority, and, where permissable in connection
therewith, after notice to the Borrower reasonably calculated to afford the
Borrower an opportunity to contest the disclosure; (iii) to the extent such
Information (A) becomes publicly available other than as a result of a breach of
this Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Administrative Agent or such Lender on a
non-confidential basis from a source other than a Credit Party or (C) was
available to the Administrative Agent or such Lender on a non-confidential basis
prior to its disclosure to the Administrative Agent or such Lender by a Credit
Party; (iv) to any assignee or participant (or prospective assignee or
participant) so long as such assignee or participant (or prospective assignee or
participant) first specifically agrees in a writing furnished to and for the
benefit of the Credit Parties to be bound by the terms of this Section 11.14; or
(v) to the extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 11.14 shall obligate the
Administrative Agent or any Lender to return any materials furnished by the
Credit Parties.
11.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower that
at least one of the following statements is an accurate representation as to the
source of funds to be used by such Lender in connection with the financing
hereunder:
(a) no part of such funds constitutes assets allocated to any
separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds constitutes
assets allocated to any separate account maintained by such Lender,
such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total
assets of such account as of the date of such purchase (and, for
purposes of this subsection (b), all employee benefit plans maintained
by the same employer or employee organization are deemed to be a single
plan);
(c) to the extent that any part of such funds constitutes
assets of an insurance company's general account, such insurance
company has complied with all of the requirements of the regulations
issued under Section 401(c)(1)(A) of ERISA; or
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(d) such funds constitute assets of one or more specific
benefit plans which such Lender has identified in writing to the Borrower.
As used in this Section 11.15, the terms "employee benefit plan" and "separate
account" shall have the respective meanings assigned to such terms in Section 3
of ERISA.
11.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit Document, on
the other hand, this Credit Agreement shall control.
[Signature Page to Follow]
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Credit Agreement to be duly executed and delivered as of the date first
above written.
BORROWER: SCHOOL SPECIALTY, INC.
a Delaware corporation
By: /s/ David Vander Zanden
--------------------------
Name: David Vander Zanden
Title: President
GUARANTORS: CHILDCRAFT EDUCATION CORP.,
a New York corporation
By: /s/ Marla Anderson
--------------------------
Name: Marla Anderson
Title: Assistant Secretary
RE-PRINT LLC,
a Delaware limited liability company
By: /s/ Marla Anderson
--------------------------
Name: Marla Anderson
Title: Assistant Secretary
BIRD-IN-HAND WOODWORKS, INC.,
a New Jersey corporation
By: /s/ Marla Anderson
--------------------------
Name: Marla Anderson
Title: Assistant Secretary
SAX ARTS & CRAFTS, INC.,
a Delaware corporation
By: /s/ Marla Anderson
--------------------------
Name: Marla Anderson
Title: Assistant Secretary
<PAGE>
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ Michael R. Heredia
--------------------------
Name: Michael R. Heredia
Title: Senior Vice President
<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 Report on Form
10-K 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-25-1998
<PERIOD-START> APR-27-1997
<PERIOD-END> APR-25-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 39,435
<ALLOWANCES> (716)
<INVENTORY> 49,307
<CURRENT-ASSETS> 101,529
<PP&E> 22,553
<DEPRECIATION> 0
<TOTAL-ASSETS> 223,729
<CURRENT-LIABILITIES> 53,738
<BONDS> 62,699
0
0
<COMMON> 0
<OTHER-SE> 106,466
<TOTAL-LIABILITY-AND-EQUITY> 223,729
<SALES> 310,455
<TOTAL-REVENUES> 310,455
<CGS> 219,313
<TOTAL-COSTS> 219,313
<OTHER-EXPENSES> 74,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,505
<INCOME-PRETAX> 10,719
<INCOME-TAX> 5,480
<INCOME-CONTINUING> 5,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,239
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
</TABLE>
<PAGE>
Exhibit 99.1
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other
Description Date of Period Expenses Accounts
- ---------------- ------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts.................... January 1, 1994 $ 137,000 $ 121,000 $ -
January 1, 1995 239,000 2,000
January 1, 1996 211,000 10,000
May 1, 1996 202,000 27,000 243,000 (b)
April 27, 1997 471,000 (64,000) 293,000 (b)
Accumulated amortization of
intangibles..................January 1, 1994 1,540,000 757,000
January 1, 1995 2,297,000 1,098,000
January 1, 1996 2,614,000 203,000
May 1, 1996 2,817,000 566,000
April 27, 1997 3,324,000 2,061,000
Balance
at End of
Deductions Date Period
- ---------------- ----------------- -----------
<C> <C> <C>
$ (19,000) (a) December 31, 1994 $ 239,000
(30,000) (a) December 31, 1995 211,000
(19,000) (a) April 30, 1996 202,000
(1,000) (a) April 26, 1997 471,000
16,000 (a) April 25, 1998 716,000
December 31, 1994 2,297,000
(781,000) (c) December 31, 1995 2,614,000
- (c) April 30, 1996 2,817,000
(59,000) (c) April 26, 1997 3,324,000
(24,000) (c) April 25, 1998 5,361,000
</TABLE>
- ----------------
(a) Represents write-offs of uncollectible accounts receivable.
(b) Allowance for doubtful accounts acquired in purchase acquisitions.
(c) Represents (write-offs) / recoveries of fully amortized intangible assets.
